Ladies and gentlemen, good day and welcome to the Rallis India Limited Q1 FY 2021 Earnings Conference Call. As a reminder, all participants' lines will be in listen-only mode, and 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 star and zero on your touchtone phone. Please note this conference is being recorded. I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.
Thank you, Vikram. Good day, everyone, and thank you for joining us on Rallis India Limited Q1 FY 2021 Earnings Call. We have with us today Mr. Sanjiv Lal, the Managing Director and CEO; Mr. Nagarajan, the Chief Operating Officer; and Mr. Ashish Mehta, the Chief Financial Officer. Before we begin, I would like to mention that some statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement and disclosure in this regard is available in the result presentation. I now invite Mr. Lal to open proceedings of the call. Over to you, Sanjiv.
Thank you, Gavin. Good morning to everyone. Thank you for joining our Q1 FY 2021 Earnings Call. As mentioned by Gavin, Mr. Nagarajan, Ashish Mehta are also joining me on this call. Let me begin the discussion with a quick overview of the on-ground situation, following which I will discuss Rallis' specific developments. Then I will request Ashish to walk us through the financial highlights. To begin with, while the overall uncertainties and challenges surrounding COVID-19 pandemic remain, on ground, though things have started to improve for our sector when compared with the previous quarter. The intensive effect of the government, both at the central and state level in opening up the economy in a staggered manner has, in a way, helped ease the situation. Logistical challenges which were prominent during the previous quarter are now getting addressed, and labor issues have to some extent eased.
While, as I mentioned earlier, challenges still prevail, I believe that most of the businesses have now adapted to function in this new core business environment. Now talking about the sector where we operate, agrochemicals, on an overall basis, things have been largely good. Farmer sentiments and liquidity levels are high on the back of strong rabi season and remunerative prices for agri-products. Water storage at reservoirs are at a healthy level. Timely onset of the monsoon, along with a steady progression so far, has further buoyed the sentiment. The combination of the above factors has resulted in early start of the kharif sowing. Logistical challenges, as earlier mentioned, as well have now subsided, which has ensured better product availability in the system. Further, the situation at ports in terms of raw material imports clearance, especially from China, has been improving. Moving on to Rallis specific developments.
We have started FY 2021 on a positive note, as can be seen from our Q1 numbers. While Ashish will talk about the numbers in detail, let me just highlight the headline numbers. On a consolidated basis, we have delivered a top-line growth of 6%, EBITDA growth of 35%, while PAT has grown at 38% during the quarter over the previous year. As mentioned in our previous calls, our focus will be on maintaining the growth momentum by improving our product mix, launching new products, and widening our product reach across our business segments. In addition, we have also been able to improve our cash position through our strong collections. In terms of new product launches, we introduced six new products in FY 2020, three of which were 9(3) products, while the others were co-marketing.
While the initial response for the products was favorable, we should see the full impact of the same during the current year. Our domestic business, on an overall basis, grew by 26% over the previous year, and this is our domestic formulation business. We are working towards introducing new products during the course of the year, which should help maintain the revenue momentum. Moving on to the seeds business. The timely onset of the monsoon has resulted in good pickup of agricultural activities. Despite difficulties on logistics in the earlier part of the quarter, we were able to place our products in the consuming centers. Initial assessments indicate a lower-than-expected offtake of our cotton product, while we continue to maintain a strong position in paddy and millet. On an overall basis, our seeds category has shown a -3% growth over the previous year.
There has been some change in the crop pattern, as we witnessed some crops shift towards groundnut and soybean away from cotton, especially in Gujarat and Maharashtra. Going ahead, as indicated earlier, we are consciously working towards improving our rabi portfolio, which should help in maintaining the momentum in the seeds business throughout the year. Our international business revenue growth during the quarter remained flat due to continued pressure on metribuzin sales, which continues to be impacted by a revenue overhang in key markets. A quick word on CapEx. We have completed phase 2 expansion of metribuzin.
We are also, after some initial delays, on track and are hopeful of commissioning the new formulation unit in the Dahej Chemical Zone during the year. We are also setting up a state-of-the-art R&D facility in Bangalore to further drive our growth with a significant step up in our product development for crop protection, crop nutrition, and seed research. To conclude, I would just like to reiterate that the sector as such is relatively well-placed in terms of demand visibility. Further, with logistics and labor issues waning, we believe the business is well-placed to deliver consistent growth over the coming years. At a company level, we have been undertaking multiple steps in recent years towards reviving the growth, addressing the pain points, and consolidating our areas of strength. Some of the recent initiatives are now delivering results, strong product pipeline, launch of new products.
Further, a widened distribution reach and also revised trade terms has worked well for us, improving our overall cash position. Lastly, the proposed CapEx, which we are undertaking, will help provide the necessary manufacturing capacity for domestic and international business over the coming years. Our efforts towards strengthening the seeds portfolio will help address the concentration risk at present and transforming into a mature and balanced business going forward. With that, I will now hand over to Ashish for an analysis of the financials. Over to you, Ashish.
Thank you, Sanjiv. Good morning and welcome to all on the earnings call for Rallis Q1 FY 2021. I hope you all are safe and healthy. Before I dwell on the numbers, I wish to inform you all that there is no material difference between the standalone and consolidated numbers, as consolidated financials include financials of Indonesian JV PT Metahelix , which has no transactions during the quarter, save and except a small amount of administrative costs. Now the results. To summarize the overall financials, revenue at INR 652 crores grew by 6% over previous year. EBITDA at INR 128 crores grew by 35%. Profit before tax at INR 120 crores grew by 38%, and profit after tax at INR 90 crores grew by 38%.
It will be pertinent to point out, as was mentioned in the investor docket, that in the current year we have opted for a lower tax rate, and hence the adjustment of the tax is looking a little higher than compared to previous year. The effective tax rate, we have opted for 25.14% tax rate this year as against the normal tax rate of last year. Coming to the domestic crop care business, overall revenue was at INR 402 crores, registering a growth of 11% over the previous year. The seed division revenue at INR 261 crores registered a growth of 3% over the previous year. Within crop care, the domestic formulation business revenue was at INR 215 crores, registering a growth of 26% over the previous year. Majority growth achieved due to volume. However, we did witness pricing pressures in some of our branded products.
Crop nutrition also witnessed a healthy volume growth over the previous year. International business clocked INR 143 crores and registered a modest growth. However, we saw volume growth in our B2B business, which was largely driven by some of our molecules, acephate and pendimethalin technical. Distribution continued to be under pressure, both in terms of demand and pricing. In contract manufacturing, we saw a de-growth over the previous year due to deferment of some of our orders to Q3 of the current financial year. In the seed division, the revenue was largely impacted because of lower-than-expected liquidation of cotton. Farmers have been doing crop share by the farmers. However, maize and bajra saw volume growth over the previous year. The company continues its focus on receivables and cash flow and is confident of meeting its fund requirements for various CapEx programs through internal accruals only.
However, due to present conditions in collections in some areas still remain a challenge, as a prudent measure, the company has made an additional provision of roughly INR 3 crores towards doubtful debts, which is more than the expected credit loss model suggested by the institute. In the current year, the company has opted, as I said earlier, for a lower tax rate. The effective tax rate was 23.53% as against 30.43% in the previous year. Our CapEx program got impacted due to the present lockdown. Some of our major CapEx will now see a delay of two to three months. As Sanjiv mentioned, the Dahej Chemical Zone formulation plant is all well set to commence production end of Q3 or beginning Q4 of current financial year. Thank you, and I hand it over to Gavin.
Hello. Back to the moderator. Back to market Q&A.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your 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. We will wait for a moment while the question queue assembles. To ask a question, please press star followed by one on your touchtone phone now. We have our first question from the line of Viraj Kacharia from Securities Investment Management. Please go ahead.
Yeah. Thank you for the opportunity and congratulations for a good set of numbers. Just had three questions. First is on the International business. X metribuzin, if you could just provide some color, how is the actual volume and value growth trend being in other molecules? In metribuzin, what is the kind of price and volume moderation we have seen? Are the spreads still attractive for us in that particular molecule? That is one. Hello?
Yeah. Would you like to ask all your questions or should we respond one by one?
No, you can take one by one if that's okay.
Okay. Viraj, on IBD, while metribuzin has been a problematic product for us for the last two quarters, this is due to a huge inventory of this particular product in North America, which is our key market. While metri has been a problem, we have seen volume growth in our other products that we are exporting, which is pendi and acephate, that is a positive sign. As far as metri pricing is concerned, this we also discussed in the past. While the price of metri is trending down, the raw material for it is also trending down. In terms of the margin that we could make on this product, I would say that is still intact and there is no concern on that score.
Yes, since the price is down, the revenue will tend to look lower than what it would normally have been had we looked at a similar period one year back. The margins would remain intact.
The reason I ask is because, if you look at the recent ruling in North America as well regarding dicamba, which is one of the alternative substitutes for the molecule, the fact that we had something like INR 50 crore-INR 55 crore of deferred sales from Q4. One would think that Q1, at least the international business would have seen some kind of a healthy growth rate. Is the INR 53 crore deferred sales still intact or we see a risk to that materializing? Any color in terms of the whole ban on dicamba now, how do we see the demand for this particular molecule going forward?
Viraj, dicamba is not one of our products, so I'll just set that aside. The possibility of substitution of dicamba by metri is something that we are not very clear. We are also expecting that there would be some benefit that our product would get from that category. There are a number of combinations of dicamba which are selling in North America. Which are those combinations with metri, which could benefit us still remains to be clarified. In any case, in the immediate term, it's not that there's an immediate stoppage of use of dicamba, so the countries will allow working off of dicamba inventories before any ban comes into play. There will be certainly inventories of dicamba which are still available to the farmers in the consuming markets.
Yes, we are also hoping that such decisions on products like dicamba, glyphosate would have a positive rub-off on our category of herbicides, which is pendi and metri.
Thank you, Mr. Kacharia. Please come back in the question queue. In the interest of time and fairness to all participants, ladies and gentlemen, please restrict questions to two per participant. We have next question from the line of Sajal Kapoor from Unseen Risk Advisors. Please go ahead.
Hi, thanks for the opportunity. First of all, congratulations team on a fantastic set of results in such difficult times, much appreciated by all of us. Just two questions. First one, just wanted to understand the broad brush approach on the clients and scale-up opportunity internationally. If the economics and the chemistry of the molecule match, do we care if the innovator or client is agro or non-agro chemical? In other words, if the margins are good and we understand the technical complexities, would we look at both agro and non-agro intermediates, active ingredients or even formulations?
Sajal, just to give clarity on this issue. In terms of our company, we are very focused on agrochemicals. Right? When we say we are focused on agrochemicals, it's because we know the customers, we know the business. When we are looking at intermediates, there could certainly be opportunities which are across different product categories. For example, one of the polymers that we do, which is PEKK, which we do for Cytec, has got nothing to do with agriculture. Because of the type of chemistries that we are good at, it is a product that we do. If, for example, Cytec wants us to do two more such products for them, we will do it. We are not actively pursuing non-agro customers for our intermediates business. I don't know whether that answers your question.
Certainly if there are certain intermediates, because we do intend to get into manufacture of number of intermediates. There's a lot of work which is happening within the company on identifying the correct opportunities. If such intermediates are working across different product categories, certainly, I would not do that. Our focus is primarily on the agrochemical sector. Sajal, I hope that clarifies your question.
It does. Thanks. It gives me the flavor. I was just wondering with the new R&D center coming up, it may just add to our capabilities, but yeah, it's perfectly fine. Secondly, sir, regarding the roadmap for de-risking the supply chain risk, we have a relatively high dependency on China, we understand that. From the raw material perspective, about 55% we take from China directly or indirectly, which results in a moderate supply chain risk, obviously, for us. Our question is, are Indian suppliers not capable, or they currently don't have the capacity to fulfill our requirements? I mean, what's the roadmap like?
Sanjiv, on this subject, I think there's a lot of discussion happening between the industry and the government, Department of Commerce and Industry, Department of Agriculture on how to boost Make in India, Atmanirbhar Bharat. There will be a lot of opportunities that will be picked up by Indian companies to expand their manufacturing base to many kind of intermediates or chemicals which have so far been imported into the country. Which ones will actually get manufactured in India over a period of time still remains to be seen. There are certainly some products which are problematic because of the very high pollution load. Many Indian companies may be hesitant to take up such kind of chemicals.
Rallis certainly would look at the EHS consideration before we sign up to producing any material which could be not sustainable to the extent that there may be very significant challenges in dealing with the effluent that is being generated. There are a few such chemicals that they are being made in other countries which are able to deal with the environmental load coming from these kind of chemicals. Indian companies will need to think about it, and Rallis in particular, will be very cautious on getting into chemicals which have an environmental load which is at unreasonable level.
Thank you, sir. We have next question from the line of Varshit Shah from Emkay Global Financial Services. Please go ahead.
Sir, thanks for the opportunity. Sir, my question is on the overall lower stage on herbicides and fungicides, why there's some decline in the overall crop care level. Is this attributed to the slowdown in the international space? That's one. Second is that our portfolio is slightly more skewed towards the insecticides and hence I think, do you expect the Q2 to be better in terms of growth than Q1 because for insecticides, Q2 is the peak quarter. That's my question one. Second, on the margins. We have seen a healthy uptick in gross margins. Is this purely on account of product mix and is this sustainable going ahead?
Nagarajan, would you like to take up that response to Varshit's question?
Yeah, no, I can do that. I think the observation that you make is very correct, that in terms of our portfolio, in our domestic portfolio, herbicides is an area where we need to further improve. Insecticides and fungicides are better constituents of our mix as far as the domestic market is concerned. Internationally, of course, the picture is a little different. We have a larger component of herbicides. Yes, it is our understanding that insecticides and fungicides would really be more in demand in Q2. Having said that, I think what has also happened this year is that the season in the Indian market has kind of advanced. We have witnessed movement of insecticides and fungicides, which is, of course, largely placement in the month of June that has happened in Q1 as well. I think your overall observation is certainly something which is correct.
As far as the margin is concerned, yes, it is largely a case of product mix. We have, as we had perhaps clarified in one of the earlier calls as well, not had any kind of pricing action which is deliberate to sort of shore up the margin. We have, of course, corrected the prices where we felt that the market can absorb a little larger, a little higher prices, and also therefore accommodate the cost increases that we have had, whether it is from the standpoint of the dollar rate changes or in terms of increased COVID compliance costs. Whether it is freight costs or whatever the reasons may have been. Those are all very selective and very specific. In fact, we have had cases where we have had the price movement in the opposite direction as well.
In short, it is not a result of any specific deliberate price increase policy or anything like that. It is purely a mix-driven factor.
Sure. Just one more thing. I think you mentioned that there has been a good realization in the seed segment. Is this a one-time thing because maybe some panic in the markets and organized players like ours were able to place the products ahead of the unorganized players and hence you could command a higher realization? Is it sustainable, going into, say, next year? This year's season is obviously over, but is it something you can assume that you can sustain going forward in next year, or it seems to be more like a one-time thing this time?
No, I think it is again, to some extent, driven by the mix because for example, what we have called out, for instance, in the case of paddy, just to take an example of a better realization. Since the rains have actually come in early, the farmers perhaps have looked for slightly mid-late and late duration hybrids as opposed to looking for short duration hybrids, which was really the kind of situation that we had last year when the rains came later. Since the rains came later, they had to sort of get their sowing done and quickly get the harvest out because the remnant of time available after sowing was actually much lesser because then they had to shift to their next crop after the paddy harvest gets completed. However, this year the picture was a bit different. People were therefore looking for longer duration, longer maturity crops.
As you would appreciate, the longer duration crops typically tend to have a larger yield. The filling of the grain, because there is longer time that is available in the plant stand tends to be better and thereby the grain weight, what they typically call as a 1,000 grain weight. Basically, if you take 1,000 grains and kind of weigh it, the weight tends to be a little better, which contributes to the overall yield. Therefore, the choice of products which go into it, the choice of the hybrid seeds that go into it are skewed towards the longer duration hybrids. That, because of the fact there's a value proposition finally in terms of better yield, there is a price advantage, price premium that tends to happen. To your question about whether it is sustainable, it actually depends on how the rain pattern is.
What we try to do from the company's point of view is, of course, to have a balanced portfolio between short duration, mid-late, and late duration, so that we are able to accommodate the fluctuations that can happen from year to year, but it is very difficult to predict. For example, how things will be next year or the year after.
Sure. I think that's helpful. If I could just squeeze in one last. I just wanted to understand if there was 26% growth in the domestic brands business, that means other than that, I think the business either was flat, the B2B or sort of a decline maybe marginally. Was there any capacity constraints, and you could not service that demand because your B2C demand was higher, so you had to divert those capacities there. Is my assessment correct? If yes, what is the plan going ahead? That's it from my side.
The growth rate in the formulation space, you are right, has been higher, and that is also the space where the value addition as you would appreciate is higher. That is why you do have a bottom-line impact as well, which is coming in. On the other areas, the growth rates have been lesser and certainly, the metribuzin situation has contributed. Of course, it is a global situation. Also in India, there has been a kind of a moderation in the early phase, which has contributed to some of our institutional business being a little lower than what it was last year.
You are right that even though we had a 26% overall growth in the domestic formulated business, if you were to take the combination of crop care revenues as we are reporting it, which includes, of course, crop nutrition as well, that has tended to be about 11%. Your observation is correct.
Sure. Thank you, sir. That's from my side.
Thank you, sir. We have next question from the line of Aditya Jhawar from Investec Capital. Please go ahead.
Yeah. Sir, congrats on the overall numbers. Sir, any update that you can share on the proposed suspension of molecule that was in the news? What could be the likely contribution of those molecules for our domestic and export business? That's my first question.
Aditya, we have got a capital program for building additional capacity, which should be ready by around Q2 of next year. We expect that our R&D teams would have been able to finalize the synthesis route for a couple of such products that we intend to put in the market. You would appreciate that on day one, it would always be smaller volumes as we get appropriate registrations across the international markets, especially for some of these products. We will have a slow start starting next financial year. Nothing in this financial year, Aditya.
Absolutely. Sandy, my question was more with regards to the suspension of molecules that was in the news that the 27 molecules. Any progress specifically on the domestic front or export front that they are thinking about allowing exports and what is the contribution in FY 2020 for these molecules for both businesses? That is my first question.
On an overall basis, if you look at those, you are now referring to the 27 molecules. I am sorry, I misunderstood your question. Yes, these 27 molecules, on an overall India basis, would constitute almost, I would say, 20%-25% of the value of agrochemicals. Maybe about 25%-30% would be its impact on Rallis, I would say. We have a slightly higher impact than the overall country average. As far as the exports of those 27 molecules are concerned, that is now clarified by the government that there is no issue in export of these products out of the country. That takes away one of the key challenges because pendimethalin, which was included in that list, as also acephate, are very important for us. Therefore, it would have had a significant impact on our international business.
That challenge is out of the consideration area. That means that problem has been now put to rest. The issue now remains on the domestic application of these 27 molecules. There is considerable dialogue that has happened between the associations and the government and the regulator, and it is our understanding that the government will be constituting a committee to review this decision because it is something that, as you can appreciate, if 25% in terms of value disappears from a market which is about INR 19,000 crores, you can imagine the impact that will have on the farming community. Very popular, very effective products will suddenly disappear from their available products to use. There are no immediate substitutes at all. For example, for directly seeded rice, which is being promoted in Punjab, the only herbicide available is pendimethalin.
You can imagine the plight of the farmer who is trying to do DSR, where he does not have access to pendimethalin. All these decisions which have been taken need to be reviewed by the government and the industry associations are working towards getting a proper resolution. Our guidance from our association, which is CropLife India, is that there has to be a scientific basis before such decisions are taken. It cannot be on the basis of some particular country banning it, whether it is Saudi Arabia or Norway, and then to say that it will not be allowed in India. Each country has its own requirements of agrochemicals depending on the agroclimatic zone, as also on the types of crops that are cultivated. Paddy is not a crop that is cultivated either in Norway or in Saudi Arabia for it to be banned in India.
Some of these things, I am sure the committee that we are hoping is getting formed will look at, and we expect a positive outcome from these deliberations.
Yeah, that's very helpful, Sanjiv. My next question is for Nagarajan. Nagarajan, if you can highlight, in the domestic branded business, we clearly are seeing the effort that you guys have taken. The results of those efforts are very visible for the domestic formulation business. In terms of seeds, our business in the last few years has not been able to demonstrate strong growth. What are the pain points that you have identified, and what are the steps you plan to take to mitigate that? When can we see the results of these in the seed division?
I think if you specifically look at the first quarter performance, one of the big areas that we are identifying as an area to significantly improve is our cotton. As we have called out earlier, we are expecting much larger returns on cotton than we had planned or what we had anticipated. Obviously, there have been a number of market-level factors that have contributed to this also. As you are aware, the commodity prices of groundnut have actually ruled much better, and certainly cotton prices and other products, other commodities, have gone down. We have found there is a crop shift that has happened in Gujarat from cotton to groundnut.
Similarly, if you go to the Vidarbha region of Maharashtra or even parts of Madhya Pradesh, where soybean has been dominant, we are finding that soybean has done very well this kharif, and it has had a collateral impact on cotton. Apart from these market factors, we also think that we really need to reexamine some of the products that we are offering in the market. Although we realize, although we understand that many of the cotton players in the market have actually had challenges this year, there are still two or three players, we think, who have been able to navigate quite well. One of the important areas that we will really have to focus on is in getting the growth mojo into our cotton business. As you would appreciate at this point in time, these are all estimates. These are all expectations.
We are still in the middle part of July, and we will have better information towards end of Q2 when all the sales returns for all the companies happen to be able to have very precise conclusions in terms of what areas we need to focus on within cotton. That's certainly one of the areas. The second one, of course, has been vegetable, and that's an area which, if you recall, we had mentioned as one of our priority areas, one of our growth areas. We have created the separate dedicated team towards selling as well as the R&D of vegetables. Considering the kind of difficulties that have been there in vegetables in the quarter, we feel encouraged actually with the progress that we have made, although it is quite small in the overall scheme of things.
As you know, many reports have predicted that the profitability, per hectare profitability of farmers for horticultural crops are expected to actually decline in kharif. The prices have been quite poor and it has been difficult for farmers to sell their produce in the market. Really speaking, I think the economic condition and certainly so for specific vegetables has been challenging. In spite of that, we feel encouraged because we have been able to get our teams organized and move vegetable in different parts of the country. Of course, there is a long way to go and we really need to continue to focus on vegetables. Apart from these two, I think the earlier objective of improving our portfolio for rabi, that still remains. That is, however, not something that is a new development in Q1, because that is something which is still in R&D.
That area will continue to be an area of focus. These, I think, would broadly be the areas and I think arising out of Q1, the big message we are taking away is that for us to refocus on cotton a lot more. That's probably the way I would describe it, Aditya.
Thank you, sir. We have next question from the line of Rohit Nagraj from Suniti Securities. Please go ahead.
Yeah. Thanks for the opportunity and congrats on the good set of numbers. Sir, due to the preponement of season, has there been any sales preponement which has happened and the deferred sales during Q4, is there any component of that in Q1? Because of this, have we gained any market share from the unorganized players?
I think to your point about the earlier arrival of the season resulting in or rather having an impact on our Q1 performance, certainly, yes. I think there is no question about it because everything has got accelerated. The sowing dates have got advanced compared to last year, I'm saying. Therefore the plant growth is getting advanced. This is from a natural, what you may say, fundamentals kind of a factor. Of course, there have also been other sentimental factors in terms of people feeling trade, feeling a little bit concerned about availability of material, and thereby, there has been an element of stocking up that has happened in quarter one as well. I think the growth that we have seen on the sowing season. I mean, the reports are suggesting that more than 20% we are ahead of kharif sowing compared to last year.
This number used to be 40%, 44% sometime back, I think it was 80% even earlier. Obviously there is a moderation as we would expect to happen because the overall kharif acreage in the country is what it is, therefore it would be unrealistic to expect that these kind of percentages will sustain. CRISIL, for example, is predicting a 1% increase in the sowing area by the end of kharif season. Maybe we could say that it could be in the 5% range if you are a bit optimistic. We would expect therefore that there will be a moderation that will consequently happen. What we have seen, our view is that this is actually, it's a movie which is playing out and we are in the middle of the movie.
We have not yet reached the end state, at this point in time it is running faster. In terms of what has happened in terms of shifts from Q4 into Q1, as we had mentioned, as far as the domestic business is concerned, it is a little difficult to have much of the shift of Q4 coming into Q1 because it is related to a particular crop stage. If you miss the crop stage because we missed it because of lockdown and those kind of factors in the early part of April and late part of March, that is not something which we had anyway expected to recover. There has been a little bit of marginal recovery, maybe in the second week of April, maybe we were able to kind of do a little bit of business, but nothing substantial to speak about.
As far as the international business is concerned, what has been slipped over from Q4, we had mentioned that over a period of time, we will be able to retrieve that business because we had not got any cancellations there, that continues to be the case. Some portion of it has obviously come through in Q1. Some portion of it will probably continue to come even in Q2. That is broadly the picture as we see it.
Yeah. Thanks for the clarity. Sir, on the financial side, operating expenses have come off and this primarily would be due to shutdown of facilities, offices. The fixed expenses have come down. Are they going to come back in from Q2 onwards? What could be the quarterly run rate for the same now?
Rohit-
You know, it is true that our fixed costs have come down, and I would say largely the fixed cost has come down in the area of travel only.
Of course, there is some saving of electricity because the offices are remaining shut. Apart from that, I would say that we have increased our spend on digital marketing, on the marketing efforts since everything is being done remotely. Our teams are physically not visiting the trade or the farmers. There are other expenses that have come. Maybe I'll request Ashish to give some further insights on the fixed cost because.
No.
Yeah.
Exactly the same thing.
The same cost will come back.
Cost will come back. Excepting for the travel cost, which has seen a decline. I think the other expenses on the distance marketing in terms of digital and other thing has gone up. Overall, a very small decrease over last year. If situation improves, then naturally some traveling would happen. In the first three months of the quarter, you had practically shut down coinciding with the COVID-19 lockdown, and we had some maintenance. There also some bit of electricity cost, utility cost had come down. This is a normal yearly phenomenon, so we don't see any dramatic figures coming down as such. We are still.
All right. Thank you.
Staff cost, I think has come down.
No, staff cost is almost same as that.
Thank you, sir. We have next question from the line of Rajat Sethia from Vriddhi Capital. Please go ahead.
Hi. Thanks. Am I audible?
Yes, please.
Okay.
Yes, please. Yes.
Sir, in domestic crop care business, what is the mix of formulation and the intermediates?
In the domestic crop care business, we have only formulation. We do have a little bit of sales in our institutional business of active ingredients, but we don't have any intermediates which we sell.
Okay. What would be the mix of that formulation B2C versus B2B institutional?
Well, you could say most of it is formulations. I'm just guessing it will be 90%, 95% formulation.
Okay. In the domestic crop care, what is the sales that we recorded this time? Is it INR 255 crores or near about?
Sorry, your question was not clear. Can you please repeat it again?
What is the sales that we recorded in domestic crop care vertical in this quarter?
Ashish, would you like to give the domestic revenue? Yeah. Hello, Ashish, you there?
Sorry. I don't have.
Okay, no problem.
I mentioned No, sorry. I mentioned in my opening remark also that the domestic formulation business was at INR 215 crores, which gave a growth of 26% over last year.
All right.
It is mentioned in the call.
Sure. Sir, on the export side, we were planning to file some 60 dossiers in this year. If you can talk a little bit about it, by when do you think you will be able to file them, and by when do you expect the results to start coming in?
Yeah. Your voice is not very clear. Can you just describe what you said at the beginning about the dossier?
You're trying to file some 60 dossiers in the export market. Just want to understand where are we in that process, and by when do we expect to have the results of those filings coming in for us?
Rajat, I'll take that question. See, we are actively going ahead with filing these dossiers. It, of course, takes time depending on the country. We have already been able to successfully get some approvals, especially for some of our formulated products in Brazil. We will be seeing some business of our formulated product in that country. These are all long cycle time things. Things which we do today will become available to us for business between two to five years down the line, depending on the country. The work on these dossier submission is actively being done, and also we are expecting to get some business from what we have already succeeded in getting registrations of, especially in Brazil where we have got one of our products registered, a formulated product.
Sure, sir. Sir on another-
I'm sorry to interrupt. Would you like to please come back in the question queue?
Sure.
Thank you. Please restrict questions to per participant. Ladies and gentlemen, we have next question from the line of B. Padmanaban from Sundaram Mutual Fund. Please go ahead.
Thank you for taking my question. My question, the first part is when you're talking about the shift that has happened from the institution part of the business to the branded business, one would understand that you would also see some benefits as far as working capital is concerned, also that I hear that more of cash buying had happened from the farmers. If you can talk a bit more about how the cash flows and the working capital was in this quarter because of this mix.
I think we have definitely had a significant improvement on the working capital. Earlier it used to be 110 days last year. Now it is about 60 days. There is actually a significant drop. That's largely coming on the back of the strong collections that we have had
this year, Q1 of FY 2021, compared to Q1 of FY 2020. This is one of the points that I think Ashish alluded to earlier in terms of the selections that we have seen. What we have also done is that we have increased the stock of our raw material inventory consequent to the COVID challenges that are there as a coping mechanism. This is the net result of all of these actions. However, I want to just preface this or say that this is nothing to do about shifting of business from AI to formulations or anything like that. This has been in the domestic business, 90%-95% has been the formulation component of the business, even in the past. This is just a pure result of the Q1 rather than about any change in strategy or change in mix of our business.
You said 60 days, right? From 110 days.
You are right.
Yeah. This would continue in the second quarter. Which means that your first half cash flows will be significantly better than your first half of the previous year. Is that a right assumption?
At this point in time, for Q1, it is significantly better.
Yes.
I think, as you know, that cash is, at this point in time, one of the most important things that we are focusing on from an operating point of view. Making sure that the right allocation of capital is going to things like inventory, for example, like I mentioned to you, and of course, to our CapEx program. Trying to expedite our collection so that we are able to improve our position. All of this depends on how the COVID-19 sort of pans out. So far, contrary to what our peers were, and possibly to some extent helped by the initiatives that we have taken, which is really to encourage prompt payment, we are witnessing actually very good collections, and therefore our working capital has improved.
Sir, my second question is on the Innovator Done Index. If I look at the annual report, I was quite surprised to see us doing 16% after several years of us being in probably low single digits to 10%, et cetera. One is, you did mention that the product launched between that FY 2017 to 2020 has done very well. Also that we launched six products. From launches perspective, earlier you mentioned that we are quite heavy in insecticide and fungicide, and herbicide is a bit of a place where we need to fill. From that perspective, can you talk a bit more about how do we see this Innovator Done Index? What kind of launches are we expecting to see this year going forward? Probably how much should be the contribution coming in from these products probably this year and next year?
In terms of, I think we have mentioned this, that we have indicated that at least two new formulations will be introduced in the Indian market every year. As far as this year is concerned, in Q1, we have not had any new introductions, although we have received approvals from the CIBRC, which will go through for the launches in Q2. I think we should definitely do, at this point in time, better than what we had indicated. As we go along, we will have products that may arise for Q3, Q4. That is as far as the outlook on new product introduction for FY 2021. Certainly, I think the point of increasing our herbicide presence, that is built into our plans for product introduction. It may come either through in-house R&D or it may come through co-marketing route.
That is something which we are focused on. That is what I meant earlier when I said that herbicide is an area where we need to focus.
Just a thing on this, clarification, this product that you launched, is it a 9(3) or would it be a co-marketing product?
We have so far not launched anything in Q1. We are expecting to launch in Q2, nine new products.
Sure. Thanks a lot, sir.
Welcome.
Thank you, sir. We have next question from the line of Nitin Gosar from Invesco. Please go ahead.
Yeah. Just wanted to understand more bit on cotton part. You said the mojo is missing. Typically, these are science-driven products, so are you indicating more towards marketing side, or there is really lesser excitement for Rallis products? Is it more to do with the science itself in the product?
Sorry, again, I didn't hear your question, the early part, very clearly. Can you repeat it again, if you don't mind, please?
Sure. I guess to try and understand, you mentioned cotton is missing mojo. Is it more to do with the science part? Typically seeds are more akin to science part. Is it more to do with the distribution marketing part where the mojo is missing?
Well, to be honest with you, at this point in time, we are passing through those different factors. We are still, as I mentioned, in the middle of the season. The season is not completely over. We are hearing reports, like I mentioned, that many companies, other than two or three, have had significant challenges. We are trying to distill between what you may call as market factors and what you may call as company-specific factors. Now, within the company-specific factors, we do believe that both the points what you mentioned have a role to play, which is the science-related aspects, as well as the marketing or distribution-related factors. These are all, at this point in time, tentative thoughts. Like I said, we will formulate our view once analysis is completed.
Mm-hmm. The ECL provision that was mentioned on cotton is, I believe the age life of the cotton seed is around two years, so that can be reused next year?
No, no. The ECL loss, I think was mentioned was more with respect to collection. As far as cotton seeds are concerned, you're right, the life is more than two years.
Okay. I think your slides typically do mention about how you're progressing on logistics and distribution. This time it was not around. Could you throw some light on how we have progressed so far? Was COVID a challenge during the quarter for distribution expansion?
Yes, it was a very big challenge. I think while, as we mentioned earlier, there has been a very swift adaptation to work from home. As you can appreciate, work from home, particularly in the sales environment, can take you thus far and no further, right? In the sense that we have been able to have good Google Hangout meetings with our distribution partners, sometimes even with farmers. Communication is at one level and engagement, convincing, these are all things where we do think that face-to-face engagement have been missed in the Q1. It has been a challenge. We've also had frequent changes, as you know, in terms of red, green, yellow. In fact, this is how it started in April with different areas being classified. All of that actually changed. We had all different ways of containment zones being defined, and so on and so forth.
That has been quite a bit of a challenge for us to focus on increasing the number of distributors. We are hoping that things will improve as we go along. To your point, it has been challenging. Similarly, on the logistics front also there have been tremendous challenges. You are aware of the difficulties that were experienced even consequent to customs clearances taking long time about maybe a month back, and then it got sorted out subsequently. Prior to that, of course, there were problems with regard to even movement for people. Of course, even prior to that, we had significant challenges in terms of inbound raw materials itself. The Baltic Dry Index, I think we had mentioned it in the April call, had actually dropped significantly where the shipping had also got caught.
I think it would be fair to say that we have actually gone through a fairly trying quarter. We have tried to cope with it by, like I mentioned, buying up more inventory where it is possible. Our teams have been working hard to try and coordinate with all these agencies. The government has been very supportive. As we had mentioned earlier as well in the seeds area as early as April when the stocks had to be moved, different state governments and the central government had called it out as an essential area. I think what we are seeing at the end of Q1 is a result of a combination of both these challenges and the coping effort that both industry and the government have taken.
Thank you, sir. We have next question from the line of Abhijeet Akella from IIFL. Please go ahead.
Yes. Hi. Good morning, sir. Thanks a lot for taking my questions. Just to clarify with regard to the international business progress that we are expecting. Just to clarify, did you mention on the call previously that we expect to see some traction in terms of the generic AIs business by 2Q of next year? Is that when we are expecting the plants to come up?
That is right, Abhijeet. I did mention that our new facility, which is a multi-product plant, we are taking that capital investment. We expect it to be up by around Q2 of next year. We will, by that time, all going well, have our synthesis routes for a couple of products available for producing in that facility for the international market.
Got it, sir. In terms of how much CapEx would we be incurring in that part of the business? If you could also just share this total CapEx budget we have of INR 150 or INR 200 crores to be spent over the next year or so. What would the rough breakdown of that be across buckets?
I would say that there is only one bucket to talk about which would be important. I would say that there's another bucket of contract manufacturing capital investment, and there's a bucket of other investments that we're doing to support both domestic and international business. We actually looking at it as only one bucket, Abhijeet. When we have something finalized on contract manufacturing, we will talk about that when we have something significant to report. Yes, we are expecting about INR 150 odd crores to be spent on capital, and much of that would have got commercialized towards Q4 of this financial year. This includes expansion of our Pendi capacity. Hello?
Yes, sir. I can hear you.
Yeah. Many of our products we are already progressing with capacity expansion because we are practically running flat out in terms of our capacities today.
Got it. Just one last link.
Yeah, go ahead. Complete.
Yeah, sorry. Just to clarify also that on the CRAMS front, given the fact that international travel of customers might be restricted, et cetera, would you foresee any kind of delays in possibly receiving client approvals for our facilities? Or would you still expect to sort of announce something maybe in the next couple of quarters or so?
Abhijit, it's very difficult to forecast these things. There is, like the way we are conducting our business remotely, discussions are also happening with potential partners. We have nothing further to report as of now. We will, of course, when there's some material decisions that have been taken, we will, of course, let you all know. For the time being, we continue to pursue opportunities that we believe should be there for a company like ours.
Got it. Great. Thank you so much, Sanjiv Ji. I wish you all the best.
Thanks.
Thank you, sir. We have next question from the line of Chirag Dagli from HDFC Mutual Fund.
Yes, sir. Thank you for the opportunity. Sir, I wanted to check on the acephate pricing, technical pricing, as well as the intermediate DMPAT pricing and how are spreads in that product for us.
Chirag, we'll not get into specific pricing, except to say that many of these products that are being sold, they have some linkage with the raw material prices. As the prices move up or down, they sort of get adjusted for the cost of the raw material, or the raw material cost gets adjusted in the price of the selling product.
Have we made any changes in our sourcing strategy, sir, for the key raw materials?
Certainly, we have looked at further diversification of our sourcing. In fact, it is not something that we have done today, but we have been working on it for the last couple of months. As you are aware, during the last financial year, there were considerable disruptions which had happened due to various safety incidents in some of these chemical parks, especially in China. That had been a little disruptive. For most of our products, we are looking at multiple suppliers who are located in different chemical parks in China, so that if there's a problem in one particular area, it should still give us the opportunity to get from other areas.
Specifically for acephate, sir, we've been able to de-link from China.
No, no, we have not de-linked from China on acephate because DMPAT is one product which is being produced in fairly good quantities in China, our dependence on China for DMPAT continues to be there.
Understood. Okay, sir. Sir, you talked about, CRISIL's talking about 1% sowing growth for this kharif season. Is there an estimate for the Agchem sales for kharif 2020 or 2021?
Yeah.
For the industry as a whole, sir.
Yeah. If you look at the growth over the last couple of years, it's been between 9%-11%. Maybe a percentage here and there, but I don't think it's going to be very, very different. While the farmer certainly has money in his hand, I don't see him putting double the dose of anything into his field. It may be around between 10%-14%. That's my guess. I don't have any insight because the consumption is yet to start. A lot of it is just on as placement only.
Understood.
As you're aware that we are not able to send our teams physically into the field for them to understand really what is happening physically in the fields. Yes, there's been very good placement.
Understood. Thank you so much.
Thank you. We have next question from the line of Lakshmi Narayanan from ICICI Mutual Funds. Please go ahead.
Thank you. A couple of questions. First is, just to understand in terms of your product mix you talked about. In the agrochemical space where we are operating, is it possible to make some adjustments in terms of grammage or the volume, like what FMCG companies do? Not for all product, but is there a possibility to actually do it? Because how the farmer comes in, does he come to the budget in mind, or it's a product in mind or a volume in mind, right? That's my first question.
No, I think we have to be conscious of the fact that typically the pack size farmers buy depending on his acreage, and there is a recommended dose, per acre dose. The pack sizes are decided with that criteria. Unlike in FMCG where it is on affordability which decides the pack size, whether it should be a bottle of a shampoo or should it be a sachet for a shampoo, where the ticket size will determine the kind of customer who will buy it. It doesn't work that way in agrochemicals. It is more in terms of dose per acre and the farmer will buy depending on his size of the acre that he has. The second point to keep in mind is that many of the newer generation agrochemicals are actually made available in smaller packs even for larger acres, right?
Because of the higher efficacy, et cetera, the pack size may be small but may be intended for a much larger acreage. I would say that FMCG practices are not translatable into agrochemical business.
Yes. Thank you. Over the last one year, there have been a lot of changes in terms of working capital, in terms of how we manage things. Extremely a great job the team has done. With respect to the supply chain, what has been any improvements, if any, to ensure that there are fewer stockouts? There are multiple crops in multiple states, then you need to have your SKU to be dispatched, right? Any efficiency you have got on any specific program that actually has gone through in the last one year or so on that front?
Yeah, I think already what Sanjiv mentioned, one of the big things, which I would say is a shift or a change, not for one year, but more, let's say one quarter, is to focus on resilience versus low cost, lowest cost. We have diversified suppliers and try to sort of ensure availability is central to the activity and operationally it would translate into, we have also kind of had a share of business between L2 and L3 suppliers, right? Not just on L1 suppliers. One is that, and that of course, wherever it is possible. Secondly, I think we are also in the process of automating. This is actually a little bit longer duration activity.
Last two quarters in terms of our procurement process, we have implemented procurement platforms and again, wherever feasible, it is not 100% coverage of all the items that we procure, but certainly for a number of items, we have automated the procurement process. With a view to improving efficiency, better price discovery, and simplification of activity as well. That would be the second important area. The third is that consequent to the merger of the seed division, Erstwhile Metahelix with CropCare of Syngenta, we have integrated some of the areas of procurement in order to derive synergies as well as better knowledge transfer, shall we say, between the more experienced procurement processes and procurement teams of the Erstwhile Rallis with the Erstwhile Metahelix . I would say these three would probably be important.
How it has translated to reaching your customer with the right product, right? Has there been some improvement? You're talking about the input logistics, this is procurement. What about the outbound logistics in terms of reaching the customer? Because if there is a stock out in a high growth phase like what it has been, then there is an opportunity lost, right? Has it been some changes in the outbound logistics supply chain?
Well, I think we are focusing on that. Certainly in this quarter gone by, ensuring availability has been a central element of focus. What I mean by that when I say focus is that we did identify in the early days of the COVID crisis, the red, yellow, and green areas and tried to prioritize availability of material to the green and the yellow areas, because at that point in time, we felt that it would be very difficult for us to get into the red areas. However, as you know, this red, green, yellow and all that changed very dramatically.
I'm a little hesitant to say that it has been an unqualified kind of a success, but certainly I think prioritization of material to wherever it is possible to get it over, that has been an important area from a planning point of view, from a dispatch point of view. Second, of course, that consequent to COVID, some of the non-traditional channels are channels with whom we have tied up as well. Again, these are early days. We are still waiting to see how much of this has been effective, how much of it has actually borne fruit. We have also supported some of our distributors to be able to make material available in the particular villages, right? Because the distributors are available in a particular place, but they will have to get the material over to specific villages.
In some early stages, again, there were a lot of difficulties for people to travel and so on and so forth. I would say we have tended to focus on this a lot more. Of course, we are also trying to use some basic prediction platforms that we are having with regard to disease and pest incidents. These are all still learning systems, which are still learning the system. Again, I wouldn't call that as a fully established kind of a system, but we are trying to use it to prioritize our placements in specific geographies where we think this information can complement the information coming from our own team members who are locally present and say that, okay, we can move this particular product, more of this product in this particular geography and so on.
I would say between the supply side, what I explained, the input side and the output side. On the input side, we have made lot more progress. Output side is work in progress. Yeah.
Okay. We will take this last question now.
Yeah. Thank you, sir. We have next question from the line of Nirbhay Mahavar from N Square Capital. Please go ahead.
Thanks for the opportunity, sir. Just a follow-up on our strategy. In our earlier communications, we have stated that our medium-term plan is to take domestic market share from 6% to 8% and share of international revenue to 40% of crop care segment. We have seen some hiccups in international business in recent quarters. Is there any recalibration for our longer-term plans, medium-term plans for the international businesses?
No, not at this stage.
Yeah. Sorry, go ahead please.
Nirbhay, as of now, there is no change in our overall strategy. There will be certain occasions where things may not really work out the way we would expect, because the revenue numbers change. Your volumes may still be good, your revenue numbers may move up and down. On an overall basis for our crop care, we do expect to have a 60/40 between domestic and international. That approach or that target still remains. As far as our domestic business is concerned, we have stated that we will be ahead of the average in terms of growth of the Indian industry. That is really driven by the vagaries of the climate and agriculture that can change from year to year.
While we may have, let's say, a 26% growth during Q1 of FY 2021, there is nothing to suggest that Q1 of FY 2022 will be having similar kind of growth. If the weather patterns are different next year, we will actually may see things happening in a quite a different manner. These are vagaries that we will need to keep dealing with. Yes, we will strive to improve our market position to about 8%.
Yes. Well, I was just trying to understand directionally we are headed there.
Yes. Absolutely. There's no change in our strategy as articulated.
Another thing, sir, on seeds business from last two years, we have seen some moderation in the volume. Is it because of the production-related challenges or the market or the demand itself is under question? Last year also, our volume growth was subdued, and this is on top of a reasonably good monsoon.
Yeah, no, it has nothing to do with supply. I think on the supply side, we are well provided for. I think we have to get some of our front facing, particularly cotton has been the big determinant, right, in both the years in terms of the growth part coming to the level that we had expected it to be, and that is the area which we covered in the beginning of this call, which we intend to focus on.
Okay. Thank you, sir.
Thank you. Ladies and gentlemen, that was last question. I now hand the conference over to the management for closing comments. Over to you, sir.
Thanks, Gavin. As the season for kharif progresses, we remain focused on getting our utilization of our factories to be at the highest level. There continue to be some challenges on adequacy of labor availability, but we are dealing with it in the most appropriate way that we can. Our teams will continue to engage remotely with various trade partners and with the farmers. As the situation starts improving, our engagement on the field with the farmers will certainly start moving in the direction where it has traditionally been. The farmers still need a lot of support and guidance on agriculture, which Rallis has been very strong in, and we hope that we can get back to providing the kind of knowledge that the Indian agriculture and the farmers need. We look forward to a good Q2 as well.
The current situation on the ground seems to suggest that it will be a good Q2. Of course, there are vagaries of the monsoons which will play out. The incidents of pest infestation remain something which is very difficult to determine. We have done well in terms of positioning our products in the market. We have new products which we had launched last year, which hope to do well during the current kharif season. I think our team is doing the best under the circumstances. They are doing some outstanding work. A lot of the performance of Q1 goes to the entire Rallis team for pulling together, along with our extended supply chain partners. Thank you very much for joining our call, and back to Gavin and the moderator.
Thank you very much, sir. Ladies and gentlemen, on behalf of Rallis India Limited, that concludes today's conference call. Thank you for joining with us, and you may now disconnect your lines.