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Rallis: Lower costs boost bottomline - Views on News from Equitymaster

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Rallis: Lower costs boost bottomline

Jan 15, 2010

Performance summary
  • Topline suffers a small decline of 4% during the quarter on a YoY basis
  • A strong 6.7% jump in operating margins boosts operating profits by 43% YoY
  • Buoyant other income and lower taxes combine with strong operating performance to lead to a strong bottomline growth of 55% YoY during the quarter
  • Bottomline for the nine month period grows 29% YoY on the back of a 3% growth in topline

(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 2,142 2,068 -3.5% 6,742 6,941 3.0%
Expenditure 1,843 1,640 -11.0% 5,565 5,572 0.1%
Operating profit (EBDITA) 300 428 42.8% 1,177 1,369 16.3%
EBDITA margin (%) 14.0% 20.7%   17.5% 19.7%  
Other income 4 27 552.4% 16 50 219.4%
Interest (net) 6 10 56.5% 25 18 -28.6%
Depreciation 39 37 -4.4% 118 115 -2.4%
Profit before tax 259 409 57.8% 1,050 1,286 22.4%
Extraordinary income/(expense) (15) (55) 270.3% (105) (96) -8.9%
Tax 88 113 28.1% 331 398 20.2%
Profit after tax/(loss) 156 241 54.5% 614 792 29.0%
Net profit margin (%) 7.3% 11.6%   9.1% 11.4%  
No. of shares (m) 12.0 13.0   12.0 13.0  
Diluted earnings per share (Rs)*         68.7  
Price to earnings ratio (x)*         15.4  
(* annualised)

What has driven performance in 3QFY10?
  • The company caters to both the domestic as well as the export markets. During the quarter, the domestic business recorded handsome gains in the marketplace with farmers showing emphatic preference to some of the latest product offerings from the company. The exports business however was rather sluggish and this led to the company’s topline suffering a marginal fall during the quarter. Outlook on the domestic side appears positive as planting so far for the Rabi season has shown improvement over last year in most crops as per the company. The new project at Dahej has gained momentum during the quarter and is on track to commence production by July 2010 as per the schedule.

    Cost break-up…
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Raw materials 1,372 1,181 -13.9% 3,892 3,984 2.4%
    % sales 64.0% 57.1%   57.7% 57.4%  
    Staff cost 157 162 2.7% 525 496 -5.6%
    % sales 7.3% 7.8%   7.8% 7.1%  
    Other expenditure 314 297 -5.3% 1,149 1,093 -4.9%
    % sales 14.6% 14.4%   17.0% 15.7%  

  • Some significant improvements in operating efficiencies and a benign raw material price environment has helped the company put up a strong operating performance. Raw material costs as a percentage of sales have come down by nearly 7% and this has been the sole reason behind the company’s strong operational performance. Going forward though, we expect margins to come down a bit on account of raw material price inflation and the company’s limited ability to pass on the same to its customers.

  • Improving upon the 43% growth in operating profits, the company’s bottomline has registered an even stronger growth of 55% YoY. This has been made possible on account of growth in other income as well as lower depreciation and tax rates. Company’s asset light model makes it strong geared towards its operating performance and hence, any significant jump in its operating performance directly filters down to its bottomline.

What to expect?
At the current price of Rs 1,061, the stock trades a multiple of 12x its expected FY12 earnings per share. The company seems to have done little wrong in the current quarter to erode our faith in its abilities. On the contrary, it has only managed to exceed our expectations on the bottomline front. Hence, in view of the company’s robust show, we maintain our positive view on the stock and stick to our target price from a medium term perspective.

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