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Rallis India: Profitability is the mantra - Views on News from Equitymaster

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Rallis India: Profitability is the mantra
Jun 19, 2009

We recently had a research meeting with the management of Rallis India to get a first hand understanding of the various developments taking place within the company and the sector. Here are the key takeaways from the same. What is the company’s business?
Rallis India, a Tata group company is one of the leading agrochemical companies in the Indian market. It has a century old tradition of servicing rural markets and a comprehensive portfolio of pesticides for farmers. The company is known for its deep understanding of Indian agriculture, sustained relationships with farmers, quality agrochemicals, branding and marketing expertise and its strong portfolio. It is well recognized for its manufacturing capabilities in crop protection chemicals along with its ability to develop new process and formulations aided by the capability to register new products. It also has contract manufacturing alliances with several multinational agrochemical companies. The company is focusing on strengthening its international presence and establishing new capacities for contract manufacturing.

Key takeaways:

On the turnaround: Rallis India made its biggest ever loss of Rs 773 m in FY03. From there onwards, the management began restructuring its operations so as to pull the company back to sustained profitability. The company focused on becoming a complete crop care company and started phasing out the not so profitable or non profitable products from its portfolio even if that meant compromising on topline growth. This focus on profitability has enabled the company to raise its net profits to Rs 713 m by FY09 from the losses booked in FY03. During the period between FY03 and FY09, the company also focused on enhancing its brand value, optimization of operational costs, restructuring its capital allocation, entering into the international markets.

On business model: The crop protection segment is the major business of the company wherein it includes domestic formulations, institutional business, international business, supply agreements, contract manufacturing and registration based sales. The company also has a presence in seeds, plant growth nutrients and leather chemicals. However, they still form a very small percentage of the company’s overall revenues.

Rallis is not a research based company but it sources molecules from the companies who are not in India or domestic players who want to promote their products. The company also has several alliances wherein it co-markets the products of other companies but only at desired levels of profitability. The company has a bargaining power over this mainly due to its strong distribution network, brand perception and the reputation that it enjoys among farmers at grass root levels.

The company has breakaway from the industry’s trend of higher debtor days. The company managed to reduce its debtor’s days which were historically on a average of around 120 days or more prior to FY08. In FY08 the company decreased it to somewhere between 75 days and 90 days, while the same had been reduced to levels of around 30 days in FY09. This was possible only because the company concentrated on changing the prevalent business model in the industry and set a new stage for it.

On capex plans:
The company is coming up with a new facility at Dahej in Gujarat wherein it will be investing around Rs 1.5 bn. This is expected to come on stream by June 2010. The management expects that this new facility would drive the growth of the company further and also increase the profitability. It may be noted that the new facility would have certain tax exemptions as it will be inside a SEZ.

On outlook:
The management expects the topline of the domestic business to grow between 10% and 15% in FY10 on the back of robust demand. However, the company expects the international business to be challenging and maintaining the revenues at FY09 levels would be its main aim. The company plans to launch few new products during the current fiscal and expects them to add substantially to the growth. The management plans to continue to focus on the profitability and will concentrate on bottomline growth rather than volumes.

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