Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities of Rallis India Limited (Rallis). CRISIL Ratings has also reaffirmed the rating on commerical paper at ‘CRISIL A1+’.

 

Operating performance remained steady for fiscal 2023, with revenue (excluding other non operating income) growing 14% to Rs 2970 crore (fiscal 2022: Rs 2609 crore) led by price growth of 8.5% and volume growth of 5.5%. Revenue from Crop Care segment which contributes ~88% of total sales increased by 16.3% as compared to fiscal 2022. Revenues of seeds business remained relatively flattish at Rs. 345 crore in fiscal 2023 (fiscal 2022: Rs.349 crore). Overall exports improved by 24.5% to Rs. 979 crore in fiscal 2023 (fiscal 2022: Rs.787 crores).  Higher revenues from export segment was driven by both increase in price and volume while growth in domestic segment was majorly price driven. Revenue during first quarter of fiscal 2024 de-grew by 9% to Rs.782 crore (first quarter of fiscal 2023: Rs.863 crore) with crop care segment having de-grown by 13% to Rs.519 crore (first quarter of fiscal 2022: Rs.596 crore) and Seeds business by 2% to Rs.262 crore (first quarter of fiscal 2022: Rs.267 crore) owing to drop in realizations.

 

Operating margin during fiscal 2023 declined sharply to 8.6% (fiscal 2022: 11.3%) majorly owing to lower gross margin and higher non cash expenses in form of provision of slow moving inventory in seeds division and impairment of intangible assets in seeds business (~Rs. 83 crore fiscal 2023). Operating margins improved to 14.1% during first quarter of fiscal 2024 (fiscal 2023: 8.6%; first quarter of fiscal 2023: 13.1%) as company benefitted from lower feedstock prices and also as quarter one is the peak season for seeds.

 

Financial risk profile expected to remain strong driven by healthy net worth, low debt and strong liquidity. Debt protection metrics like interest coverage remains healthy at 19 times for the fiscal 2023 and Net Cash Accruals to Debt (NCATD) at 1.2 times. Strong liquidity is driven by cash surplus of Rs 269 crore as of March 31, 2023, and minimal utilization out of the fund-based limits of Rs 285 crore. Capital expenditure (capex) of around Rs 150 crore each fiscal, minimal debt repayment obligations and incremental working capital requirement should be funded from internal accruals, cash surplus and unutilized bank lines.

 

The ratings continue to reflect Rallis’s established position in India’s crop protection market, strong focus on exports, branding and farmer relationship, and a comfortable financial risk profile. The ratings also factor in the strategic importance to the parent, Tata Chemicals Ltd (TCL; rated ‘CRISIL A1+’) having 55% shareholding in Rallis (increased to 55.05 in July 2023 from 50.06% earlier), and the consequent operational and need-based funding support available from TCL. These rating strengths are partially offset by vulnerability to risks inherent in the crop protection market in India and working capital-intensive operations.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has applied its parent notch up framework to factor in support from Tata Chemicals Limited (‘CRISIL A1+’) which has 55% stake in Rallis India. CRISIL Ratings believes that Rallis will, in case of exigencies, receive support from its parent.

 

Goodwill Amortization

CRISIL Ratings has amortised goodwill on acquisitions over a period of 10 years.

Key Rating Drivers & Detailed Description

Strengths:

•      Established market position: Rallis is a major player in the crop protection sector with a strong presence in all three segments of the pesticide industry (insecticides, fungicides, and herbicides) in India and abroad. It is also in the business of selling hybrid seeds, plant growth nutrients, and organic compost, helping to diversify the revenue base. Company derives ~80% of its revenues from pesticide segment, ~12% is derived from Seeds and balance is from crop nutrition segment. Further, Rallis has a strong global presence with ~33% revenues being derived from export markets.

 

•    Strong focus on branding and relationship with farmers: Strong brand and steady engagement with farmers facilitates regular launch of new products. The company undertakes several farmer relationship programmes such as Rallis Kisan Kutumba, through which it provides them information on new and improved practices in agriculture. Rallis through its Samrudh Krishi, provides agricultural solutions to farmers and has also been working on improving productivity of crops. Other initiatives like Sampark supports field crop advisors with the goal of creating better engagement with farmers.

 

•      Comfortable financial risk profile: Rallis has generated healthy cash flows over time, which has strengthened its net worth and lowered reliance on debt. Its tangible net worth (excluding intangible assets) was healthy at Rs 1465 crore, and the gearing healthy at 0.07 time, as on March 31, 2023, while other debt metrics too were at robust levels; for instance, interest cover (EBITDA/Interest & finance charges) was at 19 times in fiscal 2023. With only moderate capital spending over the medium term, and continuing moderately working capital intensive operations, debt metrics will continue to remain at healthy levels.

 

•       Support from the parent: Managerial and operational support from TATA Chemicals Ltd (TCL) continues to benefit the company. TCL is engaged in the manufacturing of soda ash and related chemicals, including sodium bicarbonate, caustic soda and bromides. In fiscal 2023, TCL generated revenue of Rs.16,788 crore, EBITDA margin of ~23% and PAT margin of 14.6%. Rallis is also strategically important to parent TCL as it is the only company in the group catering to the agrochemical space. Further, it might be noted that TATA chemicals recently increased stake in Rallis India to 55.05% in July 2023 from 50.06% earlier further reiterating Rallis’ strategic importance to the group. TCL is expected to provide need based support to Rallis as and when required.

 

Weaknesses:

•    Vulnerability to risks inherent in the crop protection sector: The agrochemical industry remains exposed to risks such as irregular monsoon, and volatility in farm income, specific registration processes in different countries, and various environmental rules and regulations. Any ban on key products will also pose a threat to business of players such as Rallis, though the company has a strong pipeline of products which can be launched to offset/lower impact of possible ban of any key pesticides.

 

•     Working capital-intensive operations: The domestic crop protection industry is highly working capital intensive. CRISIL Ratings believes the Rallis working capital requirement will remain moderately intensive because of the nature of its business. Inventory is moderately high due to the numerous stock-keeping units and seasonality in the geographies it operates in. Overall inventory is 100-110 days (about 107 days as on March 31, 2023) and average receivables are 60-70 days (about 62 days as on March 31, 2023) and is expected to remain at similar levels over near to medium term. 

Liquidity: Strong

Rallis is expected to generate cash accruals of Rs 150-250 crore annually. Further, as on March 31, 2023, the company also had cash and cash equivalents of about Rs 269 crore. Additionally, the unutilized bank lines were Rs 285 crore over the past 12 months ending August 2023. The cash surplus, and cash accrual should be sufficient to fund any additional working capital requirements and capex of around Rs 150 crore per annum over next couple of years. Rallis does not have any long-term debt repayment obligations

Outlook: Stable

CRISIL Ratings believes the business risk profile will continue to be supported by steady demand prospects for Rallis’ products in the domestic market and improving focus on exports.  Financial risk profile is expected to remain healthy with steady cash generation which would be sufficient to cater to capex and increasing working capital requirements. Rallis will continue to remain critical for TCL and keep receiving operational, managerial, and financial support.

Rating Sensitivity factors

Upward factors

• Sustained revenue growth with EBITDA margin over 15-17%.
• Substantial improvement in working capital situation with lower inventory days, lower debtor days and higher cash surplus.

 

Downward factors

• Revenue degrowth or EBITDA margin to be ower than 9-11%.
• Larger-than-expected, debt-funded capital spending, or substantial acquisition resulting in moderation of capital structure and debt protection metrics.
• Material stretch in working capital levels.
• Downward revision in parent rating.

About the Company

Rallis, a part of the Tata group, is one of the leading players in the domestic crop protection sector and manufactures pesticides, herbicides, and fungicides at its factories in multipleocations. These agrochemicals are spread across 80% of India’s districts through an extensive distribution network. The Rallis Innovation Chemistry Hub (RICH) caters to global requirements. In fiscal 2010, Rallis became a subsidiary of TCL; earlier, it was jointly owned by multiple Tata group companies.

 

Rallis acquired a majority stake in Metahelix Life Sciences Limited, a Bengaluru-based seeds company, to focus on hybrid seeds development and sales.Rallis had also acquired a stake in Maharashtra-basedZero Waste Agro Organics Limited, which manufactures scientifically prepared organic compost. Both these companies were merged with Rallis India Ltd.

About the Parent

TCL was incorporated in 1939 to manufacture soda ash and related chemicals, including sodium bicarbonate, caustic soda, and bromides. The company commenced operations in 1944 with a 30,000 tpa plant at Mithapur. Over the years, it has expanded its gross soda ash capacity to 917,700 tpa. It entered the iodised vacuum salt business in 1986. Tata Salt is the leading iodised edible salt brand in India. TCL also has a 440,000-tpa cement plant in Mithapur, which was set up to effectively utilise the solid waste generated during soda ash production.

Key Financial indicators (consolidated) 

Particulars	Unit	2023	2022
Operating income	Rs crore	2,970	2,609
Profit after tax	Rs crore	92	164
PAT margin	%	3.1	6.3
Adjusted debt/adjusted net worth	Times	0.07	0.04
Interest coverage	Times	18.9	44.55

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Date of Maturity	Issue Size (Rs.Cr)	Complexity level	Rating Assigned with Outlook
NA	Cash Credit*	NA	NA	NA	150.5	NA	CRISIL AA+/Stable
NA	Letter of Credit#	NA	NA	NA	276.5	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	13.0	NA	CRISIL AA+/Stable
NA	Commercial Paper	NA	NA	7-365 days	75.0	Simple	CRISIL A1+

*interchangeable with other fund-based facilities

# interchangeable with other non-fund based facilities