Rallis India Limited (RALLIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Rallis India Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and thank you for joining us on Rallis India Limited's Q3 FY '20 Earnings Call. We have with us today Mr. Sanjiv Lal, Managing Director and CEO; Mr. Nagarajan, Chief Operating Officer; and Mr. Ashish Mehta, 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 of the call.

Thanks, Gavin, and thank you all for joining us on our earnings call, and wish you all a happy New Year. I have with me Mr. Nagarajan, our Chief Operating Officer; and Ashish Mehta, our Chief Financial Officer. As you would be aware, during the quarter, we have received the NCLT approval for merger of Metahelix into Rallis, and hence, our results reflects this in terms of the standalone performance. The previous quarter has also be in regards to reflect comparative results. Let me begin the discussion by highlighting the operational developments, after which I'll request Ashish to walk us through the key financials. As you would have seen, we have had a good quarter with revenue growth of about 28%. Positive farmer sentiment, which has really been supported by a good monsoon, good availability of water, has resulted in increased acreage for the current rabi year-on-year as well as supported by good produce pricing in the market. This all helped in our domestic markets. Our international business continues to perform well during the quarter. More specifically, on the Rallis developments, starting with the domestic business first. Our efforts in recent years have been directed towards introducing new products and strengthening our distribution network. We have launched 2 new products during this quarter. And our intention is to maintain this momentum of launching at least 2 new products every year over the next couple of years. The trade terms that we introduced in Q1 continues to support our partnership with our distributors and has also resulted in a positive impact on our cash flow. I'm pleased to announce that the Board of Rallis has approved setting up of a new state-of-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 seeds research. We are optimistic that such efforts should help us maintain the revenue momentum in coming years. Moving on to our seeds business. We recognize that our current product basket is largely skewed towards kharif crops. And as such, we are working towards building up our presence in the rabi segment by focusing especially on maize and mustard crops. We have crossed about 100 metric tonnes of hybrid mustard this rabi, and further, we are also undertaking significant efforts towards developing our vegetable portfolio. These efforts should help us improve the balance in the seeds portfolio for driving further growth. Moving on to the international business. The segment has seen and continues to see good traction, underpinned by new product registration in Latin America, North America and Asia. We are presently working on 2 molecules for our contract manufacturing. We are undertaking steps to leverage our tie-ups with global innovators to expand this part of our business, which currently is restricted to only 2 molecules. The other focus area for us in the international business has been to strengthen our alliance -- alliances, and we have been constantly looking towards broadening our product base and branded molecules through co-marketing arrangements. We are making steady progress in this regard and are confident of scaling up the segment in the coming years. Further, we are also actively looking at the opportunity to register our own brands and increase the revenue from the formulation business. Regarding our CapEx program. As most of you are aware, we have announced our intention to invest approximately INR 800 crores over the next couple of years for strengthening our domestic and international business. As indicated in our previous call, we had completed the first phase of our Metribuzin expansion and expect to complete the second phase production and be able to commercialize it by February of 2020. The overall expenditure incurred towards Metribuzin capacity has been approximately INR 25 crores. The completion of the expansion further consolidate our presence in the Metribuzin market, and we're also investing for backward integration in certain intermediates which we're currently importing. To conclude, I would like to reiterate that our growth agenda is on course. We expect our product portfolio to be much more balanced and growth-oriented in the coming years. Further, our revised credit terms should also help us with our growth agenda. Our international business continues to perform well, and we are hopeful that the completion of the CapEx will further provide a leg up for this business and further drive growth. I would now request Ashish to walk us through the quarterly financial performance. Over to you, Ashish.

Thank you, Sanjiv, and welcome to all, and wish you a very happy New Year. To begin with, I will like to say that the financials are drawn on the merged entity, since the Metahelix has merged with Rallis. I will also walk you through the stand-alone of Rallis' crop protection and crop nutrition business separately. So for the consolidated financials, revenue at INR 534 crore registered a 28% growth over the same period last year. Profit before tax was at INR 48 crore against INR 20 crore registered in the same period quarter last year. PAT was at INR 38 crores versus INR 14 crores. For the Rallis standalone, which is with the merged accounts, revenue at INR 533 crore registered a handsome growth of 28%. Profit before tax at INR 47 crores against INR 19 crores of previous year. PAT at INR 37 crores against INR 13 crores of previous year. Total revenue for the quarter for the crop protection and crop nutrition business was at INR 503 crores and registered a growth of 30% over previous year. Majority of the growth coming through volume growth across domestic and international business. However, we did see some price correction in some of our molecules, both in domestic and the international market. Our new products, Ayaan and Zygant, were well accepted by the farmers and witnessed a decent scale-up. In the international business, there has been a good volume growth, both in Acephate and Metribuzin. However, there was a lot of pricing pressure from competition, which resulted into price correction, and the pressure is expected to continue in the fourth quarter as well. Some orders from the overseas customers have preponed. Due to our continuous focus on collection and with the support of new trade policy announced at the start of the year coupled with tight control on inventories, there has been a decent improvement in our working capital days. Cash from operating activities improved substantially to over INR 300 crores as compared to previous year. Our investment plans for capacity expansion are progressing well. As mentioned earlier, second phase of expansion on Metri technical is expected to commence production by February 2020, and we'll see its full utilization in the next financial year. The progress in the setting up of the new formulation plant at chemical zone Dahej is satisfactory, and we expect the commercial production to start by FY '21. To meet the demand of some of our existing products and build up facility for future requirements, the Board formally approved an investment of INR 150 crores for specific projects for capacity expansion, and this is part of that INR 800 crores investment plan, which was announced earlier. Revenue from seed business at INR 30 crores registered a modest growth of 4% over previous year. We can now have the session on Q&A.

[Operator Instructions] We take the first question from the line of Viraj Kacharia from Securities Investment Management.

Just had a couple of questions. First is on the volume growth for the domestic market. Can you provide some color in terms of split between the growth in base products and new products in domestic crop protection? And how much of the spillover we would have seen from the kharif being extended in Q3?

Yes. Viraj, this is Nagarajan here. We have, in the first 9 months of the year, first 9 months of the year, not just in Q3, we have had good response to 4 of the products which we had previously said we had announced. That is Zygant, Ayaan, Cameo and Trimbo. So those 4 products. In addition, of course, Sarthak and Impeder were the 2 products that were launched in Q3. Collective, our overall revenue from these has been above INR 50 crores for the 9-month period -- for the 9-month period. So that's the contribution of the new products in the domestic formulation business.

And in terms of spillover of the kharif being extended in Q3, typically. What kind of impact it would have in Q3?

See, it is a little difficult to estimate the precise impact. We feel that about a couple of weeks there was an extension that happened in the month of October. But it's a little difficult to say because to separate out the effect of that spillover is not very easy. No, it's not very easy for us to give you a figure for that.

Okay. Second question is on the inventory situation, both for us and the industry, how are you pleased in terms of inventory in crop protection for the -- for key molecules? And just to add to -- you mentioned about this unreasonably price war. So if I just talk about domestic market, which are the key molecules we are kind of seeing these price cuts, is the kind of input cost moderation sufficient enough to offset the margin impact? How should we see that forward?

Yes. I think in terms of the -- if you're referring to our channel stock levels, we feel quite comfortable with the level of stock that we are carrying in the channels. If you're talking about our own company-level inventory, they are actually lower, I should say, compared to the similar period last time, though, we don't give out the balance sheet figures -- balance sheet details now in Q3, but directionally, they are actually better than where we were last year. In terms of price pressure in the market, I think the rabi sentiment is quite positive. We have had price pressures in selected molecules. We've also, as you correctly pointed out, had some decline in raw material prices as well. We are actually finding that some of the actions that we have taken in terms of focusing our portfolio on some of the better margin products have actually helped us, and we feel we have actually done better in terms of margin compared to last year, [ GC ] margins I am talking about in the domestic business for the same Q3.

Okay. Just last question. For the key base molecules like Tata Mida or Sonic or Takumi, how would have the price or volume trend been in the last couple of months for us?

Specific products -- specific product volume trends, we would feel is a little competitive, and we would prefer not to...

Generally, the price trend in general, how is the -- are you seeing pressure on those products as well or?

Well, there are a mix of products. There are products where we have a strong brand. And those products, we certainly find less pressure. There is a demand from the farmers. And as I said, this rabi outlook is also one of the important factors where the sentiment is quite high, both at the trade level and the farmer level. But you are right, there are certain other products, which are somewhat less strong. I mean I don't want to say weak, but I would say less strong in terms of brand position. Certainly, the price pressure exists in those molecules, those formulations.

Next question is from the line of Rahul Jain from Credence Wealth.

I have couple of questions. One, sir, on the gross margin side. So we have had our operating margins move up sharply. And with the kind of top end growth, operating level seems to be kicking in. But on the gross margin trend, on a year-on-year basis, we are still down by almost about 1%, 1.5%. So if you could just try to -- if you could [ try ], is this a stable gross margin or we see some improvement coming in? Or is this -- the margins being down probably because of some inventory -- high cost inventory, which we would have carried from the previous quarter?

So Rahul, actually, I think in terms of the question that you asked, maybe I'll request Ashish to just weigh in on this.

Rahul, see, in the last quarter we had mentioned, even in the earlier quarters' conference call, due to uncertainty in supply of raw materials and to ensure that we keep our units up and running, we had to take a strategy call of keeping some of our inventories well in advance while it would have come at a particular price. And subsequent to that, we have seen some decline in the raw material prices. What is more important is that we could meet the business demand for the quarter and have those revenue registered. It is also correct to say that here some bit of margins impact was because of the high price what we bought. And I think gradually, with this reduction in the raw material price in the current quarter and going forward, the consumption of those materials would also get exhausted. And the pricing also is continued to be felt in the fourth quarter also, in the competition. So it's a mix and match of 2 reasons why there would be pressure on the margins.

Sure. But do we see this trend changing sooner or it will take some time?

Yes. Listen...

No, I think we are -- I think -- this is Nagarajan here. On an underlying basis, if you see the price pressures in the international market, there are certainly price pressures that we are witnessing in the international market, consequent to the various effects which are well-known in terms of U.S. weather and stuff like that. So these price pressures are not fully offset by raw material price reductions. So these are actually absolute pressures on the margin. This is apart from the price reduction, consequent to -- or rather sympathetic to raw material price drop. So effectively, I think there would be -- we would expect price pressure and margin pressure to continue on the international side. On the domestic business, there will be, I think, for those set of molecules and set of formulated products, where the brand levels are somewhat lesser, brand strength is somewhat lesser, we would expect it to continue. So I don't think we can say that we are looking at an improvement in a hurry.

Sure. Sir, my last question with regards to Metribuzin. Last quarter, we had mentioned that particular raw material prices for Metribuzin seemed to be coming down. There was some correction on one of the raw materials. And also our additional capacity has come in the last quarter. And further, we are adding about 500 tonnes in February. So if you could just spell out something more on Metribuzin in terms of both the product demand, the product pricing and the raw material availability as far as Metribuzin is concerned.

So as far as the raw material availability is concerned, certainly, it has eased considerably over the last couple of months and also the price of some of these key ingredients for this molecule have come down as well. And that is also reflecting in softness in the price. There is also some buildup of inventory, which has happened in certain markets, which could give us short-term impact in terms of our shipments for Metribuzin, but we see that more in terms of a short-term issue rather than any significant structural issue.

The demand continues to be good for Metribuzin?

Yes. We expect it to be good. I mean there is short-term issue in terms of high inventory in certain geographies, but that is expected to be only short term. This is really arising out of unseasonal rains and all in the U.S.

Next question is from the line of Prashant Biyani from Prabhudas Lilladher.

Sir, how has been the domestic industry growth in Q3?

Well, Prashant, Rallis is the first with results which are out. I can only say that the monsoon effect, the water availability effects, the positive sentiment in the market will have a positive impact on most of the agri players. So I guess you'll have to wait and see how they report their performance. As of now, our own view is that there's a very positive sentiment with the trade and the farmers. So that could have a positive impact on the entire segment.

And is it also reflecting in terms of higher liquidation from the farmer side?

Higher liquidation from the farmer side?

I mean, liquidation of...

Mr. Prashant Biyani, I'm sorry to interrupt. Sir, requesting you to please speak a bit louder. Your audio is not very audible.

Am I audible now?

Yes, it's fine. Go ahead.

Liquidation, I mean, the retail sale of agrochemicals. Is that also going strong?

Yes. I think that has already been responded to in the previous question that was asked. In terms of our own inventory levels, we are seeing a reasonable good control that we have on it. So we will reflect only on our own position on this. We will not comment on any of the others in the industry.

Okay. And sir, there were some initial remarks regarding preponement of orders. So that was -- that had happened in Q3.

Yes. See, what I had mentioned in my previous calls also that our international business, sometimes we may have some bringing forward of a shipment or deferment of a shipment. And our base is reasonably small. So even 2 or 3 shipments getting adjusted here and there, suddenly gives a swing to the quarterly performance. So I would sort of say that we must always look at the cumulative performance of our international business because of the small base that we have on our exports.

And just one last question, the Sarthak and Impeder would be catering to which crop and which disease or weed?

Impeder is for wheat and Sarthak is for grapes.

Next question is from the line of Dhavan Shah from ICICI Securities.

My first question is about the overall segmental wise numbers. I mean we have seen decent growth in herbicide as well as insecticides and in the fungicides. So basically, would it be possible to share the key products, which is driving the strong growth across these 3 segments? Apart from this Metribuzin, we understand that because of the new capacity, herbicide has performed well. But in insecticide and fungicide, would it be possible to share the growth numbers, or the key products, if you can share?

We've got a basket of products in each of these categories, and they are all intended for certain crop segments and pest segments. I would say that most of these categories have shown a decent performance. We would not like to get into any specific molecule at this stage. But our own assessment is that all these 3 categories, in fact, there's another category of plant growth, regulators and soil conditioners also, all of them have done fairly well.

Okay. Okay. And for the international market, I mean, we were about to commercialize the Metribuzin in December. So we extended by around 2 months. So is this a strategic decision because the Metribuzin prices are down? So is it like so? And if you can share the Metribuzin prices for Q3 vis-à-vis Q2?

So actually, we -- you are right, we had intended to have our plant up and running by December. So it has actually got delayed by just a couple of weeks. And I did mention that we will start the commercial production in the month of February. So there is just about maybe 2, 3 weeks delay. And yes, there is some pressure, which is there in terms of inventory, which I also mentioned. So in a way, it is not really impacting our overall sales for this particular category. There has been some softness in price. So we have seen a couple of dollars getting knocked off in terms of the selling price in this category.

Okay. Would it be possible to share the price if it's okay from your side?

So we'll not get into specific pricing, except to say that there is some softness in the pricing. We do have some arrangements with some of our customers in terms of contract pricing. So it'll not be correct to be sharing any figures.

Okay. And can you please share the CRAMS revenue for Q3?

CRAMS revenue for Q3, We have not specifically shared that, Dhavan, except to say that there is some delay in our shipments for PEKK, and this is really coming out of higher inventories for this polymer with our customer. So some of that volume has got deferred into Q4.

Next question is from the line of Nitin Gosar from Invesco Mutual Fund.

Could you call out the revenue base for international business during the quarter?

Nitin, can you...

Can you speak a little louder?

Repeat your question please, Nitin?

Yes, sure. Is this better?

Yes, perfect.

Can you call out the international revenue base for the quarter?

We have given in our investors docket, no? We have given a percentage, already there.

Okay. Second question is pertaining to raw material availability issue for certain products. Has the availability eased out? And how should we see the raw material inflation from here on?

Yes. I would say that the -- for some of the raw materials, there is still some pressure. But for our key products, pressure has substantially eased, I would say.

Okay. And you called out INR 25 crores investment, that is for Metribuzin and INR 125 crores -- sorry, INR 150 crore incremental investment, that is going in for raw material backward integration?

No, no, no. This is largely for expansion of some of our other key products. So this is for the new products, which we are acquiring in FY '21 and beyond. So we'll be doing the expansion of those capacities in the next couple of months.

Okay. So within INR 150 crore, there is no number related to backward integration. Is that the way one should look at?

So backward integration number had already been approved by the Board for which the work has also started. So we will expect that to also get commissioned during the next financial year.

Okay. So to put it together, next financial year, we should be seeing CapEx of INR 175 crore or more than that?

Well, it would perhaps be more than that. But of course, when the expenditure happens, it doesn't all happen in one period of time. The expenditure will be over a period of time. But yes, in terms of commitments, in terms of CapEx, the commitments on the table close to about INR 200 crore, apart from whatever has been already actioned.

Next question is from the line of Dhaval Shah from Girik Capital.

Sir, I have a question on your contract manufacturing business. You mentioned you're working on 2 molecules. Sir, would that be the generic molecules or would be with the innovators? And would that be intermediate or -- so at what stage are we working with the innovator?

No, no. Dhaval, just to clarify, we have only 2 products that we make as part of our contract manufacturing portfolio. Have only two. And we are still looking for getting the partnerships for doing additional molecules. So this is a work-in-progress area for us. And we expect that during the FY '21, we would have something to share in terms of additional products, which we may want to add to our portfolio for contract manufacturing.

Got it. So this would be intermediate or the AP -- or the technical, I mean, the actual ingredient part of the chain?

So we are agnostic to that. It could be intermediate, it could be active. So contract manufacturing means that we will be doing on a peer-to-peer basis only for one specific customer. So we are open to doing both actives as well as intermediates for a good partner.

And this will be with an innovator agro chem or it will be a generic agro chem?

So I think it's difficult to take these decisions. It depends on what our partners want us to do for them.

Got it. And a couple of agro chems are going off-patent as well in next many years. So in -- so are we also tapping that opportunity? So are we -- or -- yes, so how are we -- so what -- how are you playing that opportunity?

So I think in our earlier calls, we had talked about the work which is being done by our R&D teams on synthesis, organic synthesis for some of these off-patent -- coming off-patent molecules. So that activity is very much underway. And as I had also mentioned that we will be significantly expanding our R&D capability. We are going to be building a new R&D center. So we will be kicking off that work during Q1.

Got it. So sir, incrementally, a lot of growth should come from contract manufacturing for us, for Rallis?

Well, we see it as an important area because one of the strengths of Rallis is in manufacturing. And we have been focusing largely on what we require for our own business. And we will be looking at contract manufacturing for helping us quickly expand our top line. So it is a line of business, which will be helpful for our overall growth agenda.

Next question is from the line of Varshit Shah from Emkay Global.

Sir, my question is on the -- slightly on the working capital side. So I think we have improved our trade terms. But I missed the earlier comment mentioning some INR 300 crore number. So just wanted some clarification around that. Is this incremental improvement in working capital or something I'm misreading out here?

Varshit, what I mentioned was the cash generated from operating activities at INR 300 crores on a YTD number, which is a marked improvement over previous year's 9 months. Since balance sheet and cash flows are not reflected in these results, I just wanted to mention the highlights. On the inventory, it's not that the working capital has gone down by INR 300 crores. I didn't say that. It's only the cash from operating activities, since there was an improvement in the working capital days overall.

Right. So this is on a 9-month basis you're saying or?

9 months, 9 months.

9-month basis, okay. Okay. And sir, what about the key improvement? Is it the trade terms only thing? Or is it the demand factor also slightly playing out in this?

It's a mixture of all. It's a mixture of all.

Okay. And sir, my second question is on the gross margin. So I just -- I'll just connect to the earlier question. So you had mentioned that there is some realization pressure in some molecule and some of that is offset by RM cost rationalization. Going forward in Q4 and probably FY '20, what is the direction you're looking in terms of gross margins on an absolute basis for our key molecules? Do you see that coming under pressure? Or is it still a wait-and-watch mode depending on how the RM plays out?

So Varshit, I think, again, I'll just reflect back to our earlier conversations on this subject. We are very focused on growth, right? And therefore, we will, of course, try and make sure that any improvement, which we have in terms of our raw material sourcing prices and all gets reflected in our product pricing. And at the same time, we have to be competitive in the market as well. We cannot be disconnected from what is happening around us. So recently, looking at our growth agenda as a key driver, margins and all will certainly be an area of focus. But I think we will keep adjusting our margins as the business requires for our growth.

Right. So just to maybe add to that question. So we have seen quarter-on-quarter improvement in gross margins. Is it that you have passed -- this is despite you have passed all the RM cost benefit? Or probably you have let go of -- kept something to you in the company and partially passed on the...

I think it's not as simple as that. There is also a product portfolio that we have. And certainly, some of the products in our portfolio have a higher performance and the willingness of the farmer to pay for these higher-performing products is also there. So it's a mix of that as well.

Next question is from the line of Bajrang Bafna from Sunidhi Securities.

Just when -- what is the price trend that we are seeing on the Pendimethalin and Acephate because as per your last con calls, the pricing was on the declining trend. So are we seeing the similar trends or some improvement on that side?

So I think in terms of Pendimethalin, there is softness, and it has continued into Q3 as well. As far as Acephate is concerned, I would say it is more stable now. It is not -- it has shown some increasing trend, but we are now seeing a more stable performance on asset-based pricing. But pendi, yes, it still continues to be soft.

Okay. And sir, what about the backward integration? When we -- you indicated that it will be somewhere around next financial year. But what sort of margin impact that we can envisage, considering the pricing of your raw material today? So just some ballpark number would really be helpful for us, sir.

So Bajrang, the way we see it is that we have justified the expenditure based on a certain expectation of returns. And we had also talked about what is our weighted cost of capital and how we are looking at our CapEx program. So even our intermediates will be in line with our approach towards making sure that there are reasonable margins for the products that we're getting into. Plus also, we have also kept a filter of derisking our sourcing. So both these filters have been applied when we look at the products that we are getting into and what is the impact that will have on our overall margins. I think I'll just leave the response to that.

Okay. And what will be our dependence post this expansion on China because I think we were 50% plus historically? So now with this backward integration, what we can expect in terms of our overall sourcing arrangement from China?

So Bajrang, since we are on a growth path, we may find that our percentage imports from China may not substantially change because we will be getting into newer things. So there will be certain things that we still depend on imports. But yes, there would be, at least for the products that we are talking about for backward integration, there will be some reduction. We are not saying that we're going to be doing 100% in-house. We will be doing only partly in-house in the first phase.

Next question is from the line of Saurabh Kapadia from Asian Markets Securities.

Sir, firstly, you mentioned about the softness in Pendimethalin. But how is the volume trend for you in the current quarter in Pendimethalin?

Saurabh, the volume trend is good. I mean, I would say, our order book is absolutely full.

Okay. And sir, on your inventory side, you mentioned at the company level, the inventory is lower compared to last year. And as you see, in the last 2 years, actually, we were holding a few strategic inventory because of the Chinese situation. So now do we see the -- for next year, the overall inventory level will come down, and we are more comfortable at the current inventory level holding what you are having it?

So see, as it stands today, I would say that the situation in terms of availability of key ingredients, key raw materials has substantially improved, right? But these things are very dynamic. And as a responsible organization, we will keep our ear to the ground because there have been very disruptive kind of things happening from the key supplying countries, and you are aware of the kind of safety issues, environmental issues that have created disruptions, right? So we certainly see a much better situation today. And we will need to be watchful of events which could create disruptions in the supply chain for our key ingredients. Yes, there is some significant improvement.

Okay. And sir, the -- you mentioned about the preponement of shipment in export. So can you quantify the additional revenue coming from that preponement of shipment?

Saurabh, I had explained. This month end, quarter end, shipments getting adjusted here and there. I think we should not be too bothered about that because our base is small. So even few of our containers moving this way and that way suddenly make the figures look very different. So let us look at it only on a 9-month performance. And as we have shown in our presentation, if you look at the quarter performance, you'll suddenly find that the figure of international business is looking very, very phenomenal. But if you look at the period of 9 months, it is the one which really needs to be looked at, Saurabh. I hope you understand what I'm trying to say.

Yes. And sir, one last thing about the INR 150 crore Capex, which you plan to do for the key products. So what is the time line by which the CapEx or the commissioning will be happening? And like have you identified a number of products or the -- those products from which are getting off-patented or the more of a generic products? What is the product profile which you are trying to build for?

So Saurabh, some part of this CapEx is related to our existing products and some part of it is related to the newer products. And the expenditure, we will be starting in Q1 of FY '21. And some of this expenditure may go into FY '22 as well. So some of these may be slightly longer term because we will be building some capacity for the pipeline of new AIs that our R&D team is working on.

Okay. And sir, last thing on the R&D lab which you're setting up in the Bangalore. So what will be the CapEx for that?

So we will -- we are in the process of finalizing that. The whole purpose of building a much larger center is to substantially increase the work that we can do. So we will be substantially increasing that.

But that CapEx is not yet accounted in your guidance of INR 200 crore for next year?

No. We will let you know about that once we've been able to finalize with the architects and other things.

Next question is from the line of Aditya Jhawar from Investec Capital.

The first question is on the export business. You mentioned that there was kind of a pricing pressure in some of the key molecules. It would be great if you can highlight what could be the reason because of this competitive pressure. And are you seeing kind of a visibility where the pressure will start easing?

Yes. So the key reason is, in the international business, if I were to summarize it, is inventory overhang in the overseas markets, notably in U.S. and some of these spaces, which we had unseasonal rains. So that is the driver why the price levels are lower and, therefore, there is also in fact the demand in the market compared to the supply. We do think that this is a short-term kind of a material issue that we will have to contend with, though in the longer term, we do believe that things will come back to a more secular trend in terms of requirements of agrochemicals.

Okay. Okay. And just to better understand this raw material thing, so in the export, which is roughly about, say, 40% of the business, are you experiencing the pricing pressure on bulk of the portfolio? Or what percentage of this export is seeing pricing pressure? And similarly, for the domestic business, we are saying that there are prices -- or some price -- raw material prices are softening. At the same time, there could be some pricing pressure. So if you can just highlight the proportion of the international business, which is seeing some pressure and the proportion of the domestic business, which is -- which should benefit because of softening.

So I think just, I would say it is reasonable to assume that with better availability of a whole lot of raw materials, most of the products will be showing some softness in terms of pricing. And they will -- our customers will also expect some passing on of benefits of reduced raw material prices. So we will look at our pricing and our business appropriately. Hello?

Domestic business...

Sorry, we lost your audio.

Yes. Yes, yes. Sorry. So that was quite helpful. But on the overall domestic portfolio, our portfolio should have a favorable impact of raw material from next quarter onwards. That's the fair assessment?

See, when it comes to margins, I think, Aditya, we need to recognize that wherever it is possible, we would like to support the farmer with better pricing, right? And I think there's also some competitive pressures, which will automatically help the farmers in getting better pricing for the agrochemicals that they buy. And I would think it's only responsible for the industry to be able to pass on benefits to the farmer as and when opportunities arise.

Okay, okay. Fair enough. And if you can throw some light on the new product...

I'm sorry to interrupt. But may I please...

Just last question. So on the 2 products that you have just introduced, if you can highlight what is the target segment they are targeting, what is the potential revenue that we are expecting from these 2 products?

So the 2 products are Impeder and Sarthak. Impeder is the wheat side, and that is the segment we are targeting. And Sarthak is for grapes. These are products which potentially address about -- wheat herbicide would be -- it's a fairly large market. I mean, we can let you know the numbers later, but I'm not able to immediately tell you, but these are pretty large markets. But it's also highly contested market. There are other players also.

[Operator Instructions] Next question is from the line of Dhwanil Desai from Turtle Capital.

Sir, only one question. So I wanted to understand slightly bigger picture on the export side how are we thinking about it for next 3 to 5 years. We are currently focused on 4 products plus the CRAMS with global MNCs. So -- and we are doing a lot of registrations in international markets. So -- I mean, are we thinking about derisking this international business and growing through registrations? And will that be primarily led by B2B? Or do we need to also set up the marketing network in other markets and scale up there? I mean, what is the game plan?

As of now, we don't have any plans for us to setting -- for setting up our own distribution networks in other countries. We will really be working with partners. And as I had mentioned that we are also actively working on getting our registration. Some of them we've already got. So we will be doing our branded sales in some of these markets.

Okay. So this -- our dependence on these 4, 5 products will reduce over a period of time as and when we get those partnerships going and selling those branded products, right? Is that a fair assumption?

So I would say that this is a good way of derisking. So rather than only selling active ingredients, we would also be getting into rather expanding our registration-based sales with our brands.

Next question is from the line of Nihal Jham from Edelweiss.

Sir, you mentioned that for 9 months, our new products have done around INR 50 crores of sales. I am not sure how that number pertains to the same period for last year. But our innovation index, at least still last year, was taking a dip. So I just wanted the feedback that you've been getting from the channel in relation to our new launches? And also if there is any missing gaps in our current portfolio?

Yes. I think to your first point, the revenue that I mentioned was for only this year. These products were launched this year. So the innovation turnover index is actually calculated on a 4-year rolling forward kind of basis. So last year, there was no revenue from Zygant, Ayaan, Cameo and Trimbo. These are the 4 products that we have launched till H1. Sarthak and Impeder, of course, came in, in Q3. They are just in the process of stabilizing and ramping up. In terms of portfolio, certainly, we do believe that there are areas in our portfolio which we can strengthen. And the Impeder is an example of one such product. In the wheat crop herbicide segment, we have felt that there is a need for us to improve our offerings, and that is what we are focused on, and this is one of the products that has been launched. There are other areas as well, which we have identified, and we would be focusing on them as we go back.

[ Termination ] pipeline, which we've been talking about that we'll be bringing in 2 products every year, the basis for that is to identify what are those hits and portfolio gaps we have. The work is really happening around that for our own in-house line 3 development.

Definitely. Sir, just on the quantum of launches that you mentioned of around 2 a year, as I understand a bit past, maybe we've done more a number every year and even competition does around, say, 5 to 6 launches a year. So is there a chance that maybe at the distributor or the retailer level, more launches from the competition could be a concern?

Sorry, Nihal, your voice is getting garbled. But if I understood you right, see, while we are talking about 2 and if you look at this year itself, we've already done 6. So we're just saying that, look, minimum of 2 is what we expect that we will be able to bring to the market. And of course, we'll look at opportunities as and when they come up in terms of putting in new products into the market and to our portfolio.

Fair, sir. My colleague, Rohan...

Sir, just one question to add here -- Rohan here. Sir, on this, can you be a little more specific about the INR 150 crore project, which you're talking about in terms of its revenue potential and the kind of margins, which we'll be having in this CapEx?

Rohan, we have also -- earlier also said that any CapEx we do, it will be -- the IRR will be much above the hurdle rate. Hurdle rate is our VAT and -- which is VAT plus the business risk premium around 16%, 16.5%. These products -- the capacity expansion are for the existing products and some new products, as Mr. Sanjiv said. So we see the full potential of the investments coming out from FY '22. Some of it will come in FY '21, but the full potential will start falling in from FY '22 onwards.

But this project will be completed by end of FY '21?

No, no, some...

There will be some into FY '22 as well.

Yes.

We take the next question from the line of [ Nirbhay Mahawar ] from N Square Capital.

You mentioned Metribuzin investment is around INR 25 crore. This is for 1,000 tonne or 500 tonne?

This is for 1,000.

So without getting into the pricing detail, would it be fair to assume that we would be generating 2.5x to 3x our investment out of this, sales turnover?

Yes, because see, the investment of INR 25 crores is only for setting up some of the, what you call, main equipment. It doesn't require full utility and all that thing. So in a manner, you can say, again, INR 25 crores, the turnaround would be at least 2x or 2.5x. It will be correct to assume that phase.

And for this chemical plant, which we are setting up, which is going to commission in FY '21, would it cater largely to the domestic or international? Or a mix of both?

Combination of both. Combination. Yes, it's a combination domestic business.

And on the time line, would it be like on the second half of FY '21? Or will it...

No, we are targeting commissioning in Q2.

Q2 FY '21. Okay.

We take the next question from the line of Abhijit Akella from India Infoline.

One clarification about the outlook for 4Q and kharif now. Given the very strong environment that we are seeing, do you see this sort of spilling over into 4Q? And then do you also see any sort of underlying reasons for support for the kharif season as well, the water levels, et cetera?

I think we'll be really doing a lot of crystal ball gazing if we start talking about kharif or next year. But yes, I mean, Q4, we'll have the residual effect of a good Q3. So that will certainly be there. And we still need to see what are those forecasts which are coming from the various agencies regarding El Niño and El Niña (sic) [ La Niña ] going forward. So I think maybe this is something we can discuss in Q1, early part of Q1, what we expect to see in terms of next kharif.

Right. I appreciate that. And just to clarify, regarding the domestic versus international revenue breakdown from the slide in your presentation, if I calculate the numbers, it seems like domestic grew about 38% this quarter and exports grew about 24%. Is that broadly in the right ballpark, sir, just to confirm?

Yes, you could make that correct. Correct assessment, I would say.

Next question is from the line of [ Sanjaya Satapathy ] from Ampersand Capital.

Sir, I've been hearing this INR 800 crore CapEx plan. My first question is that, will it all be made through internal accrual, one? And how it will be kind of phased out, in the sense, we assume some kind of INR 150 crore to 200 crore kind of CapEx per annum?

Yes, I think it will be safe to assume that about INR 150 crores is what may be the cash, which will go out for -- every year for the capital program.

And it will be made out of internal accrual, obviously?

As of now, it appears that we should be okay with our internal accruals.

And sir, is there a possibility of you getting that new tax benefit of 15% on any of the projects that you may envisage?

No. As of now, we are not looking at that at all. They are -- I think we really need to be setting up a completely new business. We have a lot of land. So it means giving up that land and rebidding for it, I think overall, it may not be something that would work for us.

Understood. And sir, lastly, like, is it kind of possible to get -- give us a sense like after all this CapEx program is over, will there be a dramatic shift in revenue mix towards CRAMS or something else?

See, it's very difficult to say. I can only say our intention is that our contract manufacturing and you may call it the CRAMS portfolio, which is, I would say, relatively small, needs really to be accelerated. So we would certainly like to see it in a much better place 3, 4 years from now.

I mean the other way to ask this question is that out of this INR 800 crore, how much will go towards CRAMS?

So we will invest as appropriate, Sanjaya. As of now, since we don't have anything to talk about, it'll be, I think, not very wise to be putting some number there. But I can only say that we will not hesitate to put investment on the ground to accelerate our contract manufacturing business.

Understood. If I can ask the last question that you have done well in a non-kharif season, and you started by saying that you are typically you're more kharif heavy. So my question is that, like, what is the proportion? And is there a way that you will also look to kind of diversify your kharif and rabi exposure?

So I think Sanjaya, one thing is important to recognize, and this is for everyone on the call, we must recognize that this year, we have had a very, very favorable monsoon -- rainfall, which has been higher than what has been forecast. And therefore, there has been a very good tailwind that we have got this year. If you compare to what happened last year, rabi was extremely weak. So therefore, we have to see our performance with respect to what happened last year because since we are looking at quarter-on-quarter compared to the previous year. So we need to keep that in mind that last year, rabi was particularly weak.

Next question is from the line of Nitin Agarwal from IDFC Securities.

Sir, on Metribuzin, have you seen any changes in the competitive dynamics for Metribuzin as well as for competitive products or anything that one should sort of watch out for also?

Yes. I think today what's happened is that there are a lot of players who have got into this business. So I think it's been an attractive category. So we have a lot of competition in this category today.

And sir, what implication does it have? Does it have implications because we are adding capacities in terms of our ability to sort of sell all the volume that we will have of Metribuzin? Or do you think it's largely going to have an impact on the pricing, which is going to be there on the product?

Well, there will be some impact on the pricing. I don't see any impact on the volume of business that we do. These are products which are not -- in a way, there may be a commodity, but other end they are also specialty because the product needs to meet a certain impurity profile, which every manufacturer cannot meet. And with many of our overseas partners, we are registered as source, and we meet the impurity profile that the customer requires as per the requirement of that particular country. So while there may be availability of product and competitive pricing, as far as we are looking at it, we don't see any impact on the total volume of business that we expect to do going forward.

Next question is from the line of Trilok Agarwal from Birla Sun Life. As there's no response from the current participant, we take the next question from the line of Somaiah V from Spark Capital.

Sir, on the supply side, so you've mentioned the situation has kind of improved. Just want to understand, I mean, you see this is more on the structural side as in new factories coming up in China or new capacity coming for your existing -- I mean, raw material requirements? Or is there any seasonal angle to it generally to which is relatively softer or something? So just want to understand the structural and cyclical angle to this improvement in supply side.

See, from what we are able to understand is that certainly some capacities have now come on stream. And there's a lot of correction that had to be done in the various chemical parks that were there, especially in China, in terms of they having to undergo various reviews by the regulators and all. So some of the capacities, which had actually shut down for these inspections and all would have come back. That has also ease the availability of product.

And also both the factors, actually. Structural, what Sanjiv already alluded to and cyclical also because of the reduced demand for the end product in the U.S. market, there has also been an inventory overhang there leading to less requirement. So I think it's a combination of both. Structural new capacity is coming on stream as well as short-run characteristics.

Helpful, sir. Sir, I mean, with respect to U.S., I mean, you've mentioned that in the developed markets, a lot of inventory overhang being there. So the recent trade deal between U.S. and China, so you see any -- I mean, expectations for inventory kind of getting eased out? I mean, on the Phase 1 of this trade deal, so you see markets getting imprudent, both -- I mean, specifically in U.S., do you see any improvements from this recent take off?

I think we need to really understand what this Phase 1 deal between the 2 countries is and how it would impact us, if at all. So I don't think we are ready with any feedback on that because we have simply not studied it yet.

Next question is from the line of Ritesh Gupta from Ambit Capital.

Just one. On the domestic side, given that you have seen a good growth this year and I can understand the basis of tracking that is what you have alluded to as well. Is there something changing on the industry side as well like competitive intensity kind of easing out or some bit on the rural inflation side given that rural inflation also has been going up, so commodity prices probably improving a bit? Is there some correlation to that as well which probably could sustain, let's say, even in the kharif or next season rather than just like being a base effect?

See, the competitive pressure, I think we should only expect it to keep increasing, and it is also good that there's more competitive intensity. But I think what is favoring is better product pricing for the farmer, which is also helping in his own cash availability. And also, what we are finding is that many of the farmers are actually willing to invest in the more effective products as well. And that is certainly very helpful when it comes to getting better outcomes from his own cultivation. So competitive intensity will continue to increase, and we welcome that. And farmer being more prosperous is good for the entire segment because his ability to invest in his crop is also very good.

We take the last question from the line of Ranjit Cirumalla from B&K Securities.

My question is on the domestic side. Like you alluded, in the CRAMS, you are now willing to do more of a collaboration activity. Can the same strategy be adopted for the domestic market as well, like getting into more co-marketing products rather than depending upon your own registrations?

So Ranjit, we are already doing a whole lot of partnerships for many of the products, the products that we have launched this year are also including some of the co-marketing products as well. So in fact, Trimbo and Impeder and Cameo, these are all in-licensed in a way.

So these are in-licensed from?

Yes, from the innovator companies.

Can you name them, just to get a better understanding?

I think we're done? Sorry. Ranjit, is there some follow-up question or?

Yes. I think, are we in a position to name them, just to have a better understanding of these collaborations?

No, I think it's best interest of the partnerships that we just leave it at that, that we have been actively participating with our partner companies for these molecules.

Okay. And that these things should continue in the future as well?

Absolutely, absolutely.

Any products lined up with the co-marketing for the ensuing kharif season?

Well, our discussions are always on, and we will have -- we'll announce as and when we launch, Ranjit.

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.

So just to thank everyone for the questions that they have asked, we trust that we've been able to provide the clarity. And thank you all for the positive good wishes that you have given to the company, and we look forward to our next call 3 months from now. Thank you very much.

Thank you. On behalf of Rallis India Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.