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Aarati Krishnan

Hopes of an early turnaround have propelled the Rallis India stock in the recent times. The turnaround hinges on a revival in agrochemicals offtake and an infusion of cash to retire debt. Though both seem possible, a few `ifs' remain for investors, says Aarati Krishnan.

A good monsoon may perk up pesticide offtake.

DESPITE a balance-sheet liberally spattered with red ink, the stock market has not hesitated to mark up the Rallis India stock. The stock hovers at Rs 90 now, up 65 per cent in the six months since March 2003. The stock has been propelled by hopes of an early turnaround at Rallis India, based on an expected infusion of cash, a revival in pesticide offtake and a slew of debt reduction measures, all topped by a change in the company's top management.

Shareholders with an investment horizon of over a year can hold the stock. Recent initiatives have the potential to engineer a turnaround. If this happens, the Rallis stock will indeed have significant scope for further appreciation, even from its present levels. The company has hard-to-ignore strengths in manufacturing, research and distribution of agrochemicals.

But Rallis' immediate prospects also hinge on whether offtake for its products picks up in the current agricultural season. (Agrochemical offtake is notoriously unpredictable and does not follow automatically from a good monsoon.) An entry into the stock at the current levels could, therefore, carry a significant downside risk in the near term.

Unappealing façade

On the face of it, Rallis' financials look particularly unappealing. The company closed 2002-03 with a 14 per cent drop in net sales (at Rs 845.8 crore) and a net loss of Rs 77.3 crore (against a net profit of Rs 58.7 crore the previous year). The poor run has continued into the first quarter of 2003-04 as well, with the company once again reporting lower sales and a net loss.

Rallis' business portfolio is diffused, with businesses such as gelatine and leather chemicals vying for attention with the core businesses of agrochemicals, seeds and fertilisers. To top it, with six loss-making subsidiaries under its fold, the company's consolidated balance-sheet is considerably weaker than the one on a standalone basis.

Greener than it appears

But a closer analysis puts the recent performance in better light. For one, the apparent deterioration in Rallis' performance between 2001-02 and 2002-03 is not due to its operations. After excluding exceptional items (such as income from asset sales and investments), Rallis has actually managed to marginally reduce its net losses between the two years, from Rs 57.2 crore in 2001-02 to Rs 56.8 crore in 2002-03.

Second, the drop in turnover, both in 2002-03 and in the June 2003 quarter, are explained partly by Rallis' decision to disengage from low-margin businesses. The company divested its pharma business in 2001-02 and has opted out of disengaged from marketing of fertilisers on behalf of Tata Chemicals, with effect from April 2003While these moves have dented sales, they are likely to perk up Rallis operating profit margins over the long term.

Third, with the widespread drought in key consuming markets, 2002-03 was a particularly bad yearfor most companies with a significant presence in the domestic agrochemicals market. With the South-West monsoon for 2003 turning out to be exceptionally good both in terms of quantum and spread, the current fiscal is certainly more promising.

Doing its bit

The rationalisation and restructuring measures initiated by the management may also aid Rallis' recovery. Over the past year, the company has reorganised its businesses for a sharper focus on agricultural inputs. In agrochemicals, it has strengthened its internal controls on debtors and inventories. Integrated farm management solutions to farmers with products such as specialty fertilisers, seeds and agrochemicals, being offered as one package, have also been initiated.

Playing to its strengths

These initiatives have the potential to pay off. Rallis possesses a good research infrastructure with strengths in process skills. That the company is capable of delivering specialty formulations to farmers at lower costs than offered by the multinational players, is evident from its success with new formulations launched over the past three years.

With several MNCs gearing up to tap the potential of the Indian agrochemicals market, it is also likely that they will seek out alliances with Rallis to use its low-cost manufacturing facilities and formidable distribution network. Rallis' residual businesses are also looking up.

Increasing recognition for India as a low-cost manufacturing base for chemicals, may aid Rallis' foray into export markets for generic agrochemicalsBright export prospects for pharmaceutical formulations points to robust offtake for the gelatine business (gelatine goes into the manufacture of capsules).

It all depends on debt

But the most important contribution to Rallis' turnaround has to come from its debt restructuring exercise. By March 2003, the debt on Rallis' (stand-alone) balance-sheet stood at Rs 353 crore, at an uncomfortable 4.5 times its shareholder funds. The merger of Rallis' subsidiaries (which has been proposed) may only add to Rallis' debt burden.

This is why the company's recent proposal to raise Rs 188 crore (the source and instruments to be used are not yet clear) may make the crucial difference to its turnaround. The promoter group (the Tatas) have been willing to bail out Rallis on more than one occasion in the past.

Given the benign interest rate environment, a Rs 188-crore infusion, if it coincides with an upturn in product offtake, will cut Rallis' debt burden and could engineer a quick turnaround at Rallis.

Overall, while there are solid reasons to support expectations of an early turnaround at Rallis, there are quite a few `ifs' attached to it, as well.

In its good years, Rallis has attained a per share earnings of around Rs 18-20 per share. After the recent upsurge, the stock price discounts this level of earnings seven times.

This leaves some scope for upward movement, if Rallis manages to establish itself firmly on the profitability path. But if the turnaround is delayed, the downside risk from the current levels can be significant.

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