Rallis India Ltd- Rough waters, strong captain



Rallis India Ltd is a Tata group company operating in the agriculture input sector. The parent company of Rallis is Tata Chemicals Ltd. Rallis has presence across seeds, crop protection, soil conditioners & plant growth nutrients segments. It is also trying to establish a footing in the contract research & manufacturing services. CRAMS is a high growth area with many companies trying to establish credibility in the field.


India is the fourth largest agrochemicals producer in the world after the US, Japan and China.

There is little need to speak about the importance of agriculture in a country like India. Dominated by vegetarians and the soil quality conducive for agricultural activity in many parts of the country, India has the potential to be the most efficient food producer in the world. After all, we have 1.3 bn stomachs to satisfy and that puts the agri sector in a natural advantage of economies of scale.


The agri inputs industry is critical for India to achieve its goals in the agriculture sector. As per FICCI, the sector stood at USD 5 bn in 2018 and is expected to grow at an impressive CAGR of 8.1% in the coming years.


The major problems facing India’s agri sector are: over-production of certain varieties, emphasis on cash crops for higher realizations, lack of farmer education, low engagement with farmers to understand their preferences, Government’s role in deciding prices, subsidies, vagaries of monsoon, water availability, lack of farm infrastructure and modernization of farms, and in general low food prices which makes farming unviable for most smaller farmers. One of the few things that seem to be working for the sector is state Governments waiving off farm loans just before elections!


The list of problems seems endless and I know you are thinking: why invest in a sector having an endless list of issues? But hang-on, the investment rationale is coming!


Among all the problems listed above, what really concerns the agri inputs industry the most is the present low level of interaction between companies and farmers. It is no secret that knowing your consumer well is a key to success for any company operating in the knowledge economy. There is a tech & information tsunami that is sweeping almost all sectors inadvertently. Advancement in telecom has played a key role in the evolution of the manner in which agri input companies have interacted with farmers. There were times when the communication was a monologue in the form of television and posters/ banners being pasted at common meeting points. It was never truly a dialogue, which is critical for companies to know consumer preferences. This situation is expected to change fast as information is now available at the movement of fingertips. Companies not just want to inform farmers, but they are equally keen to hear from them.


The potential for agriculture in our country is under-realized for all the reasons discussed so far. The path we have chosen so far is to develop the secondary and tertiary sectors of the economy by systematically ignoring the plight of the primary sector. I have a strong hope that such irregularities do not last forever. It is only a matter of time before technology starts improving productivity in Indian agriculture. Developments in the secondary and the tertiary economy will slowly increase people’s ability to pay more for food. To sum up, golden days for agriculture are yet to come. Whether they ever come or not, is something only time will tell. But, the hope is strong and especially in a sector which employs close to 50% of our population!


Rallis India is one the better-managed companies in a sector which has a plethora of problems ranging from the vagaries of nature to the policy stance taken by the Government. The number of variables to be handled is too many, to say the least.


“We cannot live without crops. Agriculture is dead only if we become hunter-gatherers again. That happening looks unlikely”


Does it make sense to invest with so many variables and uncertainty? My answer to this is yes, it does. Especially in companies that have shown the ability to exist in such difficult sectors. It speaks about the sheer quality of management. Being hopeful is not wrong, in fact that is what most investors do. The combination of a hope of the underlying situation improving and a strong management to benefit from the improvement forms an investment case here. Investing in Rallis is similar to sailing with a strong captain through rough ocean waters, and hoping for calmer waters ahead.


Raw material

N,N - Dimethyl-P-Toluidine, triazinone, 4-NOX are some of the key raw materials for the company and prices increased by about 15% for the year ending Mar 2019.


Operating cashflows

Cumulative operating cashflows from 2010 to 2019 stand at Rs. 1332 crores. Cumulative PAT during the same period adds up to Rs. 1417 crores. Both the figures being almost equal indicates that the company is able to convert profits into cashflows without the added burden of working capital rise.


Free cashflows

Free cashflows to the company during the same period from 2011 to 2019 stood at Rs. 614 crores. Percentage of free cashflows to total cash from operations stands at 46.11%


Indebtedness & solvency

Long term borrowings for the company are Rs. 15 crores & short term borrowing stood at Rs. 53 crores as on 31st March 2019. Borrowing numbers are comfortable as a %age of equity (D/E < 0.1). Also, interest coverage ratio is a comfortable number.


Working capital

Receivable days for the company have increased from 28 to 78 from 2011 to 2019. During the same period, payable days and inventory days increased respectively from 95 and 59 to 110 and 114. Clearly, there is inventory buildup and also pressure on receivables. However, the increase in receivable days is partly offset by the increase in payable days.


Dividends

From 2011 to 2019, the company has paid total dividends of Rs. 440 crores against a cumulative net profit of Rs. 1417 crores during the same period. The average dividend payout during the period stood at 31%.


Management & board

5 out of 9 board members are independent directors. Mr. Bhaskar Bhat is the chairman of the board. He was at the helm of operations in Titan Company and is widely credited for the work during his tenure.

Mr. Sanjiv Lal is the MD & CEO of the company and has gained extensive experience in the world of chemicals after completing chemical engineering from IIT Delhi.

All other members of the board are professionally competent and the board has the desired diversity. None of the board members are related to each other (is a big positive from a corporate governance perspective).


What stands out

One of the few companies where quality of management is a moat. In a challenging business environment, having a competent management and board of directors is a big advantage and these companies can be the next compounders of your capital


Financials

The 10 year CAGR in sales, EBIT and PAT is 8.6%, 4.7%, 4.3% respectively.


Valuation multiples

EV: EBITDA - 14

Price: Earnings per share - 23

Price: Book - 3


Quick DCF valuation

Assumptions:

10 year CAGR: 10%

Terminal growth: 4%

Cost of capital: 12%

5 year avg FCFF: Rs. 117 crores

Year 1 FCFF for DCF: Rs. 117 crores

Fair value by DCF: Rs. 3932 crores

Current mcap: Rs. 4322 crores


Risks

The company imports raw material from China and the supply side disruptions from China can affect the raw material availability. While, in the long term, this could be an opportunity for the company for backward integration, this is definitely a risk in the short term.


Other salient information

  • Research & development expense as a % of sales stood at 1.18% for 2019. Company has a dedicated R&D center in Bangalore

  • No. of patents filed since 1994: 29.

  • Crop protection is a slow growing segment for the company and CAGR between 2012 and 2018 stood at 2.75%.

  • International business division grew at 36% in 2019.

  • 33% of revenues came from non-pest portfolio in 2019.

  • Bio-stimulants grew at 51%, micronutrients grew at 57%.

  • Agri services(geo-green) grew at 14% in 2019.

  • Statutory auditors for the co: BSR & Co. LLP


Points not covered, but are very important

  • To what extent Govt subsidies affect the business?

  • How much is the capital employed in each of the divisions?

  • If pesticides is a slow growth area, what are the company’s plans to reduce dependence on it?

  • If the trend of organic foods grows substantially, what happens to Rallis?

Disclaimer: Invested in Rallis. This article is for educational purposes and should not be treated as an investment recommendation. Please contact your financial advisor to evaluate the same as an investment opportunity.


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