Rallis India Limited (RALLIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Rallis India Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] 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's Q1 FY '21 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 results presentation. I now invite Mr. Lal to open proceedings of the call. Over to you, Sanjiv.

Thank you, Gavin, and good morning to everyone. Thank you for joining our Q1 FY '21 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. And 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 of 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 COVID 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 [ bored ] 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. Now moving on to Rallis-specific developments. We have started FY '21 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 a strong collection. In terms of new product launches, we introduced 6 new products in FY '20, 3 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 the 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 minus 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 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 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 necessity 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 matured, 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. And good morning, and welcome to all on the earnings call for Rallis Q1 FY '21. I hope you all are safe and healthy. Before I dwell on the numbers, I wish to inform all that there is not a material difference between the standalone and consolidated numbers as consolidated financials include financials of Indonesian JV PT Metahelix, which has no transaction during the quarter except a small amount of administrative costs. And now the results. To summarize the overall financials, revenue at INR 663 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 92 crores, grew by 38% (sic) [ 53% ]. It would 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 little higher than compared to previous year. The effective tax rate, we have opted for 25.1% tax rate 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 previous year and the Seed Division revenue at INR 261 crores, registered a growth of 3% over previous year. Within crop care, the domestic formulation business, revenue was at INR 215 crores, registering a growth of 26% over previous year. Majority growth achieved is due to volume. However, we did witness pricing pressures in some of our branded products. Crop Nutrition also witnessed a healthy volume growth over 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. Metribuzin continued to be under pressure, both in terms of demand and pricing. In contract manufacturing, we saw a degrowth over 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, primary reason being crop shift by the farmers. However, maize and bajra saw volume growth over the previous year. The company continues its focus on receivables and cash flows 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 and as a prudent measure, the company has made an additional provision of roughly INR 3 crore 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 2 to 3 months. And as Sanjiv mentioned, the Dahej chemical zone formulation plant is all well set to commence production end of Q3, beginning Q4 of current financial year. Thank you. And I hand it over to Gavin.

Back to the moderator for Q&A.

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

Congratulations for good set of numbers. Just had 3 questions. First is on the international business. So ex Metribuzin, if you could just provide some color how has the actual volume and value growth trend been in your other molecules. And in Metribuzin, what are the kind of price and volume moderation you have seen? So are the spreads still attractive for us in that particular molecule? So that is one.

Yes. 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, so on IBD, while Metribuzin has been a problematic product for us for the last 2 quarters, and this is due to a huge inventory of this particular product in North America, which is our key market. So while Metri has been a problem, we have seen volume growth in our other products that we are exporting, which is Pendi and Acephate. So that is a positive sign. As far as Metri pricing is concerned, this we have also discussed in the past, while the price of Metri is trending down, the raw material for it is also trending down. So 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, so the revenue will tend to look lower than what it would normally have been, had we looked at a similar period one year back, but the margins would remain intact.

Okay. And so because -- the reason I ask is because if you look at the recent ruling in North America as well, regarding Dicamba, which is one the alternative substitutes for the molecule. And the fact that we had something like INR 50 crores or INR 55 crores 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. So is the INR 53 crores deferred sales still intact? Or we see a risk to that materializing? And any color you can provide in terms of the full ban on Dicamba now, how do we see the demand for this particular molecule going forward?

So Viraj, Dicamba is not one of our products. So I'll just set that aside. But the possibility of substitution of Dicamba by Metri is something that we are not very clear and we are also expecting that there would be some benefit that our product would get from that category. But there are a number of combinations of Dicamba, which are selling in North America. So which are those combinations with Metri which could benefit us is -- still remains to be clarified. And in any case, in the immediate term, there is -- it's not that there's immediate stoppage of use of Dicamba. So the countries will allow working off of Dicamba inventories before any ban comes into play. So there will be certainly inventories of Dicamba, which are still available to the farmers in the consuming markets. But yes, we're 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.

[Operator Instructions] We have next question from the line of [ Sajal Kapoor ] from [ Unseen Risk Advisors ].

So first of all, congratulations team on a fantastic set of results in such difficult times and much appreciated by all of us. Just 2 questions. First one is, I just wanted to understand the broad brush approach on the CRAMS scale-up opportunity internationally. So if the economics and the chemistry of the molecule match, do we care if the innovator or client is agro or non-agrochemicals? So 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?

So [ Sajal ], just to give clarity on this issue, in terms of our company, we are very focused on agrochemicals, right? And when we say we are focused on agrochemicals is because we know the customers, we know the business. And when we are looking at intermediates, there could certainly be opportunities, which are across different product categories. So for example, one of the polymers that we do, which is PEKK, which we do for Cytec, has got nothing to do with agriculture. But because of the type of chemistries that we are good at, it is a product that we do. And if, for example, Cytec wants us to do 2 more such products for them, we will do it. But we are not actively pursuing non-agri customers for our intermediates business. So I don't know whether that answers your question. But certainly, if there are certain intermediates because we do intend to get into manufacturer of number of intermediates, there's a lot of work which is happening within the company on identifying the correct opportunities. And if such intermediates are working across different product categories, then certainly, why would we not do that? But our focus is primarily on the agrochemical sector. [ Sajal ], I hope that clarifies your question.

It does. It does. It gives me the flavor. Now I was just wondering if the new R&D center coming up, it may just add to our capabilities, but yes, it's perfectly fine. And secondly, sir, regarding the road map for derisking the supply chain risk, we have a relatively high dependency on China, we understand that. So the -- 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. So are -- question is are Indian suppliers not capable or they currently don't have the capacity to fulfill our requirements? I mean what's the road map like?

[ Sajal ], on the subject, I think there's a lot of discussion happening between the industry and the government, Department of Commerce and Industries, Department of Agriculture, on how to boost Make in India, Atmanirbhar Bharat, and 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. Now 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. And 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. So 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. But Indian companies will need to think about it. And Rallis, in particular, will be very, very cautious on getting into chemicals, which have an environmental load, which is at unreasonable level.

We have next question from the line of Varshit Shah from Emkay Global Financial Services.

Sir, my question is on overall lower sales of herbicides and fungicides YoY. There's some decline in the overall crop care level. So is it attributed to the slowdown in the international phase? That's one. And second is that our portfolio is slightly more skewed towards insecticides and, hence, I think -- do we expect the Q2 to be better in terms of growth than Q1 because -- for insecticides, Q2 is the peak quarter? So that's my question one. And second, on the margins. So we have seen a healthy uptick in gross margins. So is this purely on account of production mix? And is this sustainable going ahead?

Naga, would you like to take up that response to Varshit's question?

Yes. No, I can do that. Yes. I think the observation that you make is very correct that in terms of our portfolio, our domestic -- in our domestic portfolio, herbicides is an area that 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. And yes, it is our understanding that insecticides and fungicides would really be more in demand in Q2. But having said that, I think what has also happened this year is that the season in the Indian market has kind of advanced. So 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. So 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 mix. 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 margins. 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, right, whether it is trade costs or whatever the reasons may have been. But those are all very, very selective and very specific. And in fact, we have had cases where we have had the price movements in the opposite direction as well. So 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. And just one more thing. I think you've mentioned that there has been improved realization in the seed segment. So is this a onetime thing? There was maybe a -- maybe some panic in the markets and organized players like us were able to place the products ahead of the unorganized players and hence we could command a higher realization. And is it sustainable, I mean going into, say, next year? I mean this year season largely is over. But is it something you can assume that you can sustain with going forward in next year? Or it seems to be more like a onetime thing this time?

No. I think it is, again, to some extent, driven by the mix because what -- 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. So 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 have 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. And as you would appreciate, the longer duration crops typically tend to have a larger yield. The filling of the grain because there is a longer time that is available in the plant stand tends to be better and thereby, the green wheat, what they typically call as the thousand grain wheat. So 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. Now 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 varieties, longer duration hybrids. And 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. So to your question about whether it is sustainable, it is actually -- depends on how the rain pattern is. What we do -- 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. Sir, that's helpful. If I could just squeeze in one last. I just wanted to understand if there was 26% growth in the domestic brand business, that means other than that, I think the business either was flat, the B2B, or sort of a decline maybe marginally. So was there any capacity constraints? And you could not service that demand because B2C demand was higher, so you had to divert those capacities there. Is my assessment correct? And if yes, what is the plan going ahead? And 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. And 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, but also in India also, 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. So you're 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.

We have next question from the line of Aditya Jhawar from Investec Capital.

Yes. So congrats on bigger numbers. Sir, any update that you can share on the proposed extension of molecule that was in the news? And what could be the likely contribution of those molecules for our domestic and export business? That's my first question.

So Aditya, we have got our capital program for building additional capacity, which should be ready by around Q2 of next year. And 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. And you would appreciate that on day 1, it will always be smaller volumes as we get appropriate registrations across the international markets, especially, for some of these products. So we will have a slow start starting next financial year. Nothing in this financial year, Aditya.

Actually, Sanjiv, 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 we are thinking about allowing exports? And what could be the likely contribution in -- what is the like -- what is the contribution in FY '20 for these molecules for both businesses? That is my first question.

Okay. So on an overall basis, if you look at those -- you're now referring to the 27 molecules, I'm sorry, I misunderstood your question. So yes, these 27 molecules on an overall India basis would constitute almost, I would say, 20% to 25% of the value of agrochemicals. And maybe about 25% to 30% would be its impact on Rallis, I would say. So 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. So that takes away one of the key challenges because Pendimethalin, which was included in that list, as also Acephate are very important for us. And therefore, it would have had a significant impact on our international business. So that challenges 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 a 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, where very popular, very effective products will suddenly disappear from their available products to use. And there are no immediate substitutes at all. For example, for directly seeded rice, which is being promoted in Punjab, the only herbicide which is available -- only herbicide available is Pendimethalin. So you can imagine the plight of the farmer who's trying to do DSR, where he doesn't have access to Pendimethalin. So 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. And 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 won't be allowed in India. Each country has its own requirements of agrochemicals depending on the agro-climatic zone, as also on the types of crops that are cultivated. So paddy is not a crop that is cultivated either in Norway or in Saudi Arabia for it to be banned in India. So some of these things, I'm sure the committee, that we are hoping is getting formed, will look at. And we expect a positive outcome from these deliberations.

Yes. That's very helpful, Sanjiv. My next question is for Naga. Sir, if you can highlight, like in the domestic branded business, we clearly are seeing the efforts that you guys have taken. The results of those efforts are very visible for the domestic formulation business. But in terms of seeds, our business in the last few years has not been able to demonstrate a strong growth. What are the pain points that you have identified? And what are the steps you plan to take to mitigate that? And when do we -- when can we see the results of these in the Seed Division?

So 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 prices of -- commodity prices of groundnut have actually rolled much better and certainly, cotton prices and other products -- other commodities have gone down. And 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. What -- although we realize -- although we understand that many of the cotton players in the market have actually had challenges this year. There are still 2 or 3 players, we think, who have been able to navigate quite well. So one of the important areas that we will really have to focus on is in getting the growth mojo into our cotton business. But 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, very precise conclusion in terms of what areas we need to focus on within cotton. So 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. And 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 have actually -- are expected to actually decline in kharif, right? Because the prices have been quite poor, and it has been difficult for farmers to sell their produce in the market. So really speaking, I think the economic condition and certainly so for specific vegetables has been challenging. But 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. But of course, there is a long way to go, and we really need to continue to focus on vegetables. Apart from these 2, 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 quarter 1 because that is something which is still in R&D. That area will continue to be an area of focus. So 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. So that's probably the way I would describe it, Aditya.

We have next question from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on 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? And because of this, have we gained any market share from the unorganized players?

Yes. 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, right? The sowing dates have got advanced, compared to last year I'm saying. And therefore, the plant growth is getting advanced. So this is from a natural, what you may say, fundamentals kind of a factor. But of course, there have also been other sentimental factors, right, 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 1 as well. So I think the growth that we have seen on the sowing season, right, 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, and I think it was 80% even earlier. So obviously, there is a moderation as we would expect to happen because the overall kharif acreage in the country is what it is. And therefore, it would be unrealistic to expect that these kind of percentages will sustain. So CRISIL, for example, is predicting a 1% increase in the sowing area by the end of kharif season. So maybe we could say that it could be in the 5% range if you are a bit optimistic. So we would expect, therefore, that there will be a moderation that will consequently happen. What we are seeing, 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 do not -- we have not yet reached the end state. And 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. And 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 in late part of March, that is not something which we had any way 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 have mentioned that over a period of time, we will be able to retrieve that business because we have not got any calculations there, and 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. So that is broadly the picture as we see it.

Sir, on the financial side, so operating expenses have come out, and this primarily is the result of shutdown of facilities, offices. So the fixed expenses have come down. Are we going to come back in -- from Q2 onwards? And what could be the quarterly run rate for the same?

Rohit, 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. But apart from that, there is -- 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. So there are other expenses that have come. And maybe I'll request Ashish to give some further insights on the fixed cost because -- yes, the costs will come back.

No. Exactly the same thing. There has been a little bit of -- yes, costs will come back, excepting for the travel cost, which has seen a decline. I think the other expenses on the distance marketing is -- digital and other things has gone up. So overall, a very small decrease over last year. If situation improves, then naturally some traveling would happen. In the first 3 months of the quarter, you had practically shutdown coinciding with the COVID-19 lockdown and we had some maintenance. There also some bit of electricity cost and utility costs have come down. This is a normal yearly phenomena, so we don't see any dramatic figures coming down as such, as we have discussed.

All right.

Staff cost I think has come down.

No. Staff cost is almost the same as ours.

We have next question from the line of Rajat Setiya from VRDDHI Capital.

Sir, in the 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. And what would the mix of that formulation B2C versus B2B entities?

Well, you could say most of it is formulations. Maybe -- I mean I'm just guessing it will be 90%, 95% formulation.

Okay. Okay. So in the domestic crop care, what is the sale that we recorded at this time? Is it 22 -- 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 do the domestic revenue? Yes. So -- Ashish, you are there? Okay, no problem. I will...

I've mentioned -- sorry. I've mentioned in my opening remarks also that the domestic formulation business was at INR 215 crores, which gave a growth of 26% over last year. It was mentioned in the call.

Sure. And sir, on the export side, we were planning to file some 60 dossiers in this year. So if you can talk a little about it by when do you think we will be able to file them and by when we expect the results to start coming in?

Yes. So you are -- can you just -- your voice is not very clear. Can you just start -- just describe what you said at the beginning about the dossier?

Sir, trying to file some 60 dossiers in the export market. So just wanted 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?

So Rajat, I'll take that question. See, we are actively going ahead with filing these dossiers. And it, of course, takes time depending on the country. And we have already been able to successfully get some approvals, especially for some of our formulated products in Brazil. So we will be seeing some business of our formulated products in that country. These are all long cycle time things. So things which we do today will become available to us for business between 2 to 5 years down the line depending on the country. So the work on this dossier submission is actively being done. And also, we are expecting to get some business from what we've already succeeded in getting registrations of, especially in Brazil where we have got one of our products registered, a formulated product.

[Operator Instructions] We have next question from the line of Sudarshan Padmanabhan from Sundaram Mutual Funds.

Sir, my question, the first part is when you're talking about the shifts that have 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. And also that I hear that more of cash buying had happened from the farmers. So -- I mean if you can talk a bit more about how the cash flows and the working capital was in this quarter because of this mix?

Yes. No, 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. So 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 '21, compared to Q1 of FY '20. So this is one of the comments that I think Ashish alluded to earlier in terms of the collections 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. So this is a net result of all of these actions. However, I want to just reiterate this update that this has nothing to do about shifting of business from AI to formulations or anything like that. This has been -- in the domestic business, 90% to 95% has been the formulation component of the business even in the past. So this is just a pure result of the Q1 rather than about any change in strategy or change in mix of our business.

And -- I mean you said 60 days, right, from 110 days?

You're right.

Yes, and this would continue in the second half -- second quarter, so which means that your first half cash flows will be significantly better than your first half of the -- in the previous year. Is that a right assumption?

At this point in time, for Q1, it is significantly better. Because I think, as you know, that cash is, at this point in time, a little -- I mean it's a -- that's 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 and trying to expedite our collection so that we are able to improve our position. But 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 prompter payment, we are witnessing actually very good collections. And therefore, our working capital has improved.

Sir, my second question is on the Innovation Turnover Index. I mean 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, [ 8% to 10% ], et cetera. One is you did mention that the product launched between this -- to that FY '17 to '20 had done very well. And also that we launched 6 products. I mean from launches perspective, earlier, you mentioned that you are quite heavy in insecticide and herbicide and a bit -- there is a bit of a space that we need to fill. I mean from that perspective, can you talk a bit more about how do we see this innovator index? What kind of launches are we expecting to see this year going forward? And probably how much should be the contribution coming in from these products probably this year and next year?

So in terms of -- I think we have mentioned this, that our -- we have indicated that at least 2 new formulations will be introduced in the Indian market every year. Now 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 -- not just in Q2. So 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 will arrive for Q3, Q4. So that is as far as the outlook on new product introduction for FY '21. 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 core marketing route. So 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.

Yes. And just a thing on this, clarification, this product that you launched, is it a 9 (3)? Or would it be a core marketing product?

We have so far not launched anything in Q1. We are expecting to launch in Q2, 9 (3) products.

We have next question from the line of Nitin Gosar from Invesco.

Yes. So I just wanted to understand more a bit on cotton part. You said the mojo is missing given -- typically, this is hand sown product. So are you indicating more towards marketing side? Or there is a lesser excitement for Rallis products? Or 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 restate it again, if you don't mind, please?

Sure. Sure. So I just want to try and understand. You mentioned cotton is missing mojo. I mean is it more to do with the science part because typically seeds are more akin to the science part? Or is it more to do with the distribution marketing part where the mojo is missing?

Well, I think we are -- to be honest with you, I'm just pointing there, we are passing through those different factors because we are still, as I mentioned, in the middle of the season, the season is not completely over. And we are hearing reports, like I mentioned, that many companies, other than 2 or 3, have had significant challenges. So we are trying to distill between what you may call as market factors and what you think all 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 aspect as well as the marketing or distribution-related factors. These are all, at this point in time, sensitive thoughts. Like I said, we will formulate our view once kharif is completed.

And the ECL provision that was mentioned on cotton is, I believe, the base life of the cotton is around 2 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 parts and fees are concerned, you're right. The life is more than 2 years.

And sir, in your slides, typically, you do mention about how we are 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 strict 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 Hangouts meets with our distribution partners, sometimes even with farmers. But communication is at one level and engagement, convincing, these are all things where we do think that face-to-face engagements have been missed in the quarter 1. So it has been a challenge. We've also had frequent changes, as you know, in terms of red, green and yellow impact. These are -- this is how it started in April with different areas being classified. All of that actually changed. We had also 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. But 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 clearance is taking a 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. And 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. So 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. We've tried to sort of -- 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 have to be moved, different state governments and the central government had called it out as an essential area. So I think what we are seeing at the end of Q1 is a result of a combination of both the challenges and the coping effort that both the industry and the government has taken.

We have next question from the line of Abhijit Akella from IIFL.

Yes. Just to clarify with regard to the international business progress that we are expecting. So 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, Abhijit. I did mention that our new facility, which is our multi-product plant, we are taking that capital investment. We expect it to be up by around Q2 of next year. And 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. And in terms of -- how much CapEx would we be incurring in that part of the business? And if you could also just share this total CapEx budget we have of INR 150 crores or INR 200 crores to be spent over the next year or so, what would the rough breakdown of that be across buckets?

So 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 are doing to support both domestic and international business. So we are actually looking at it as only one bucket, Abhijit. So when we have something finalized on contract manufacturing, then we will talk about that when we have something significant to report. But 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 pending capacity. Hello?

Yes, sir. I can hear you.

Yes, yes, yes. So many of our products, we are already progressing with capacity expansion because we are practically running flat out in terms of our capacities today.

And just one last one.

Yes, go ahead. Complete.

Yes. 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?

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, and 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. But for the time being, we continue to pursue opportunities that we believe should be there for a company like us.

We have next question from the line of Chirag Dagli from HDFC Mutual Funds.

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?

So 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. So 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?

Well, 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. Because as you're aware, during the last financial year, there were considerable disruptions which have happened due to various safety incidents in some of these chemical parks, especially in China. So that had been a little disruptive. So for most of our products, we are looking at multiple suppliers who are located in different chemical parks in China. So if there's a problem in one particular area, it should still give us the opportunity to get from other areas but...

Specifically for Acephate, sir, we've been able to delink from China?

No. No. We have not delinked from China on Acephate because DMPAT is one product which is being produced in fairly good quantities in China. And our dependence on China for DMPAT continues to be there.

Understood. Okay, sir. And sir, you talked about CRISIL, talking about 1% sowing growth for this kharif season. Is there an estimate for the ag chem sales for kharif 2021 for the industry as a whole, sir?

Yes. So if you look at the growth over the last couple of years, it's been between 9% to 11%. So 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. So it may be around -- between 10% to 13%, 14%. That's my guess. I don't have any insight because the consumption is yet to start. A lot of it is just gone as placement only. And I -- 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. But yes, there's been very good placement.

We have next question from the line of Lakshmi Narayanan from ICICI Mutual Funds.

A couple of questions. First is just to understand in terms of your product mix you talked about. In India, agrochemical space which we are -- where we are operating, is it possible to make some adjustment in terms of grammage or the volume like what FMCG companies do? Not for all products, but is there a possibility to actually do it because how the farmer comes in, does he come with a budget in mind or with the product in mind or volume in mind, right? So that's my first question.

No. I think we are clearly conscious of the fact that typically, the pack size, farmers buy depending on his acreage, and there is a recommended dose, per acre dose, right? So the pack sizes are decided with that criteria. And unlike in FMCG, where it is on affordability which decides the pack size, whether it should be a bottle or a shampoo -- or for 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, so -- because of the higher efficacy, et cetera. The pack size will be small, but maybe intended for a much larger acreage. So I would say that FMCG practices are not translatable into agrochemical business.

Yes. And over the last 1 year, there have been a lot of changes in terms of working capital, in terms of how we manage things. Extremely a great job that the team has done. With respect to the supply chain, what has been -- any improvements, if any, to ensure that there are no stock-outs so that the right crop or the right -- I mean there are multiple crops in multiple states and we need to have your -- if they were to be dispatched, right? Any efficiency you have got or any specific program that actually has gone through in the last 1 year or so on that front?

Yes. I think already what Sanjiv mentioned, I think one of the 3 things which I would say is a shift or a change, not for 1 year, but more, let's say, 1 quarter, is to focus on resilience versus low cost, right, lowest cost. So we have diversified suppliers and tried 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 supplier. So one is that. And that's, 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 2 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 active -- number of items, we have automated the procurement process with a view to improving efficiency, better price discovery and simplification of activity as well. So that would be the second important area. And the third is that consequent to the merger of the Seed Division, like Metahelix -- erstwhile Metahelix, with crop care of Rallis, we have integrated some of the areas of procurement in order to derive synergies as well as better knowledge transfer between the more experienced procurement processes and procurement teams of the erstwhile Rallis with the erstwhile Metahelix. So I would say these 3 would probably be important to...

And how has this translated to your -- reaching your customer with the right product, right? Has there been some improvement? Because you're talking about the input logistics, which is procurement. What about the outbound logistics in terms of reaching the customer because if there is a stock-out in a high-growth pace like what it has been, then there is an opportunity loss, right? Has there been some changes in the outbound logistics supply chain?

Well, I think we are focusing on that. Certainly, in this quarter that's gone by, ensuring availability has been a central element of focus. What I mean by that when I say focus is that we didn't 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 yellow areas because at that point in time, we felt that it would be very difficult for us to get into the red areas. So -- however, as you know, this red, green, yellow all that changed very dramatically. So I'm a little hesitant to say that it has been an unqualified kind of a factor. But certainly, I think prioritization of materials 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 nontraditional channels ore 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've 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. And in some early stages, again, there were a lot of difficulties for people to travel and so on and so forth. So I would say we have tended to focus on this a lot more. And of course, we are also trying to use some basic prediction platforms that we are having with regard to [indiscernible]. But these are all still learning systems, we're still learning the system. So again, I wouldn't call that as a fully established kind of a system, but we're 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. But I would say between the supply side, what I explained, the input side and the output side, on the input side, we have made a lot more progress. Output side is work in progress, yes.

Gavin, we will take this last question.

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

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. So is there any recalibration for our longer term plan, medium-term plan for the international businesses?

So [ 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 stay pretty good, but your revenue numbers may move up and down. But on an overall basis, for our crop care, we do expect to have a 60-40 between domestic and international. So that approach or that target still remains. And 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 industry, and that is really driven by the vagaries of the climate and agriculture that can change from year-to-year. So while we may have, let's say, a 26% growth during Q1 of FY '21, there is nothing to suggest that Q1 of FY '22 will be having a similar kind of growth. If the weather patterns are different next year, we will actually may see things happening in quite a different manner. So these are vagaries that we will need to keep dealing with. But yes, we will strive to improve our market position to about 8%.

Yes. I was just trying to understand, directionally, we are headed there?

Yes. Yes. Yes. Absolutely. There is no change in our strategy as articulated.

Another thing, sir, on seeds business. From the last 2 years, we have seen some moderation in the volume. So 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 season.

Yes. No. 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 current pacing. 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.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Over to you, sir.

Thanks, Gavin. So 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. And 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. So 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 incidence of pest infestation remains 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 we hope to do well during the current kharif season. And I think our team is doing the best under these circumstances. We are doing some outstanding work, and 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.