Rallis India - Mid Cap Stock Idea

Rallis India is predominantly an agrochemicals manufacturer, which also sells other farm inputs such as hybrid seeds and specialty fertilisers. The company undertakes manufacturing work on contract for leading agrochemical majors.

This ensures that its plants works at higher capacity utilisation levels throughout the year besides providing a consistent cash flow. Apart from innovating agrochemicals business, Rallies India is also exploring new areas for growth.Through its contract manufacturing agreement with US-based Cytec Engineers, the company has emerged as the sole manufacturer of specialty polymer PEKK (poly ether ketone ketone), mainly used in aerospace industry, in the world.Last year, the company launched an enterprise value-creation programme "Disha" aiming at bringing in improvements in manufacturing and procurement, through plant modernisation, capacity de-bottlenecking, process improvements and cost reduction.

Its efforts towards targeted growth in its international business are also paying off well. Following the success of Disha phase 1, the company has initiated Disha phase 2 for creating value in sales and marketing.The global agriculture industry is facing challenges to improve productivity to cater to the food as well as the energy requirements of the ever-increasing population. This coupled with higher agro-commodity prices, is likely to maintain a healthy demand for pesticides in the coming years.

Rallies India has recently closed down its plant at Patancheru in Andhra Pradesh to unlock value in the land bank. Meanwhile, it is also setting up agrochemical plants in Dahej and Jammu, which will commence production in 2010. At Dahej, the company has secured land in special economic zone (SEZ) and notified chemicals zone (NCZ) and it also plans to spend over Rs 150 crore in two phases there. Besides, another captive power plant at Ankleshwar will also developed by the company.Rallies India's focus on specialty products is helping it earn better margins.

The company is expected to continue its new product launches to keep its innovative sales above 30% of its total revenues.

Rallis India has outperformed broader market and has maintained its price-to-earnings ratio (P/E) intact over the last one year. I expect the company to finish FY10 with EPS of Rs 71.3 excluding any extraordinary income.

Market Cap 710.21
EPS (TTM) 59.98
P/E 9.88
P/C 7.49
Book Value 217.51
Price/Book 2.72
Div(%) 160.00
Div Yield(%) 2.70
Market Lot 1.00
Face Value 10.00
Industry P/E 12.69

At the current market price, the scrip is trading at 9 times its expected net profits for estimated FY10 earnings.It paid Rs 16 per share as dividend in FY08 and is likely to maintain it in future. At its current price, the stock dividend yield works out to 2.7%, making it a safe mid cap stock to buy for risk adverse investors.