Good Long Term Bet - Rallis India

From a diversification strategy that failed to generate the desired results to a much focused agro-chemical business, from operating losses in FY04 to briskly growing operating profits in FY09, and from a high debt-to-equity ratio to almost a zero debt company. This has been the story of Rallis India (Rallis) over the last five years. It’s indeed one of the most successful turnaround stories. A restructuring strategy that was undertaken in FY05 is paying rich dividends as Rallis has not only come out of the woods, but has been performing consistently since then. Besides, with the company coming out with good FY09 numbers, impressive capex plans, the FY09 dividend of Rs 16 per share resulting into a higher dividend yield of 3 per cent, cash reserves amounting to Rs 117 per share and attractive valuations, the Rallis scrip certainly merits a second look in this column.

Rallis is one of the leading players in the agro-chemical business. Almost 95 per cent of its revenues come from the pesticide business, while the rest are derived from the seeds and fertiliser business. The domestic revenue was a major contributor to the total revenue at 68 per cent, while exports accounted for 32 per cent in FY09. However, it should be noted that the exports’ contribution to total sales has increased to 32 per cent in FY09 from 21 per cent in FY08. FY09 was indeed a special year for Rallis. First and foremost, the company crossed Rs 900 crore in turnover and that too with a much healthy growth rate of 21 per cent. The company’s[PAGE BREAK] 

operating profits have almost doubled to Rs 120 crore from Rs 66.55 crore on account of not only better cost management but also improved sales realisation. Rallis had undertaken a series of price hikes totalling to almost 15 per cent in FY09. This led to a fantastic jump in the operating margins by a whopping 436 basis points.

All this has happened due to the initiative taken post-FY05 called DISHA (Drive Innovative Solutions with Hyper Achievements), which targets at improving operational efficiency across various areas. Rallis has already completed the first phase of DISHA and has now embarked on the second phase where it would focus on improving sales, finance and logistics. That apart, the factors that have also helped Rallis to grow consistently include continuous innovation, launch of its new products and discontinuing the mature ones. From FY05-08 Rallis has launched 19 new products and discontinued around 10 old ones. And considering the excellent acceptance level of its products the company has also secured contracts worth Rs 1,000 crore from its key customers.

On the capex front, Rallis is setting up an agro-chemical plant at Dahej with an investment of Rs 150 crore to be funded through debt and internal accruals. The company feels that the plant that would to come up by May 2010 would have the potential to generate revenues of Rs 400-500 crore in the next 3-4 years. For FY09, Rallis posted PAT of Rs 72 crore, which is down from Rs 125.30 crore posted in FY08. But the FY08 profit had a one-time gain of Rs 87.38 crore, adjusting for which PAT in FY09 has almost grown by 89 per cent. At its FY09 EPS of Rs 60, Rallis generates PE of 8.8x, while on EV/EBDITA too it looks attractive at 4x and hence one can buy it at its CMP of Rs 530 for long-term gains.