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Aarati Krishnan

Mr. R. Gopalakrishnan, Chairman (right) with Mr. V. S. Sohoni, MD. The company has emerged as a focussed agrochemicals player, post-restructuring - Shashi Ashiwal.

OPERATIONAL and debt restructuring measures have helped Rallis India report a sharp turnaround in its financial performance for 2004-05. After a series of divestitures, Rallis India has emerged as a focussed play in the crop protection sector with a robust pipeline of new products.

There is also considerable scope for the company to ramp up revenues through alliances with multinationals, given its strengths in low-cost manufacture and an extensive distribution network. Now, trading at a multiple of about 12 times its trailing annual per-share earnings, the stock has good potential to deliver capital appreciation from current levels of about Rs 278.

However, as the near-term outlook for the company is clouded by an erratic monsoon, investors could take the opportunity to enter the stock at lower price levels.

Rallis India's reported net profits were up from Rs 25 crore to Rs 33.5 crore in 2004-05. But these numbers do not appropriately capture the sharp ramp-up in Rallis' profitability in 2004-05. The company had earned Rs 73 crore from asset sales in 2003-04, which was included in profits. Excluding this one-time income, the company's earnings before taxes stood at Rs 38 crore in 2004-05 against a loss of Rs 47 crore in 2003-04.

At the post-tax level, this translates into per share earnings of about Rs 21 on an equity base of Rs 11.9 crore. Revenues for the year grew strongly by 12 per cent to Rs 610 crore.

The company has wrought a substantial transformation in its business since it reported massive losses in 2002-03. Over the past two years, a series of unrelated businesses including pharmaceuticals, gelatine and knowledge services have been divested, freeing up substantial cash flows. These have been used to retire debt, slashing Rallis' borrowings from Rs 353 crore in FY-03 to Rs 138 crore by FY-05.

Preference capital raised from other Tata group companies has also be deployed in the business, generating savings in interest costs. These measures have scaled down the company's size, but have actually helped it emerge as a focussed player in the crop protection and seeds businesses.

Rallis has also substantially restructured operations. It has reduced working capital requirements by streamlining pipeline inventories and rejigging its collection mechanisms.

To grow the domestic business, the company has stepped up the pace of new product launches, rolling out six new herbicide and insecticide formulations in 2004-05. It has also entered into co-marketing arrangement with MNCs to leverage on its extensive distribution network. These launches, which have coincided with the sharp increase in cotton acreage in 2004, have delivered strong growth in the domestic market for Rallis.

Several new product registrations in new markets and manufacturing arrangements with global agrochemical majors such as Nufarm, DuPont and Makhteshim Agan have delivered a 25 per cent expansion in export revenues in FY05.

This fiscal, the exports and institutional businesses could gain further traction, as benefits from recent registrations and alliances begin to flow in.

The company has also lined up a few more insecticide formulations for a domestic launch. However, growth in domestic offtake will depend to an extent on an expansion in cotton acreage and firm trends in cotton prices.

On these scores, the news so far is not too good. The late start to the monsoon has resulted in substantial declines in cotton and oilseeds acreages and it remains to be seen if this is made up as the season progresses. Pricing pressures from low cost substitutes will also continue. Therefore, while long-term prospects for the company are bright, the near term could be clouded by uncertainty.

Shareholders may have to watch out for other triggers as well. Over the past two years, the company has significantly wound down its investment book, liquidating its substantial exposures in all the Tata group companies, except Tata Chemicals.

The stock would, therefore, no longer enjoy a superior valuation on account of an undervalued investment book.

The exit from group holdings could also be a signal that the Tata group is preparing to restructure or re-evaluate its holdings in Rallis India.

A merger with Tata Chemicals or a possible takeover of the company by a third-party, is a possibility. But as there are no concrete indications in this regard, such scenarios are purely in the realm of speculation.

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