Ladies and gentlemen, good day. Welcome to the Rallis India Limited Q3 FY 2021 earnings conference call. As a reminder, all participant lines will be in listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing * then 0 on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you. Over to you, sir.
Thank you. Good day, everyone. Thank you for joining us on Rallis India Limited's Q3 and nine-month FY 2021 earnings conference call. We have with us today Mr. Sanjiv Lal, the Managing Director and CEO; Mr. Nagarajan, Chief Operating Officer; and Mr. Ashish Mehta, the Chief Financial Officer. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in the results presentation. I now invite Mr. Lal to begin proceedings with the call. Over to you, Sanjiv.
Thanks, Gavin. Good afternoon to everyone. Thank you for joining us on our call today afternoon. I'm joined for this meeting along with Nagarajan and Mr. Ashish Mehta, our CFO. Let me begin the call by highlighting the key operational developments, following which Ashish will walk us through the financial performance for the quarter. To begin with, we believe that the Rabi season, despite the cyclone that we had experienced, has panned out reasonably well. The cyclone did result in some disruptions, excess rainfall, some crop damage across certain geographies, the market environment broadly has been fairly encouraging and growth has been conducive. Amid such positivity, we believe that the domestic agrochemical industry is growing in the range of 10%-11% during the current fiscal year. The overall pace of growth, though, may taper down compared to what we've seen in the past couple of months.
Moving on to Rallis specific developments. We are fairly pleased with our performance for the quarter, having delivered a top-line growth of 7% and operational profitability growth of about 8%. The performance is broadly in line with our stated objective of prioritizing growth by introducing new products and widening our distribution reach. With regard to new products, we have been guiding the introduction of at least two new 9(3) products each year for the next couple of years. As most of you must be already aware, we had introduced one product, Kriman, during the first half of this fiscal. One more will follow in Q4. In addition to that, we have also launched two new fertigation products under our crop nutrition portfolio with the brand name Aquafert. This is addressing the grapes crop as well as vegetables.
We also introduced two biopesticides, as this is a new category that we have entered during Q3. We have also introduced an in-licensed product during the year, a soybean herbicide by the name of Enzip. As you're aware, we have identified wheat and soybean as segments that we need to strengthen our portfolio. Moving on to the international business. Having registered the highest ever sales of all products barring metribuzin in H1, I am pleased to report that the business momentum continues to remain strong. Inquiries for product volumes from customers remains encouraging, and the order book for majority of our products remains robust. We continue to operate at full capacity for most of our key products, namely hexaconazole, pendimethalin, and acephate, as also metribuzin. We have debottlenecked the capacity of hexaconazole during H1 and further added to the capacity of pendimethalin. Moving on to metribuzin.
Volumes for the same have started picking up. Order book as well is gaining traction, we maintain approximately 15% market share globally in metribuzin. We are planning for the reorganization of equipment so as to put all metribuzin production into a single plant with some additional features of mechanized material handling in the February to April timeframe. To mitigate this planned disruption, we have been working towards building up inventory of metribuzin, and also have part coincided the changeover with our usual maintenance shutdown in April. In an attempt to diversify and further strengthen our expansion business, we're also looking at adding two new products under this business during H2 of the next fiscal year. Moving on to contract manufacturing. We believe the current business environment provides a good opportunity for us to expand our manufacturing in the segment.
Government's agenda towards driving indigenous manufacturing augurs well for the business. In terms of the existing products, as indicated in our earlier calls, demand for PKK will continue to remain soft. With the airline industry showing some rebound, we expect that over the next one year, things should start normalizing. We're also looking at seeing how we can expand our product beyond the aviation segment to de-risk our business along with our key customer for this product. Moving on to the seeds business. Having delivered 7% growth in H1, our performance for Q3 has also been satisfactory. Hybrid maize has reached approximate INR 100 crore milestone along with paddy, which was already INR 100 crore category for us. Volumes for mustard seeds as well has been quite encouraging. We have launched two new products in maize, one in bajra and one in jowar during the first half of this fiscal.
Further, our collections continue to be much better compared to the previous year. R&D pipeline is also shaping up well with strategic crops such as cotton, Rabi maize and vegetables. As we already mentioned that the R&D process will take its own time, and in a couple of years, we do expect to start seeing results from the work being done by our teams in hybrid development. On our CapEx, I would just like to say that we had announced projects worth approximately INR 525 crores of the INR 800 crores earmarked for the expansion. The proceeds are directed towards building a formulation plant at the Dahej Chemical Zone, a Multi-Purpose Plant at Dahej SEZ, debottlenecking existing products, a new R&D center in Bangalore, and investments in automation, digitization of our manufacturing operations, as well as modernization and expansion of our HR management systems.
All these projects are on track, we expect to propel the growth post-completion. To conclude, I would just like to state that the business is shaping up well. We are making steady progress towards achieving our desired objectives, delivering growth and creating value for our stakeholders. We are undertaking required investments to enhance our product offerings, reducing raw material dependence on China, and developing a new product offering for the domestic business as well as seeds. Seeds is also improving steadily, we are targeting new products and segments, which should help us address the present seasonality in the business. With that, I would just like to request Ashish to talk about the financial numbers before we open it up to the Q&A. Ashish, over to you.
Thank you, Sanjiv, a very good afternoon to all who have joined this call. First, I'll summarize the overall results for the Q3 FY 2021. Revenue was at INR 570 crores, registering a growth of 7% over previous year's INR 533 crores. EBITDA at INR 60 crores versus INR 56 crores in the same period in previous year, registering a growth of 8%. Profit before exceptional item was at INR 56 crores versus INR 48 crores in the same quarter in previous year, registering growth of 15%. Profits for the quarter were impacted due to a one-time charge of about INR 8 crores on account of substandard and non-sellable stocks. Exceptional item includes profit on sale of assets. I'll now give a brief of how each of the business performed during the quarter under reference. The crop care.
Revenue from crop care was at INR 529 crores, registering an overall growth of 5% over the previous year, with a volume growth of 10% and a price correction of 5%. International business demand challenges in metribuzin still continued in the third quarter as well. However, revenue was at INR 184 crores versus INR 182 crores in the same period in the previous year. There was a good volume growth of about 18% with a price correction of 17%. Major volume growth seen in acephate Technical, Hexa, and metribuzin 75 WDG. Even we saw a very small volume growth in Metri as well. In the international business, contract manufacturing registered a revenue of INR 30 crores versus INR 48 crores in the same period in the previous year. There was a drop in our polymer business, we continue to see the same trend in FY 2022.
In the seed division, registered a top line of INR 38 crores at INR 41 crores versus INR 30 crores in the same period the previous year. This was largely driven by volume growth in maize and bajra, coupled with better price realization. Profits for the quarter were impacted due to a one-time charge of roughly about INR 6 crores on account of substandard stocks. Plant growth nutrients and organic manure registered a top line of INR 36 crores versus INR 33 crores, a growth of 10%. Due to better working capital management, cash from operating activities was at INR 201 crores. Cash and cash equivalents as of 31st December stood at INR 382 crores versus INR 263 crores in the same period the previous year. Overall working capital days improved to 79 days versus 83 days in the previous year.
Inventory levels were high compared to the previous year, largely due to stocking of critical raw materials, planned metribuzin stocking to meet the demand for Q4 FY 2021. However, receivable days also improved to 73 days from the previous level of 97 days. Work in the new formulation plant at Dahej Chemical Zone is at full swing, and we expect to start commercial production by the end of March 2021. Work on setting up the new MPP plant at SEZ zone is also progressing satisfactorily. Thank you, and over to Gavin.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. A reminder to the participants. In order to ensure that the management is able to address questions from all participants, please limit your questions to two per participant. Should you have any follow-up, request you to rejoin the queue, please. The first question is from the line of Aditya Jhawar from Investec Capital. Please go ahead.
Sir. Hi. Thank you. Hi. Thanks for the opportunity. I have couple of questions. Firstly, on the export, Sanjiv, you mentioned that in this quarter, there was a plan to increase a further CapEx of about INR 65 crore. Does that mean that we got some incremental new orders in this quarter, which can translate into revenue in the next couple of years? Related to that, keeping this new CapEx announcement, what is the annual CapEx plan for FY 2021 and FY 2022?
Aditya, in terms of our CapEx plan, maybe I'll just request Ashish to fill in on the numbers. Much of our project work is now at very advanced stage when it comes to projects like the new facility at the Dahej Special Chemical Zone. The cash outflows and all will now start happening during this quarter as well, as well as overflowing into the next quarter. There is some skewness which is going to happen during FY 2022. Apart from that, our capacity expansion for hexaconazole is complete, Metri is complete, except for the reorganization which I mentioned, and also some increase in capacity for our pendimethalin plant, which we've also undertaken. Apart from that, other products at Ankleshwar, all that will also get completed in terms of capacity expansion latest by April of this calendar year.
Our ability to book more orders against our capacity is certainly increasing. We had also set up additional facilities at the Dahej SEZ during the last financial year, which we may not have spoken about. This is related to some of the WDG formulation and SC formulation for Metri. That capacity has also started getting utilized with some of our exports of the Metri WDG already happening during the current Q3. We've already been able to meet some of the export requirements of our formulated metribuzin product, for which we had got the registration during the course of this financial year. Ashish, may you just add to the CapEx spend?
Aditya, the INR 65 crores largely relates to the additional CapEx we had seeked from the board on the MPP project. The earlier one, it was about INR 80-81 crores, we have seeked additional CapEx for the MPP, which is being set up in the SEZ zone. The others were all small capacity expansion or process reworking and all that thing. That is first question what I have addressed. The second one is that for the nine months, the actual CapEx outflow is about INR 90 crores. While the confirmation of procurement orders or the purchase orders is around about INR 150 crores so far. The cash flow is only INR 90 crores. We expect in the next 3 months for this current quarter, the cash flow should be around about INR 40-45 crores, if not less.
The balance cash flow will happen in the next financial year. I believe in the first quarter, there will be quite a bit of a cash flow. Overall for FY 2022, as we are in the process of finalizing our budget, we expect a larger cash flow than what we would be ending for the FY 2021.
That's quite helpful.
Jhawar
basic question. Yeah.
Sir, sorry to interrupt. Before any follow-up, request you to rejoin the queue, please.
Okay. Sure.
Thank you. A reminder to the participants, please limit your questions to two per participant. The next question is from the line of Tarang from Old Bridge Capital Management. Please go ahead.
Hello, good afternoon. Two questions from my side, both on the seeds business. First, on the revenue. What has led to this 38% volume growth? Is it you'll have gotten into new markets or is it gaining market shares? Just wanted to understand the underlying reasons for this volume growth in maize and bajra, because I've seen it in Q2 as well, and now we're witnessing it in Q3. The second is on the margins. Despite a significant volume growth, and even if I adjust for the INR 6 crores of substandard stocks, we've actually seen an EBITDA decline in Q3. What cost element went up for the EBITDA decline in the seeds business? These two questions from my side. Thank you.
Yeah. Hi, Taranf. This is Nagarajan here. To address your first question about the contributors for the growth. We have had some increases in our maize and millet, mustard, what we mentioned in the note. Really speaking, I don't believe there is anything fundamentally that has actually contributed to that beyond these increases that we have got in this particular year. Remember that these are actually on really small base of INR 30 crores that we had. We are not seeing that as a structurally something has changed. The second question, what you said, if you adjust for the one-time charge, you are saying that the EBITDA for the seed business has gone down?
Yes. It's gone down from, if I adjust for the INR 6 crores, it is still negative INR 16 crores against negative INR 11 crores in the same period last quarter.
Okay. Maybe Ashish, you want to just respond on the EBITDA after adjusting for the-
Sure. If I compare it with the incremental increase of revenue by INR 11 crores, there should have been equivalent increase in the EBITDA and the % also. There is a one-time charge, and also there is a cost increase in terms of employee costs due to alignment of policies with Rallis. That also has an impact. There are certain expenses on sales promotions and marketing and other things, activities and all that. These are all operational expenses which needs to be incurred. That is why you see a little bit dip in the margins.
At an overall level, we have not seen any major fundamental change in the operations of the business. Like what Ashish said, we have definitely harmonized our policies after the merger between the seed division and the rest of Rallis. There has been a cost push on account of that.
Okay. Thank you.
Thank you. The next question is from the line of Ritesh Gupta from Ambit Capital. Please go ahead.
Thanks for taking my question, sir. One is that on the metribuzin pricing side, what is the outlook there on the metribuzin pricing side? The second one that I have is that in terms of your gross margin improvement in the crop care division, what has driven that gross margin improvement? Is it just a product mix improvement or is it some sort of API prices led gain?
On the metribuzin prices, certainly we are finding that they are firming up in the last few months. If you really look at this year versus last year, Y-o-Y, if you did a comparison, nine months of this year versus nine months of last year, what we are finding is that there is a significant drop that has happened in terms of the metribuzin prices. On an average, the prices last year were about INR 2,100 per kg. Now it is about INR 1,300 per kg. This is Y-o-Y, nine months to nine months. You can see that it's a 40% kind of a drop. If you see within the quarter, that is within quarter three, the beginning of quarter three to the end of quarter three, there is a firming up that we are seeing. We do expect that this trend will continue.
We do feel that overall the metribuzin prices will look up compared to how they have been in the last nine months. Second point, what you were asking is about.
Gross margin improvement
the gross margins, the initiatives that we have taken. Yes, I think we have actually taken different initiatives for the different businesses. With regard to the domestic business, what you said is absolutely correct. We have had some mixed focus. We have tried to sort of focus on some of the larger GC products, wherever possible, of course, and that has helped us in terms of improving the GC. We also have, to be honest, witnessed extremely volatile raw material prices in quarter 3. In fact, even higher so than they were in quarter 2 or quarter 1. What we have done is we have also, therefore, adopted a very close approach to pricing our products. Wherever it has been possible to transmit the cost increases, we have done that. Of course, it doesn't mean that in every product we have done that.
We have, in certain products, actually altered our prices downward as well. On an overall basis, I would say that we have taken pricing action wherever feasible as well. Those are broadly the two initiatives as far as the domestic business is concerned. As far as the international business is concerned, as already Sanjiv mentioned, the demand outlook has been quite positive from a volume standpoint. Even in the case of metribuzin, the demand has actually been quite good, and we have been able to, as Ashish mentioned, reach the same revenue levels as last year, same quarter, INR 182 crore, INR 184 crore, despite the prices ruling significantly lower. As I mentioned, in the case of metribuzin, they are 40% lower, but in other cases, they have been lower, too.
There, what we have tried to really focus on is in the other products, wherever it has been possible to offset the significant reduction that has happened in metribuzin, both on the price front and consequently on the GC front, try to address it in the other products, and we have been successful with few of them. Overall, we have been able to maintain the GC levels at a similar level as last year overall for the international business. Although in the case of metribuzin, we have had a significant price pressure. Effectively, you could say that it's a bit of pricing action and focusing on what we can do under the demand conditions that prevail with regard to other products. That's really what we have done in the international business. Broadly, these are the initiatives that have helped in the GC front.
Understood, sir. Just on the MPP plant expansion that you're doing, these are largely to do with the capacity expansion and some of the APIs that you're doing. I mean, the acetamiprid and lambda-cyhalothrin, et cetera. Is it where the MPP expansion going in, or this is for contract manufacturing bit which where it is going? I mean, I'm talking about the INR 65 crore expansion.
No, no. That INR 65 crore expansion is for setting up a completely new MPP plant, which is not for expansion of existing products like lambda-cyhalothrin, what you mentioned, but it has nothing to do with specific contract manufacturing. It is about what you can call exports business.
You're building a plant. Just a clarification on that. You're building that plant to basically seek business on the contract manufacturing side.
It could be utilized. It could be useful from that standpoint as well. Really speaking, we also are looking at new products that we can produce from that multipurpose plant on an exports basis, not necessarily on a contract basis.
Understood, sir. Thank you so much.
Thank you. The next question is from the line of Varshit Shah from Emkay Global. Please go ahead.
Hi, sir, thanks for the opportunity.
Mr. Shah, can you speak closer to the handset, please? Your voice is not audible.
Can you hear me now?
Yes, sir.
Thanks for the opportunity and congratulations to the management for good delivery on the domestic front. Sir, my question is, A, the kind of growth you've reported is 15% in domestic business. Is it largely the same in the domestic B2C business as well? That's my first question. What are the key driver of this growth? Was it largely because of the product mix, which you alluded to, resulted in higher realizations because you sold a better margin product and a niche product? What was the reason for this kind of 15% growth? Because it is quite significantly higher than the industry average.
Yes, we are seeing that actually largely on the B2C business, as you know, that is the principal component of our domestic business. To some extent, I think the product mix has helped, but I think it is also the volume throughput that we have had. In fact, much of the growth we would attribute to volume increase. Remember that we have had a rather positive rabi season, we have also been well prepared, I should say, with regard to the availability of our products. I think it is largely driven by volume to some extent, yes, because of the portfolio mix. The portfolio mix has a bigger role to play in the margins more than in the top line.
Sure. Was there any additional, let's say, pest attack or demand, pest pressure YOY, which resulted in higher volume growth, or largely it was at the same level?
In fact, pest pressures in some cases have actually been little lower. I would say that I guess we have been able to focus in certain geographies a little bit more closely. We've been able to generate a lot more of demand. I don't think the pest pressure has been higher than last year.
Sure.
Mr. Shah.
Yeah, that's the follow-up last line. You would also have benefited from the expanded distribution which you have created. Even that would have contributed to this. Would that be a significant contribution? I mean, I'm not asking for a number, but would that have helped you contribute to grow faster than the market?
I think that is to some extent also contributed. It's a combination of more than the channel expansion. It is also about the demand generation, what we call crop advisors. We have actually had a lot of difficulties, as you know, in the first two quarters because of the lockdown. Some of that started reviving towards the end of Q2, and in Q3 also, we were able to do a little bit more of physical movement. Therefore, demand generation as well as trade enhancement, yes.
My last question.
Sir, so sorry to interrupt, sir, for any follow-up, request you to rejoin the queue, please.
Sure.
Thank you. A reminder to the participants, please limit your questions to two per participant. The next question is from the line of Abhijit Akella from IIFL. Please go ahead.
Yeah. Thank you. Good afternoon, gentlemen, and thanks for taking my question. Just a couple, sir. One is on the capacity expansions that you've talked about, the acephate, hexaconazole, and all the others. If you could just characterize the market demand supply environment for these. Are we seeing firmness in the market environment, or is there any risk that our expansion could lead to some kind of situation similar to what happened with metribuzin a couple of quarters ago?
Well, at this point in time.
Acephate increase.
Yeah, that's right. In the CapEx program that we have got, no, I don't believe we envisage anything. We have acetamiprid and lambda-cyhalothrin. That is not something where we envisage any major pressure. In fact, hexaconazole expansion has been completed, and as Sanjiv already mentioned in the opening remarks, that is also running now at full capacity. We do expect it will continue. Pendimethalin capacity expansion, we do not expect the kind of situation that we witnessed last time around with metribuzin. No, I don't believe that we will expect that in the foreseeable future.
Okay, got it. That's helpful. The second thing was just on, in your opening remarks, you alluded to maybe some slowdown in the domestic industry's growth in the next couple of months compared to what we've seen in the last couple of months. Just wanted to get your sense for whether, I mean, this season has been more front-ended for the industry of Rallis, and therefore Q4 could be a bit softer than we've seen in Q3.
No, Abhijit, I think the only point I was trying to make is that the overall growth of the agrochemical sector in India is unlikely to be at the fantastic growth that we had witnessed in Q1 and some part of it in Q2 as well. It's going to be just about 10%-11% growth. Ultimately, that is what the average for the entire sector will be. Whatever are the placements, stock levels and all, the consumption will be at the 10%-11% only.
Okay, great. Thank you. I'll come back in the queue for a couple of follow-ups. Thanks a lot.
Thank you. The next question is from the line of Rohan Gupta from Edelweiss. Please go ahead.
Hi, sir. Good afternoon. First question is on your CapEx. Out of roughly INR 550 crore CapEx, which you have already done, sir, can you quantify that how much has gone so far in MPP and how much in formulation, excluding this INR 65 crore which you have further announced? If you can just give some number on that. That is first question, sir.
Ashish will give the detail, but the MPP cash flows are still small because the construction is just about getting started. We are currently completing all the detailed engineering, and the construction is going to start. As far as the new CZ formulation plant is concerned, the construction is well on its way. The cash flows have already been articulated by Ashish a little while back. All going well, we expect to be able to commission at least one of the multiple lines during this financial year. That's our target. We are just putting all our resources in place to ensure that that happens. Things in these difficult times of this pandemic can change things over the next couple of weeks as well. We are just working towards getting one of our lines commissioned. Ashish will elaborate.
Rohan, see, for the formulation plant at the chemical zone, about INR 100 crores-INR 110 crores is committed. That is on setting up the three to four formulation lines. That is one big chunk. The MPP is around about INR 120 odd crores. The R&D building is roughly about, including the cost of the land, which we have already purchased sometime in August last year, is about INR 90 crores. The hexa acetamiprid and other would be around INR 65 crores-INR 70 crores. The Metri expansion already we have completed. There, we have already spent about INR 30 crores-INR 35 crores. Then there are about INR 15 crores-INR 20 crores for the land grading and all that, which is not part of what you call the capacity or anything, but this is a minimum infrastructure what we require. Overall, I'm just giving a breakup of this. There are many small.
Sure, sir. Sure.
I've covered.
Yeah. Sir, just on this only. Formulation plant, you are saying that will be completed by March 2021, I mean, just in a month period. MPP is going to be completed by end of this year, right?
Yeah, that's expected in H2 commissioning for next financial year.
Okay. Sir, just second question on this, the further investment in INR 65 crore. Though you have clarified that you are looking for CapEx, I mean, this plant is going to cater more to the export. Sir, I think that we have yet not decided that what will be the product which we'll be manufacturing on this and what will be the markets or what chemistry we will be using on this. I think that is MPP plant investment is more ahead of I mean, it's a pre-planned investment. The product is yet not decided, so it should be something like that. Can we have more such plants and more such MPPs to put in advance where we will cater to the market depending on the market scenario later on, but the product may be decided later on.
I'm just talking that are we forefronting our investment without finalizing the product? Is that the thought process that RV has right now?
No, that's not exactly the way it is, Rohan. We do have a product which we'll be producing in that plant. We have not articulated it, but we do clearly have a product that will go into the new MPP. We did mention that by the time this plant comes up, we'll be ready with the commercialization of at least two new active ingredients in this new facility.
Okay. Sir, just on this clarification further-
Sir, sorry to interrupt, sir, but for any follow-up, request you to rejoin the queue, please.
Okay. Thank you.
Thank you. The next question is from the line of S. Ramesh from Nirmal Bang. Please go ahead.
Thank you, good afternoon. My first thought is, can you share what is the contribution you got from new products launched so far in the nine-month period compared to the same percentage from new products last year?
Well, I think what we do track is something called the IPI, right? The Innovation Power Index.
Yeah.
What we can at this point in time share is that at the end of December, this index has reached 12%. Last year, full year, it reached 15%. I am talking about the cumulative number. The 12 will be expected to increase. At this point in time, although we have had a difficult year in terms of being able to do demand generation for the newly launched products of last year, the response has picked up, like I mentioned earlier. We are hopeful that we will cross the last year's IPI number.
Okay. The second thought is, what is the current thought process in the government on extending the PLI to agrochemicals? We hear a lot about it from different forums. Is there any finality, and what are the kind of measures you expect if some clarity is available on that?
As of now, this is still work in progress on the PLI for the agrochemical sector. Nothing yet has been finalized. As far as Rallis is concerned, we are not particularly focused on whether that PLI comes or doesn't come. Plans continue to be there for growing with or without the PLI.
Okay. Thank you very much. I'll join the queue.
Thank you. The next question is from the line of Chintan Modi from Haitong Securities. Please go ahead.
Yes, sir. Thank you for the opportunity. First question is with respect to this CapEx towards the formulation plant and MPP. Could you give us a broad range in terms of what kind of asset turnover that this can generate at peak utilization?
Actually, we have responded on a similar kind of question in the past. What we are focused on is not the asset turnover. We evaluate our investments on an IRR basis. We do have situations where you could have a large asset turnover, but somewhat low margins, but the effective cash flow from that investment may be still justifiable. We really don't compute, nor do we managerially use that as a thumb rule for our evaluations.
Okay, sir. Second question is with respect to the INR 6 crore of write-off that we have taken. Is it that it has been reported for the first time, or should be treated as purely as an exception for this year?
Yeah, it is an exception for this year. It is an exception for this year. I didn't understand when you said reported for the first time. It is an exception which is actually caused because some of our seeds turned substandard.
is this scenario kind of can come up in next year also?
No
particular to third or fourth quarter or something like that?
No, I think maybe I can just provide a little bit more of a background so that you can appreciate the context. When you take production of seeds, you could take it in kharif season or in rabi season. Normally, people take it in rabi season. If you do take it in kharif season, you are actually exposed to a possible risk depending on the weather vagaries. Some things working out in your favor, some things not working out in your favor. In this instance, it did not work out in our favor. We don't expect that it is a recurring kind of an event.
Okay. Sure, sir. That is helpful. Thank you.
Thank you. The next question is from the line of Rohit Nagraj from Sunidhi Securities. Please go ahead.
Yeah, thanks for the opportunity. Sir, in the presentation on slide number seven, we had talked about strategic initiatives on domestic business. If you could just elaborate on those four points, and what is the timeline with which we are likely to garner these benefits? Thank you.
The strategic initiatives, it is listing both domestic and international. Which one are you referring to?
The domestic business, how do these pan out over the next foreseeable future, what kind of benefits are we expecting?
On the domestic business, yes. I think the first point there is about digital campaigns. We have commenced Customer Connect through digital campaigns from Q1 actually this year. That is continuing. What we are finding is that there is likely to be a settling down over a period of time in a hybrid mode between physical and digital campaigns. To be candid, I think we should say that we have learnt a lot in the process of experimenting with digital campaigns, we will apply those learnings going forward, we will end up in an end state, which will have a combination of physical and digital campaigns. New brand architecture has been introduced for many of our products. About 11 products have been introduced by December.
We expect two-thirds of our products to be on the new brand architecture by March, by Q4, the rest of it will follow, the remaining one-third. This is an attempt to simplify our communication and make it much more memorable. This exercise is underway, it should get completed by H1 of next year. Focus on new product launches and portfolio optimization. Yes, we have talked about this in the past. We have identified the gaps in our portfolio. Wheat and soybean, as was called out, are a couple of crops where we do have some strengthening to do. Our R&D is focused on new formulations, which will help us, as well as we would depend on alliances, co-marketing, other routes in order to introduce those new products. This would be a continuing activity.
As the pests evolve, as the opportunities emerge, as some of our products fade out, we will continue to focus on this. Connection between distributors and company. Yes, I think this is something which we kicked off about now almost a year and nine months back. We had refreshed our credit terms, our policies for doing business with the company, including the reward and recognition kind of programs. This has got a little bit interrupted, particularly the R&R portion because of the pandemic. We are trying to kind of do things that can be done digitally or locally. This is something which we would expect will revive in the coming year, assuming the pandemic goes away. Refreshing of the distribution channel adding distributors to enhance growth in underserved geographies. Yes, this is a very important area of focus.
Like we have mentioned earlier, this will be carried out coterminous with our portfolio augmentation because we do believe that we need to have both in place to be able to capture the opportunity. Having the product but without the distribution is as good as having the distribution and not having the product. This is something which will progress. We are not focused here on the number of distributors. We are more focused on being able to capture the opportunity with the quality distributors that we require. That's really the update. That will also continue. That will continue because the product launches will also continue.
Thank you. The next question is from the line of Samir Deshpande from Fairdeal Investments. Please go ahead.
Congratulations for good numbers. I would like to know this raw material price volatility. Do we still import from China, certain raw materials?
Yes, we do. Our imports, we had mentioned earlier, is roughly about 50%-55% of our total procurement bill. We do, and we have a significant dependence on China.
Is there any currency fluctuation which is also affecting us?
It is affecting us because there is an appreciation of the Chinese currency that has happened, which creates a problem for us. Yes.
We are not in a position to source it from some other country. It is specific to China only we need it.
Yes, you are right. See, some of these are available only from China, and we have not, in some cases, been able to source from others. Of course, there are many other products where we are able to source, but there are a few products where our dependency on China is very high.
Okay. Now the export, last time the product pricing was a bit of a problem, but it seems to have improved. The outlook for the Q4 in terms of domestic as well as exports, will it be better? Last time we had this COVID impact and we had a loss, but this year, will it be better than this latest quarter?
Well, I think we have shared the experiences that we are going through now. Projecting for Q4, I guess we are not providing you a forward guidance, but at this point in time, certainly, the current context is a lot better than what it was in the beginning of the quarter.
Okay.
Just to add one thing, because in the last year, fourth quarter, since pandemic happened in the third week and fourth week of March, there were naturally immediate disruptions in the transportation and all that thing. Hence it had impacted our dispatch of materials, which we had reported also in the SEBI results.
Yeah.
Over the last nine to 10 months, a lot of things have stabilized, we don't foresee such type of problems coming into the fourth quarter. I just wanted to add on that.
Out of the turnover, what is the export? How much % of the turnover currently?
It's given in the slide. Investor slide.
Hello.
It is already provided in that slide, investors deck.
Okay. I will go through. Okay, thank you, and all the best.
Thank you. The next question is from the line of Vishnu Kumar from Spark Capital. Please go ahead.
Hi, this is Sowmya from Spark Capital. First question is on the margin split. Can you help us understand this 15.5% margin that is given for the crop protection? Can you just give a ballpark split between the exports and domestic, how to read this 15.5%?
I think we have talked about the growth in revenue, not on the margins saying they're at 15%.
The crop protection, we have a margin, EBITDA, I mean, margin, which is 15.5%. This is a 200 basis points YoY expansion from 13.4% to 15.5%. Just wanted to understand what would be the broad breakup of exports versus domestics here.
I couldn't follow your question. I didn't understand. We don't give a separate margin for crop care or seeds that way. From where are you quoting these numbers, please?
In our presentation. With respect to the crop protection business. We give a split of the EBITDA for crop protection and the seeds business. The crop care division.
That is an overall. Yeah. You're talking about.
Yeah, overall crop care. What I'm trying to understand is between domestic and exports, how would the number read? At an overall crop care, we are 15.5%. How would it read between domestic and exports?
Let me give you a context. In the exports, post the sales, we don't have any expenses. Whatever expenses are there on headcounts or other administrative expenses. In the domestic market, you have a field force, you have a lot of activities going around and all that. If you were to compare at an EBITDA margin for international business, definitely it'll be higher than the domestic business. When you compare the actual impact, the gross margins would be different. The EBITDA will be higher for the international business because there are no expenses being incurred post the sales.
Got it, sir. Somewhere a 200, 300 basis points higher when compared to the domestic business, the exports.
Maybe if I can add to what Ashish says. Maybe what I can explain to you is how we think about it, so that you can use as a springboard to kind of assess how you might want to look at it. What we focus on is the GC margin.
Yeah.
On the GC margins on the domestic side, because we have a predominantly formulations business, which is much more value-added compared to the active ingredient exports, B2B exports that we do on the export side, the GC margins tend to be higher on the domestic side compared to the international business. Thereafter, the rest of it, we actually focus on a fixed cost basis. That is the fixed cost that we incur in terms of salaries, in terms of sales and marketing. SG&A kind of things. That is the way we actually look at it. We don't actually break out an EBITDA number between international business and the domestic business. That's why we are a little bit struggling to give you an immediate response. This is the way we think about it.
We focus on the GC, and then we focus on the individual elements of fixed costs.
Got it, sir.
Mr. Kumar. Sir, sorry to interrupt, but for any follow-up, request to rejoin the queue, please. The next question is from the line of Dhruv Desai from ICICI Securities. Please go ahead.
Yeah. Thanks for the opportunity. I have two questions. Firstly, on the seed side. If you look at the last two quarter numbers, that means the Q2 and Q3, you mentioned that there is no fundamental change for the seed business. Is there any exceptional during this quarter? If we look at the growth for Q2, Q3, it seems little bit higher. Is there any exceptional change into that or should we assume that this is a normalized thing and we can expect this kind of growth degree coming forward as well?
Yeah. There is no exceptional thing. You see, in the case of seeds business, as you are aware, typically, if you look at the Q1 numbers, the way we reported, I am just clarifying this so that you can get a better view of how you can model it. What happens is that at the end of Q1, the returns are not fully available in the company, right? Because that is still June and the placements are still underway. What we do is to actually take certain policy-based or normative returns, which we true up at the end of Q2. At the end of Q2, that is at the end of H1, is when you really have a good picture about what the returns have been.
Similarly, when it comes to Q3 and Q4, you really are having a similar situation because you do have certain markets like Tamil Nadu, for example, where it is actually a late Kharif market. You actually go on normative returns for specific markets and specific crops, which you again true up in Q4. What would be more helpful to look at is on an annual basis, the numbers or on a H1 and H2 basis. Fundamentally, what I was mentioning earlier, there is nothing that we are finding different in the operations of the business for us to be able to call it out to you.
Okay. Just follow up to that. Out of your overall seed portfolio, which business segment you are foreseeing can force around double-digit growth? Is it maize or bajra or vegetable seeds? If you can share thoughts on that.
You are talking about where we have had double-digit growth in this year?
High expectation.
In this year and the expectation as well. Yes, I think as you are already aware, we have cotton as a very important focus area for us. This year has not worked out as well as we had hoped. We certainly will have significant growth expectations coming from cotton. Vegetables is another area which we also want to focus on. Those are strategically two important areas where we would expect a strong growth. Paddy has been a strong area and maize has really done well this year. Contrary to our original thinking that because of commodity prices being low on maize, we might have had certain challenges, but really speaking, maize has been quite positive. One would expect that cotton, vegetables, paddy, and maize in that sequence as the important growth drivers.
Okay. The last one, I just missed that breakup on the quarterly basis, this domestic and international. Can you share the breakup of revenue domestic crop nutrition and the international B2B, any colours?
We gave overall breakup between international business and the domestic. I think it's already available in the investor's deck.
Crop care includes crop protection plus crop nutrition.
Yes.
Can you share the breakup of domestic revenue, the crop protection and the crop nutrition?
I've given in my opening remark, no? I've given the breakup in my opening remark. What was domestic formulation business, what was PG and organic compost seeds and everything. I've given in my opening remark.
Fine, sir. Okay, thanks.
Thank you. The next question is from the line of Deepak Khole from BNK Securities. Please go ahead.
Thank you, sir. Congratulations for good set of number. Sir, my first question is, what are the reasons for lower depreciation cost in this quarter? Second question is that, is it possible for you to provide domestic formulation and B2B absolute sales figure for Q3?
I'll answer the first question. On the depreciation, it is basically a classification of entries, largely arising out of impact of Ind AS 116, which is a lease accounting. Maybe I can explain you separately, but just to give a context. If you are having a lease of any third-party arrangement and if there is an increase in the number of years over the lease period, then there's a particular way how do you account for the lease accounting and then capitalize the rent at NPV value and then start charging of interest and the depreciation to the extent of the revenue at the rent what we pay. It's basically not an item for third quarter since It's applied to the YTD numbers. If you see, the YTD numbers of depreciation is almost same, INR 49 crores versus INR 48 crores of last year. It's only a classification defect.
It's not that the depreciation has come down because of a sale of any asset or anything like that. It's just a classification.
Okay. What about second question on some domestic formulation and B2B absolute sales number?
You're talking about international business?
Yes, sir.
We don't give a break-up of B2B and international business, and also the contract manufacturing. We give a break-up of what is the total exports versus the domestic sales. That is available in that slide deck. For the institutional sales in the domestic market, it's not a very large number. It's a very small number.
Okay. Sir, last question, sir.
Sorry to interrupt, sir. For any follow-up, request you to rejoin the queue, please. Thank you. The next question is from the line of Deepak Purswani from PhillipCapital. Please go ahead.
Thank you. Thanks for taking my question. First question is, sir, about our sales and marketing cost. What is your expectation now as we are now moving towards the normal situation, maybe say, next one or two quarters. Do you think the kind of benefit which you have basically received in terms of the digital marketing and all, that is going to be increased, I mean, the cost going to increase over the next couple of quarters also?
Definitely in terms of travel and communication, there will be an increase because we will be able to have more people traveling. What has happened is that in things like advertising, we have also relied on television, for example, a little more than normal. Maybe that will be a rerouting of expenditure between different media channels. Instead of using television commercials, maybe we will depend more on local demand generation activity. There will be some heads where there'll definitely be an increase. There will be some heads where there will be a rebalancing. Things like digital, for example, they are not that high in terms of expenditure at this point in time, in our portfolio of sales and marketing spend. They will go up because we do expect that there is a place for digital that we have all collectively learned. That will go up.
Overall, if you ask me, you should expect that the cost for sales and marketing should go up on an annual basis, right? On a yearly basis.
Sure. Thanks, Sudhir. My second question is about some thought process towards FY 2022. I'm sure that it is very early to comment, and obviously it largely depends on kind of a monsoon outlook we'll have for the next year. Any thought process during that, like what will be the demand outlook, kind of a growth we are expecting because considering the very high base of FY 2021?
This we've discussed in the past also. If you look at overall agriculture in the country over the last many years, year-over-year, the food grain production has been increasing despite the vagaries of the monsoon. We have got multiple agro-climatic regions in the country. While there may be stress in one part of the country due to drought conditions or excessive rainfall, there is some kind of a balancing which thankfully happens in our country, which has led to year-over-year increase in agricultural output. If you see the growth of agrochemicals, it's been about 8%-9% in the past. This year, because of all the support that is being given to this sector and good liquidity in the market, we are expecting maybe 10%-11% growth.
In a ballpark, I would say anywhere between 8%-11% is the kind of growth that we can continue to expect year-over-year basis in this agrochemical sector.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.
Thank you. On an overall basis, I would say that the Rabi season has been supportive of agriculture. We ourselves have had a good outcome so far in Q3. The difficulty of our field teams actually visiting and engaging with the farmers has continued to be there. We do see some improvement in that situation going forward as the case counts in the country are becoming more manageable. We do also expect that the immunization program that the government is taking will, in due course of time, bring us back to a level of performance where our people are able to move around more freely. Yes, there are certain learnings that we've all had through this digital approaches, which have worked well for us.
As has been articulated by Nagarajan, we will be looking at a mix of both physical as well as digital interaction with our customers, both at the distributor level as well as the farmer level. I guess that is going to be the new way of working, and I think it is something that even the farming community is getting used to. We hope that this kind of hybrid model of engagement will continue into the future. We look forward to a good tailwind for the rest of the Rabi season, and we will meet again in the month of April over this call for the financial performance for the full year. Thank you very much, and back to the moderator.
Thank you. Ladies and gentlemen, on behalf of Rallis India Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.
Thank you.