After well over two decades of falling food prices in real terms, the same rose rapidly worldwide in 2005 and were halted in their tracks only by the 2008 global economic slowdown. But make no mistake. Higher food prices are here to stay. Increasing world population, growth in developing nations and increasing urbanization are boosting the demand for food.
Rallis India is India's largest agrochemical companies. With a distribution network spread across the length and the breadth of the company and an ability to understand farmers better than perhaps any other agrochemical company in the country, Rallis India seems extremely well placed to take advantage of the strong demand that is likely to take place in the Indian agrochemical industry. The company also has a thriving exports business, which will give still greater impetus to its growth trajectory in the medium to long term.
The topline of the company grew at a CAGR of 12% between FY06 and FY09. However, at 53% CAGR, the growth in operating profits during the same period really left the topline growth in the dust. This was made possible on account of company’s new found focus on profitability.
Tata Chemicals, another group company recently emerged as the single largest shareholder of Rallis India after it steadily acquired slightly over 50% stake in the company.
We expect the company's net profit to grow at an average annual rate of 17% between FY09 and FY12 (average annual rate of 19% during FY06-FY09). In a normal scenario, we consider a compounded growth of over 20% in net profits over a period of 3 to 5 years as healthy for a company.
At the current price of Rs 900, the stock is trading at an earnings multiple of 10x its estimated FY12 earnings per share. Applying 15X multiple to the company’s FY12 EPS, we arrive at a target price of Rs 1,325 from a FY12 perspective. This translates into a CAGR of 18% or a point-to-point return of 47%.
Existing investors HOLD to cash in on the boom or BUY on Decline as we expect some correction in the market
