From THE HINDU group of publications
Sunday, July 08, 2001


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Rallis India: Buy

Recommendation: Buy

Aarati Krishnan

THE stock of Rallis India, now trading at Rs 30, appears to offer reasonable prospects of capital appreciation over a two-to-three-year time-frame.

Active investors can consider buying the stock at the current levels. However, given the fluctuating fortunes of agrochemical companies, investors should keep track of the stock on a regular basis and use profit booking opportunities to protect their returns.

With net losses of Rs 31.93 crore (before extra ordinary items), Rallis India's immediate performance is not quite heartening. The year 2000-01 was a particularly bad one for crop protection companies with MNCs and Indian companies alike turning in an insipid performance.

Three consecutive years of erratic monsoon and drought conditions in western and central India led to a contraction of agrochemical demand. In this context, reports of normal to excess rainfall in the drought-prone areas of Gujarat and Rajasthan in June 2001, point to a possible improvement in the situation this year.

This apart, with some of the recent restructuring measures taken by Rallis, the company appears to be well-set to turn around in the next one year. Rallis India, until recently, was market leader in the crop protection business with a 15 per cent market share (2000-01 turnover was Rs 1,088.90 crore).

However, after a recent bout of consolidation among the MNCs, Rallis finds its market leadership threatened by such players as Aventis Crop Science. Though MNCs do have the stronger hand when it comes to research-based specialty products drawn from their parent's portfolio, Rallis' strength lies in its strong and extensive distribution network and its long established rapport with farmers.

It has been leveraging on this strength with initiatives such as the Rallis Kisan Kendras -- one-stop-shops for agricultural inputs -- which provide counsel to farmers on food farming practices. In addition, Rallis has been working at mixtures and formulations of traditional compounds directed at farmers. Of these, Contaf, a fungicide, has been quite successful.

Business fundamentals apart, the company's diversified basket of businesses has also held down the valuation for the Rallis stock on the bourses. In the past, the company derived revenues from businesses as diverse as crop protection, trading in fertilisers, gelatine and pharmaceuticals.

Over the past six months, Rallis has set out to achieve a better focus on crop protection by weeding out non-core businesses. While fertiliser trading has been discontinued (Rallis will continue to market fertilisers for Tata Chem through its distribution network, though this will not contribute to turnover), the pharmaceutical business has been sold to Shreya Impex.

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Rallis has also been in the process of streamlining its operations for better productivity, selling off surplus assets to unlock cash. While the pharma business sale netted Rs 49 crore, the recent sale of surplus land to Tata Sons is expected to bring in around Rs 133 crore in cash. This will go a long way in bringing down Rallis' debt burden (which stood at Rs 255 crore in March 2001).

The resultant savings in financing charges will make a big difference to Rallis' profitability. In 2000-01, Rallis' interest costs at Rs 61.62 crore were slightly higher than its operating profits of Rs 51.15 crore. The sharp improvement in Rallis' operating profitability in the fourth quarter of 2000-01 also indicates a possible turnaround.

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