2QFY2013 Result Update | Agrichemical

October 18, 2012

Rallis India
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Net profit 2QFY2013 481 9 171 92 62 1QFY2013 338 11 149 35 24 % chg (qoq) 42.1 0.0 14.7 166.2 154.7 2QFY2012 432 1 170 97 59 % chg (yoy) 11.2 761.9 0.2 (5.5) 5.2

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Agrichemical 2,696 157 0.4 176/112 80,633 1 18,792 5,719 RALL.BO RALI@IN

`139 -

Source: Company, Angel Research

For 2QFY2013, Rallis India (RAIL) reported a good set of numbers. The companys consolidated net sales grew by 11.2% yoy to `481cr. The OPM for the quarter came out to 19.1%, ie a dip from 22.5% in 2QFY2012. However, on the positive side, on a qoq basis, the OPM has expanded from a low of 10.2% in 1QFY2013. The yoy dip in the OPM resulted in a subdued 5.2% yoy growth in the companys adjusted net profit to `62cr. Going forward, we expect RAIL to register a CAGR of 15.0% and 19.9% in its net sales and profit over FY2012-14, respectively. We remain Neutral on the stock. OPM expands on qoq basis: RAILs revenue for the quarter grew by 11.2% yoy to `481cr. On the operating front, the gross margin came in at 35.5%, down 389bp yoy. However, there was a dip in the OPM, which declined to 19.1% in 2QFY2013 vs 22.5% in 2QFY2012. However, on a qoq basis, the OPM has expanded significantly from 10.2% in 1QFY2013. This resulted in a growth of 5.2% yoy in the adjusted net profit to `61.5cr. Outlook and valuation: The management is confident about the long-term prospects of the agrochemicals industry. We expect RAIL to register a CAGR of 15.0% and 19.9% in its net sales and profit over FY2012-14, respectively. At the current levels, the stock is trading at a fair valuation of 14.9x FY2014E EPS. Hence, we maintain our Neutral recommendation on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 50.1 16.5 11.9 21.5

Abs. (%) Sensex Rallis India

3m 9.4 11.3

1yr 12.2

3yr 8.5

(19.5) 109.5

Key financials (Consolidated)

Y/E March (` cr) Net Sales % chg Adj.Net Profit % chg EBITDA % FDEPS (`) P/E (x) P/BV (x) RoE (%) RoACE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011 1,086 23.1 125 23.2 17.9 6.4 18.7 4.6 26.9 33.1 2.4 13.5

FY2012 1,275 17.4 109 (12.6) 14.8 5.6 21.4 4.2 20.6 23.2 2.1 14.2

FY2013E 1,466 15.0 135 24.0 14.8 7.0 17.2 3.6 22.6 23.0 1.8 12.3

FY2014E 1,686 15.0 157 15.8 14.8 8.1 14.9 3.1 22.5 23.4 1.6 10.5

Sarabjit Kour Nangra

+91-22-39357800 ext. 6806 [email protected]

Please refer to important disclosures at the end of this report

Rallis India | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 performance (Consolidated)

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin (%) Operating profit Operating margin (%) Financial cost Depreciation PBT Provision for taxation PAT Before Exc. And MI Minority Exceptional Reported PAT Adjusted PAT EPS (`)
Source: Company, Angel Research

2QFY2013 481 9 490 171 35.5 92 19.1 5 8 88 27 60 (1) 0 62 62 3.2

1QFY2013 338 11 350 149 44.0 35 10.2 5 7 33 6 27 3 0 24 24 1.2

% chg (qoq) 42.1 40.0 14.7 166.2 3.1 4.1 163.9 341.0 123.3

2QFY2012 432 1 433 170 39.4 97 22.5 4 7 87 30 57 (1) 0

% chg (yoy) 11.2 761.9 13.0 0.2 (5.5) 21.3 5.8 1.5 (7.4) 6.0

1HFY2013 819 20 839 320 39.0 126 15.4 11 15 121 34 88 2 0

1HFY2012 724 7.6 731 297 41.1 135 18.6 8 13 122 37 85 3 0 82 82 4.2

% chg 13.2 170.4 14.8 7.6 (6.3)

18.7 (0.7) (10.0) 3.4

154.7 154.7

59 59 3.0

5.2 5.2

86 86 4.4

5.0 5.0

Sales grow by 11.2% yoy

RAILs revenue for the quarter grew by 11.2% yoy to `481cr. The growth in the sales came on the back of exports growth. Metahelix, the companys subsidiary, reported sales of `19.8cr vs `3.0cr during the last corresponding quarter.

Exhibit 2: Total revenue performance

480 400 320 318 206 481 430 338 60 50 40 30 20 10 0 (10) (20) 2QFY2012 3QFY2012 4QFY2012 1QFY2013 % YoY 2QFY2013 Total Revenue
Source: Company, Angel Research

(` cr)

240 160 80 0

OPM improves on qoq basis ..

On the operating front, the gross margin came in at 35.5%, down 389bp yoy, on the back of high raw material costs, which led to a dip in the in the OPM. The OPM declined to 19.1% in 2QFY2013 vs 22.5% in 2QFY2012. However, on a qoq basis the OPM expanded significantly from 10.2% in 1QFY2013.

October 18, 2012

Rallis India | 2QFY2013 Result Update

Exhibit 3: Margin trend

50 40 30 39 40 39 44 36

(%)
20 20 10 0 2QFY2012 8 3QFY2012 1 4QFY2012 10 1QFY2013 EBITDA 2QFY2013 19

Gross margin
Source: Company, Angel Research

leading to a low earnings growth

A low growth in the operating profit kept the net profit growth under check. This along with a 21.3% yoy rise in the financial cost impacted the net profit. Thus, the net profit grew only by 5.2% yoy to end the period at `61.5cr in 2QFY2013.

Exhibit 4: Adjusted PAT trend

75 60 45 59 62 80 60 40 20 0 26 24 (20) (40) (60) 6 2QFY2012 3QFY2012 4QFY2012 Adj PAT
Source: Company, Angel Research

(` cr)

30 15 0

(80) (100) 1QFY2013 % YoY 2QFY2013

October 18, 2012

Rallis India | 2QFY2013 Result Update

Investment arguments
Set to seize rising opportunities in the domestic pesticides market: India's overall pesticide consumption is one of the lowest in the world, and we believe RAIL is well placed to seize this opportunity on the back of its wide distribution network, strong brands and robust new product pipeline. According to industry estimates, the unorganized market accounts for another 50% of the industry. Nonetheless, we believe RAIL is in a position to wrest market share as well as charge a premium for its products. Exports to register steady growth: Closing down of capacities in China before the 2008 Olympics and MNCs diversifying their base to India had resulted in the companys exports spiking by 80% to `295cr in FY2009. The scenario, however, changed post the Olympics and many closed capacities have come on stream and prices of commodities have corrected, due to which exports declined by 35% in FY2010; however since then the exports improved. For FY2012, exports grew by ~52%. Against this backdrop, we estimate RAIL to post a 25% CAGR in its exports over FY2012-14. Contract manufacturing to be the next growth driver: RAIL plans to focus on contract manufacturing for exports and selectively target and supply to top players. To facilitate the same, the company is setting up a new plant at Dahej. Overall, RAIL targets to achieve cumulative revenue of `1,000cr over the next five years from this segment alone.

Outlook and valuation

The management is confident of the prospects for key crops such as cotton and paddy due to generally normal monsoons, which should aid continued healthy growth in the agrochemicals industry. RAIL expects to outperform the industry, given its product pipeline. Overall, we expect RAIL to register a CAGR of 15.0% and 19.9% in its net sales and profit over FY2012-14, respectively. At the current levels, the stock is trading at a fair valuation of 14.9x FY2014E EPS. Hence, we remain our Neutral view on the stock.

Exhibit 5: Key assumptions

Particulars (%) Domestic growth Export growth Total revenue growth EBITDA margin Capex (` cr)
Source: Company, Angel Research

FY2013E 13.0 25.0 15.0 14.7 100

FY2014E 13.0 25.0 15.0 14.7 100

Exhibit 6: Peer valuation

Company Rallis Reco Neutral Mcap CMP (` cr) 2,696 5,477 United Phosphorus Buy (`) 139 TP (`) Upside (%) 41.6 P/E (x) FY13E 20.3 8.0 FY14E 17.5 7.0 EV/Sales (x) FY13E 1.8 0.9 FY14E 1.6 0.7 EV/EBITDA (x) FY13E 12.3 5.2 FY14E 10.5 4.4 RoE (%) FY13E 22.6 15.6 22.5 15.5 CAGR (%) PAT 15.0 19.9 10.0 18.4 FY14E Sales

120 170

Source: Company, Angel Research, Bloomberg

October 18, 2012

Rallis India | 2QFY2013 Result Update

Exhibit 7: One-year forward P/E band

500.0 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0

Share price (`)

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Price
Source: C-line, Angel Research

10x

15x

20x

25x

30x

Background
RAIL is one of the oldest and second largest pesticide agrichemical companies in the country with a marketshare of around 13% and belongs to the Tata Group. The company also has a credible presence in the international market. Pesticides account for 97% of the company's total revenues, while plant nutrients, seeds and leather chemicals constitute the balance. Historically contribution from the domestic business has stood at 77% levels while exports accounted for the balance.

October 18, 2012

Oct-12

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Jul-12

Rallis India | 2QFY2013 Result Update

Profit & loss (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) Minority Interest PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg 72 73 48.3 8.7 3.8 3.8 48.3 101 102 38.7 11.6 5.2 5.2 38.7 FY09 911 73 838 7 844 24.1 742 475 186 69 11 96 87.8 11.5 23 80 115.5 9.5 9 36 34 107 52.2 (1) 107 35 32.8 FY10 937 58 879 3 882 4.5 730 470 177 67 15 149 54.5 16.9 18 134 67.7 15.2 6 25 17 153 42.4 0 152 51 33.6 FY11 1,167 81 1,086 1,086 23.1 892 592 209 73 18 195 31.0 17.9 17 177 32.5 16.3 7 14 8 184 20.4 0 184 58 31.6 0 125 125 23.2 11.5 6.4 6.4 23.2 FY12 1,354 79 1,275 1,275 17.4 1,086 695 283 90 18 189 (3.1) 14.8 29 160 (9.7) 12.6 18 7 5 149 (18.7) (10) 149 49 32.6 2 99 109 (12.6) 8.6 5.6 5.6 (12.6) 135 135 24.0 9.2 7.0 7.0 24.0 157 157 15.8 9.3 8.1 8.1 15.8 1,466 15.0 1,249 799 326 104 21 217 15.0 14.8 38 179 12.1 12.2 14 30 16 196 31.4 196 61 31.0 1,686 15.0 1,437 919 374 119 24 250 15.0 14.8 44 206 14.8 12.2 14 35 15 227 15.8 227 70 31.0 FY13E 1,575 109 1,466 FY14E 1,811 125 1,686

October 18, 2012

Rallis India | 2QFY2013 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves & Surplus Shareholders Funds Minority Interest Total Loans Other Long Term Liabilities Long Term provisions Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long Term Loans and Advances Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 352 8 77 266 261 91 7 422 326 12 89 226 304 22 427 136 140 338 179 159 29 309 156 153 112 416 174 241 140 125 26 104 379 15 30 335 373 6 644 576 189 387 35 155 23 91 432 11 45 375 387 45 737 676 227 449 35 155 23 103 506 22 52 432 445 61 826 776 270 506 35 155 23 118 610 54 60 496 511 99 935 (10) 422 (5) 427 12 88 250 350 82 13 411 424 8 19 485 505 2 115 0 19 3 644 19 535 554 1 151 0 18 13 737 19 623 643 1 151 0 18 13 826 19 733 752 1 151 0 18 13 935 FY09 FY10 FY11 FY12 FY13E FY14E

October 18, 2012

Rallis India | 2QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Inc./ (Dec.) in loans and adv. Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances (138) 37 (30) 32 39 (0) 8 8 (58) (74) (44) 76 (42) 4 8 12 (20) 107 (36) (200) (129) 3 12 15 (52) 35 (47) (79) (91) (3) 15 11 (100) (47) (15) (62) 11 11 22 (100) (47) 0 (47) 32 22 54 FY09 107 23 46 (31) 99 (57) (81) FY10 152 18 73 (67) 104 (54) (4) FY11 184 17 (31) (49) 152 (135) 115 FY12 149 29 (29) (38) 140 (55) 3 FY13E 196 38 (17) (61) 173 (100) FY14E 227 44 (21) (70) 179 (100) -

October 18, 2012

Rallis India | 2QFY2013 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.)
(0.2) 0.3 9.1 (0.3) (1.0) 20.8 0.1 0.4 24.7 0.2 0.6 9.1 0.2 0.5 13.2 0.1 0.3 15.2

FY09 31.9 29.2 9.7 0.8 3.1 26.9 6.1 3.8 3.8 4.8 1.1 14.5 9.5 67.2 2.6 16.5 3.2 16.5 20.5 27.6 22.3 2.7 63 46 114 46

FY10 27.1 23.6 6.5 0.8 2.8 16.8 5.9 5.2 5.2 6.0 1.2 21.8 15.2 66.4 2.9 29.1 4.1 29.1 31.5 68.2 26.2 2.7 60 39 141 19

FY11 22.0 19.2 5.5 0.8 2.4 13.5 4.1 6.4 6.4 7.4 1.1 26.0 16.3 68.4 2.3 25.1 19.0 25.1 33.1 34.1 26.9 3.0 65 43 139 0

FY12 25.2 15.3 5.0 1.1 2.1 14.2 3.6 5.6 5.6 9.3 1.5 28.5 12.6 67.4 1.8 15.5 8.9 15.5 23.2 30.3 20.6 2.6 70 55 128 4

FY13E 20.3 15.9 4.3 1.7 1.8 12.3 3.2 7.0 7.0 8.9 2.4 33.0 12.2 69.0 2.0 16.9 6.2 16.9 23.0 29.4 22.6 2.3 64 51 121 9

FY14E 17.5 13.7 3.7 1.7 1.6 10.5 2.8 8.1 8.1 10.3 2.4 38.7 12.2 69.0 1.9 16.1 6.2 16.1 23.4 32.7 22.5 2.3 55 45 121 9

October 18, 2012

Rallis India | 2QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Rallis India No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

October 18, 2012

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