10/5/2013


Buy Rallis India Ltd For Target Rs.177


Summary
Rallis India Limited (Rallis), a Tata Group company, is a subsidiary of Tata Chemicals Limited which owns 50.06% in Rallis. It manufactures pesticides, plant growth nutrients and seeds. Rallis has four direct subsidiaries (Rallis Australasia Pty. Ltd., Rallis Chemistry Exports Ltd., Metahelix Lifesciences Ltd. and Zero Waste Agro Organics Private Limited) and one step down subsidiary (Dhaanya Seeds Ltd.). Rallis has manufacturing plants at Ankleshwar (3 plants—Dist. Bharuch, Gujarat), Patancheru (Dist. Medak, Andhra Pradesh), Akola (Maharashtra) and Lote Parashuram (Dist. Ratnagiri, Maharashtra).
Rallis to benefit from Metahelix’s hybrids: Rallis’ research- based seeds subsidiary, Metahelix Lifesciences Ltd. (Metahelix) has a promising pipeline of products and is carrying out extensive research on Bt Cotton, Bt Rice and Hybrid Seeds. Its two Bt Cotton hybrids, MH 5125 Bt and MH 5174 Bt have received approval from the biotech regulator, the Genetic Engineering Approval Committee (GEAC) for commercial cultivation on June 01, 2009. These hybrids incorporate a synthetic cry1C gene which provides protection against two major pests (bollworm and spodoptera) which account for more than 60% of the pests that damage this crop. The regulatory approval permits Metahelix to cultivate the two Bt varieties in the states of Gujarat, Madhya Pradesh, Maharashtra, Andhra Pradesh and Karnataka. Metahelix produces Bt Cotton seeds in India which have a market worth `40 bn. Rallis expects Metahelix to occupy an 8%-10% share in the Bt Cotton seeds market over the next 3 years, thereby leading to cumulative  revenues of close to `4 bn. It has shown a good growth in revenues in H1FY13 clocking 10% more revenues than the whole of FY12. Also, it turned profitable on an annual basis in FY12 after a series of losses.
Recent acquisition of Zero Waste Agro Organics demonstrates company’s commitment to green products: In FY12, Rallis discontinued selling of certain toxic or “red triangle products”. These products formed nearly 10% of its domestic formulations business. In continuance with this policy, Rallis acquired a 22.8% stake in Zero Waste Agro Organics Pvt. Ltd. (ZWAOPL), a Maharashtra-based organic manure and soil conditioners manufacturing company for `100 mn in October, 2012. It launched GeoGreen; a bagasse based manure immediately after the acquisition. With this acquisition, Rallis has demonstrated its commitment to having more green products in its portfolio. With companies in the agro-chemicals sector increasingly underpressure to reduce toxic products from their portfolio, Rallis has already made a start in that direction.
Increase in MSPs and rising food inflation augurs well for farmer sentiments: Food inflation in India has been steadily rising for the past 6 months. This indicates that farmers have been getting better prices for their produce. The Cabinet Committee on Economic Affairs (CCEA) raised the Minimum Support Price (MSP) for several rabi crops by 3.6% - 20% on 1st November, 2012. This would result in improved farmer sentiment. Other than pest incidence, off take of Agro-Chemicals is directly dependent on farmer sentiment and hence, raising of MSPs augurs well for Rallis.
Consistent performance and a strong balance sheet: Rallis has registered a robust 16% CAGR growth in Net Sales and 11% CAGR growth in Net Profits over the past 5 years. We expect the strong performance to continue and expect Rallis to register 17% CAGR growth in Net Sales and 37% growth in Net Profits over FY12-FY14E. A Debt-Equity Ratio of 0.2 leaves scope for further leveraging of Balance Sheet. With the investments for the Dahej plant in place, no major Capital Expenditure is expected to be incurred over the next 12-18 months. This would preserve margins for Rallis over the next 1-2 years and also eliminate the need for raising any major debt.
Outlook & Valuation
At the Current Market Price (CMP) of `149, Rallis is trading at 16x its FY14E EPS of `10.41. With the Capital Expenditure at Dahej behind it and revenue ramp up from Metahelix happening, we expect Rallis to report a robust growth in topline (18% CAGR) over FY12-FY14E. Considering the consistent fundamentals and strong business model, we value the stock at 17x its FY14E EPS to arrive at the target price of `177 with a BUY rating indicating an upside potential of 19%.


Buy Bajaj Corp Ltd For Target Rs.296

Bajaj Corp’s (BCL) 4QFY13 profits were 6.8%/5.0 above our/consensus estimates, respectively, on account of better gross margin and a lower tax rate. The company reported strong volume growth in Bajaj Almond Drops (BAD), which is likely to sustain. BCL’s management has indicated that it has booked LLP (liquid light paraffin), a key raw material, at Rs75/kg (down 6% YoY) in 1HFY14 and has gone for a weighted average price hike of 6.6% in April 2013 in lead brand BAD, which would keep margins robust going forward. Further, the effective tax rate is likely to remain at the current level until (21%) FY17 (against earlier expectation of increase to 27%) despite the income-tax benefit for one of its manufacturing plants in Himachal Pradesh expiring in 2015, as it will be entitled for MAT credit. Consequently, we have upgraded our FY14E/FY15E profit estimates by 1.5%/7.2%, respectively. We have retained our Buy rating on BCL with a revised TP of Rs296 (from Rs261).
Strong volume growth aids revenue: BCL posted strong revenue growth of 25% YoY at Rs1,842mn, broadly in line with our estimate. This was led by strong volume growth of 20.6% in its lead brand Bajaj Almond Drops, largely driven by greater distribution in rural areas, higher brand investments and rising urbanisation leading to a shift in the consumers’ preference from unbranded hair oils to branded LHOs (light hair oils). Also, BCL went for an 8% price hike in April 2012, thereby aiding value growth in 4QFY13.
Benign LLP prices drive EBIDTA margin: EBITDA margin stood at 28.1% (up 498bps YoY), marginally above our estimate. Most of the improvement was witnessed in gross margin (up 512bps YoY and 23bps QoQ), benefiting from the fall in LLP prices. The fall in LLP prices was higher than expected, which stood at Rs74.4/kg (down 7.7% YoY and 5.8% QoQ). Advertising expenditure was up at 16.4% of sales, as expected. Strong operating performance drove PAT (up 43.9% YoY, 15.5% QoQ) to Rs490mn, above our estimate (Rs459mn) and 5% above consensus estimate (Rs467mn).
Outlook and valuation: At the CMP, BCL trades at 15.4x P/E based on our FY15E estimates, which is at a 42% discount to peers despite better performance expected (21% earnings CAGR versus 18% CAGR of the FMCG sector likely over FY13-FY15E). Dividend yield was at 2.6%, higher than peers at the CMP, assuming similar dividend payout for FY14E. While BCL’s single-product concentration warrants a discounted valuation, we feel the current discount to peers is too steep. We have increase our target multiple from 17x to 18x, given the strong earnings CAGR of 21% over FY13-FY15E against our earlier estimate of 17% and the increase in average FMCG sector P/E multiple based on FY15E earnings. Therefore, we have revised our TP to Rs296 i.e.18x, (at a ~30% discount to peers) on FY15E EPS of Rs16.4, up 17% from the CMP.