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Edelweiss said Rallis’s underperformance vis-a-vis peers is a key concern, noting the company’s return on capital employed fell 900 basis points to 13.4 per cent over FY17–22, driven by a 500 basis points contraction in Ebitda margin at 10.5 per cent.

Seasoned investor Rakesh Jhunjhunwala and his better half Rekha Jhunjhunwala owned a roughly 9.8 per cent stake in the company, which is worth Rs 371.9 crore, as per Trendlyne.

Edelweiss said Rallis relies heavily on China for key inputs and that margin would continue to be under pressure for the company. Due to poor visibility of earnings improvement, the brokerage has cut its FY23 EPS estimate by 12 per cent and for FY24 by 14 per cent, and also its valuation target to 18 times from 22 times), yielding a revised target of Rs 167.

A delayed monsoon this year has led to a slow start to the kharif season in most parts of India. This has impacted seeds and herbicide segments, which continue to face the impact of the slow pickup in crop sowing, Edelweiss said.

Besides, issues of illegal cotton seeds have negatively impacted branded players, it said, adding that farmers are shifting to crops such as soybean and maize from paddy due to low water availability.

Edelweiss said Rallis raised prices by 4–5 per cent for most products in March but given steep inflation in key raw materials, the company’s operating margins are likely to stay under pressure.

To combat this, the company has built a higher inventory to tackle raw material volatility. While seed inventory has been somewhat liquidated in northern states, inventory has built up across channels in different regions, Edelweiss said.

But “herbicide sales are likely to get affected if the monsoon does not pick up well over the next 15–20 days. On top of it, freight costs and logistical challenges have intensified. All in all, we expect the company’s margin profile to remain under the weather over FY23. Newer product introductions and commencement of the new MPP plant would be the key triggers,” it said.

Last week, another brokerage Prabhudas Lilladher had trimmed its FY23 and FY24 EPS estimates by 15-16 per cent citing pressure on near-term margins.

The brokerage had revised downward its target on the scrip to Rs 230 from Rs 260 earlier based on 18 times FY24 EPS, but had upgraded the stock to ‘buy’ from ‘hold.’

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