Rakesh Jhunjhunwala recently bought 2.75 lakh shares of Rallis India, but here’s why you should not

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Among one of the companies that ended up in Rakesh Jhunjhunwala’s shopping cart during the January-March quarter was another Tata Group company — Rallis India. The farm care product manufacturer saw Jhunjhunwala increase his stake to 9.93%, buying 2.75 lakh shares in the company, but top brokerage firms are advising investors against following the Big Bull. Edelweiss Securities and ICICI Securities, both have a ‘hold’ rating on Rallis India as the firm’s March quarter numbers visibly got infected by the coronavirus pandemic. Revenue grew by just 2% on-year basis while profit after tax stood at just Rs 1 crore.

“Disruption caused by COVID-19 impacted manufacturing of products, resulting in Rs 160mn (Rs 16 crore) sales loss in the domestic market,” said Edelweiss Securities in a research note. The brokerage firm has a target price of Rs 219 on Rallis India, the stock ended Thursday’s trading session down 3.6% at Rs 214 per share. Logistical challenges arising during the coronavirus also hit Rallis India as international shipments worth Rs 53 crore suffered. Edelweiss said that growth could have been 22% on-year for Rallis India in the absence of coronavirus. “Q4FY20 margin was impacted by A) Bad debt provisioning; B) Sharp INR depreciation leading to MTM loss of INR99m (Rs 9.9 crore); and C) INR12mn (Rs 1.2 crore) increase in employee cost on higher actuarial assumptions,” the note said.

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Rallis India’s CRAMS business could cause it a short term headache but the long-term could aid business outlook, said ICICI Securities. “Rallis has been doing CRAMS for PEKK and Metconazole. The management mentioned that PEKK is largely consumed in aerospace. Given that the airline industry has been impacted by Covid-19, it can face demand side challenges for the former,” the brokerage firm said. ICICI Securities too has a hold rating on the stock with a target price of Rs 240 per share, translating to an upside of 12% from current market price. With firms looking for an alternative to China, Rallis could pose a potential beneficiary and witness better CRAMS opportunities, the report said. “We expect CRAMS presently constitutes around mid-teens of the company’s revenue. Any progress towards new wins can meaningfully improve the business outlook of the company, going ahead,” 

Metribuzin, a key product offering by Rallis India is expected to face pressure nudged by inventory overhang in the US markets, that could force the exports business to remain under pressure for Rallis, said Edelweiss. Although the company in its conference call said that there is a reduction in gross contribution from the international business for financial year 2020 versus financial year 2019, there have been no order cancellations that could help the company retrieve the revenue lost.

Among the key risks associated with Rallis India apart from its CRAMS products include, extreme weather and usage of GM crops. “The usage of crop protection products is significantly less for GM crops. Hence, growth and acceptance of GM crops by consumers may have an adverse effect on Rallis’ business,” Edelweiss said. The uncertainty that comes post the coronavirus outbreak is also worth noting. ICICI Securities values the firm at 19x PER of FY22E earnings estimates (implied EV/EBITDA 12x FY22E), while Edelweiss sees the scrip at 17x FY22E EPS.

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