Rallis India Limited (RALLIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Rallis India Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that 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, Stanford. Good day, everyone, and thank you for joining us on Rallis India Limited's Q2 FY '21 Earnings Call. We have with us today, Mr. Sanjiv Lal, the Managing Director and CEO; Mr. Nagarajan, Chief Operating Officer; and Mr. Ashish Mehta, the Chief Financial Officer. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in the results presentation. I now invite Mr. Lal to open proceedings of the call. Over to you, Sanjiv.

Thank you, Gavin, and good morning, everyone. Thank you for joining us on today's call. I'm joined by Mr. Nagarajan and Ashish, our CFO. Let me begin the discussion with a quick overview of the sector, post which I will discuss Rallis-specific business developments. After which I will request Ashish to walk us through the prospective on the financial performance. The agrochemical industry has been amongst the handful of industries that have been able to recalibrate and restore normalcy across business operations, following the COVID-19-led challenges. Barring a few issues, the industry is more or less back on track. Domestically, the industry has been fairly buoyant led by normal monsoons and remunerative prices, all of which has resulted in acceleration in agricultural activities. The current year too is expected to be good with adequate water levels in reservoirs, which bodes well for the upcoming rabi season. With acreage and crop prices both improving, I believe the sector is structurally well placed. In the near term though, talking specifically about the quarter gone by, performance has been largely benign, as excessive rains during the month of August and September resulted in low usage of spray chemicals with lower pest infestations. Paddy and cotton, which are the key crops for the sector, witnessed lower pest infestation, [indiscernible] sucking pest, brown plant hopper attack was low in paddy and cotton. We saw low pink bollworm infestation in Gujarat, Maharashtra and Telangana. Fall armyworm attacks also was relatively contained across India. We believe channel inventory levels continue to remain normal. Further advancement of sales in Q1 impacted overall sales momentum during Q2, as sales figures normalized over the 2 quarters. As such, it is more useful to compare H1 of current year with that of the previous year to get an idea of trends in the domestic market. Now moving on to Rallis-specific developments. We had a fairly steady quarter, as can be seen by our financials. Domestic performance remained strong with a growth of 7%. In our international business, barring Metribuzin, many of our key products registered volume growth over previous year. Metribuzin, as we have been indicating, remained under pressure from both the price and volume perspective, owing to excess inventories in the system. However, we expect things to gradually improve from here on, which should drive the international business. During the first half of this year, we have reported the highest sales by volume of 3 of our key export products. However, our CM products showed a declined over the previous period, as PEKK dispatches were 0 and will continue to be so till the airline industry starts turning around. Our approach to prioritizing cash flow has resulted in an increase of cash from operations of INR 276 crores versus INR 227 crores in the previous year. I will let Ashish talk about this in more depth after his opening remarks. Talking about domestic business. As we have been saying in previous calls, our focus continues to be on driving growth by introducing new products and 9(3) products each year over the next few years. After having launched 6 new products last year, I'm glad to announce that we have launched 1 9(3) product, Kriman, during the current quarter, with the [ fungi side ] aimed at great crop for control of downing the due. We are confident that the new product will help us build on the revenue momentum, which has gathered steam following the success of last year's product launches. However, due to the pandemic restrictions, demand generation for products newly launched in the previous year was hampered and hence volume scale up was modest. We have also launched 2 new crop nutrition products: Solubor, 10% liquid boron; and AQUAFERT, a full year nutrition product for vegetables during Q2. Moving on to the seeds business. Performance during the quarter was largely satisfying, following a subdued Q1. We have been able to achieve growth in our maize seeds, particularly on the back of strong performance in Tamil Nadu and our maize category crossed INR 100 crores in terms of turnover. We are happy with the things that are shaping up for our seeds business. We are making steady progress towards building a comprehensive portfolio of our seeds business by strengthening the rabi segment. Vegetables as well remains an area of focus for the business, and I'm pleased the way things are shaping. On our international business, revenues declined by 29% year-on-year despite the volume growth in many of our key products. Revenue performance was impacted by the pressure, presently being witnessed in Metribuzin and due to realization decline year-on-year even on growing products. However, GC margins of revenue have been broadly stable. Contract manufacturing business was expected to remain under pressure following low uptake of PEKK, which is largely used in the aviation business. We remain hopeful of positive developments in this regard over the medium term. While it takes time to achieve the overall desired results in contract manufacturing, we are nonetheless making steady incremental progress towards the same. A quick update on CapEx before I hand over to Ashish. We expect to commission our formulation facility in Dahej chemical zone during Q4 of this financial year, had some delays envisage largely owing to COVID-19-led challenges and excessive rainfall at the project area. We also expect to set up our multiproduct plants at the Dahej SEZ during Q3 of FY '22. To conclude, I was just trying to reiterate that the sector fundamentals are broadly in place. Domestic business continues to grow at a steady rate. Internationally as well, things are stabilizing, which should help the overall growth of the business. Our product portfolio and pipeline remains healthy. Seeds business as well is shaping up well. Revised credit terms and distribution refresh is helping us grow our sales and cash flow. Further, the completion of CapEx program will help us provide necessary growth momentum for the business. International business as well should improve going forward, which should help us to diversify our revenue mix and improve profitability. With those opening remarks, I will now hand over to Ashish to talk us through the financial performance. Over to you, Ashish.

Thank you, Sanjiv, and good morning and welcome to all on the earnings call of Q2 FY '21. To summarize the overall results, I'll first speak about the Q2. Revenue was at INR 725 crores versus INR 749 crores in the same quarter in previous year. EBITDA at INR 117 crores versus INR 120 crores. Profit before tax before exceptional item was at INR 108 crores, higher than INR 106 crores in the same period in previous year. Profit after tax after exceptional item was at INR 83 crores versus INR 86 crores in the previous year. Previous year's revenue, you should know that it includes about INR 10 crores of revenue from pharma AI business, which was -- which has been since discontinued. For the H1 results, revenue was at INR 1,388 crores versus INR 1,372 crores, a growth of 1%. EBITDA of INR 245 crores versus INR 215 crores in previous year. Profit before tax was at INR 228 crores versus INR 194 crores in previous year. And profit after tax after exceptional item was at INR 175 crores versus INR 147 crores in the previous year. I'll now give a brief on how each businesses performed during the quarter. Crop care. Revenue from crop care, which is largely the domestic business, domestic crop care witnessed -- was at INR 436 crores against INR 408 crores in the previous year, registering an overall growth of 8%, largely contributed by volume growth of 10% and a bit of price correction downwards. We saw growth in volumes of some of our major branded products like Takumi, Captaf, Contaf Plus, Asataf, Blitox, Tata Panida. Our newly introduced [indiscernible] was also -- has also witnessed a good volume growth. In the international business, B2B, challenges in Metribuzin still continued in the second quarter as well. Overall, revenue was at INR 145 crores versus INR 188 crores in the same period in previous year. There was a volume growth in acephate tech roughly 17%; pendi tech, almost 46%; while a drop in volumes and price of metri tech. International business in the contract manufacturing segment registered a revenue of only INR 10 crores versus INR 29 crores of -- in the same period in the previous year, largely due to drop in volumes, both of Metconazole and PEKK and also the price corrections that happened in -- sorry, demand for PEKK continues to be low in the next 2 quarters, and we hope to liquidate the stock by end of Q3 or beginning Q4. Seeds division top line growth was at 29%, a growth of 29% at INR 73 crores versus INR 57 crores in the same period in the previous year. This was largely driven by volume growth in maize and mustard, coupled with better price realization. Overall volume growth has been 23%. Nongrowth nutrient and organic manure registered a top line growth of INR 39 crores versus INR 32 crores, a growth of 22%. Due to better working capital management, cash from operating activities was at INR 278 crores versus INR 227 crores in the previous year. Overall, working capital days improved to 65 days versus 104 days in the previous year. Inventory levels were high compared to previous year, largely due to stocking of critical raw materials to meet the demand for Q3 FY '21. However, receivable days improved to 75 days from the previous 101 days. Cash and cash equivalents, including liquidity investments, stood at INR 470 crores roughly versus INR 347 crores in the previous year. Progress on CapEx, there has been a good progress in some of our major CapEx. Formulation plant at the chemical zone expected to start commission products production by end of current financial year. The second phase of metri capacity expansion is over and the plant is now ready for commercial production. And expansion of other active ingredients produced at our Ankleshwar unit is well on track. Work is also going on, setting of the NPP at Dahej SEZ Zone. The Board has approved a further investment of roughly INR 70 crores yesterday towards capacity building. Hence out of about INR 800 crores of investment that was to be done over a period of 3 to 5 years, as on date, we have committed a line of site of roughly INR 525 crores, including setting up of the new R&D center at Bangalore. I now hand over to Gavin for the Q&A session.

[Operator Instructions] The first question is from the line of Prashant Biyani from Prabhudas Lilladher.

Sir, first, one clarification on our total international domestic revenue. Can you share the figures once again for current quarter and last quarter, total international, including everything and total domestic, including everything?

Ashish, would you like to...

Yes. International is INR 154 crores against INR 217 crores of last year. And domestic -- seed is INR 73 crores versus INR 57 crores of last year. Domestic crop care, which includes, say, the domestic formulation, the PGN, the Geo Green and the domestic institutional business was at INR 486 crores versus INR 451 crores of last year. And others, which includes aqua and some other items, HHP, and it was at INR 12 crores versus INR 24 crores of last year.

Sir, if I'm not mistaken, last year in Q2, you had mentioned international business revenue of INR 325 crore. Can you -- I mean, has there been any restatement or anything?

No, no, there's no restatement. There's no, no. I don't know. It's very clearly written there also, no.

It is only 217 crore?

Yes.

Okay. And sir, have we started to sell anything from our phase 2 Metribuzin plant?

Well, the plant has been commissioned, and it is operational. And in fact, we have been running it just to keep it commissioned. But as such, the volumes of metri have only started moving towards end of Q2. And we have also got some registrations for our formulated product also from the -- for the international business. So while the volumes have been subdued, I think the inventories, which have been the key cause of our lower sales, seems to be showing some correction because some inquiries have now started coming in. So we are hopeful that over the next 2 quarters, things should start improving. In the meantime, we continue to produce and build up some inventory in anticipation of the sales picking up.

Okay. And sir, the CapEx that we are undertaking for AIs, these AIs are relating to our backward integration? Or these are all separate products?

No, the backward integration, while we have kept aside some money for that, a large part of the CapEx is going towards new AI.

And how much are we investing in this?

So there is a new multiproduct plant is intended for the new AIs. Apart from that, as already mentioned, most of the capacities at our Ankleshwar plant have been revamped, 4 are being revamped, 4 completions within this financial year for commissioning. So products like Hexaconazole, we've already revamped the capacity. In fact, 1 of the 3 products where we registered the highest ever export was Hexaconazole as well.

Okay. So I mean, sir, any indication of how much revenue can we have at optimum capacity from these AIs, just to get some indication because these are all revamped facility. So asset and all, we won't get so much of an idea.

Well, the way I would look at it is that today, we have been running practically flat out in terms of our capacity. And the newer investments for debottlenecking these capacities will help us to service the market better. And these are all incremental CapExs, which have been done to provide balancing equipment for debottlenecking the plant. So the CapEx involved is important for us, but not very significant in the overall scheme of things. The major CapEx, of course, is happening in the multiproduct plant, which we had mentioned will be commissioned only towards Q3 of next financial year. And that will be intended for commercializing some of the work that our R&D teams are doing on synthesizing these off-patented AIs.

Okay. And sir, any CapEx number of the NPP plant?

So we will come back with these kinds of numbers, but it is going to be a plant which will be able to handle multiple chemistries.

Okay. And just one last question. The asset turn from the...

Excuse me, this is the operator. Mr. Biyani, may we request you to come back in the queue for a follow-up please. [Operator Instructions] The next question is from the line of Rahul Veera from Abakkus Asset Management.

Sir, just one small question. I want to understand the INR 70 crore the approval that we got from the Board, what will be this for?

So this investment is intended for certain additional facilities that we proposed to build, including some pre-engineering that we need to take up for some opportunities in contract manufacturing as well as to expand our current proposal on the multi-product plant. So we have already got a proposal for NPP, but we are looking at further equipment to be added to the plant. So that was for expanding the scope of our NPP plant. Apart from that, we're also proposing to buy additional land for our seeds business. So some of these approvals are related with that as well.

Sure. So sir, any thought process for CRAM for this year, that kind of business where we will be going beyond our agrochem business also. For example, for the way we have done for PEKK for the airline industry, are there any other chemistries we are looking like we are open to source that?

Well, Rahul, to be very, very specific, we are intending to focus our contract manufacturing on the agrochemical space primarily. That means we will not actively look for CM business outside of agrochemical industry. But if there is something that comes to us, we will not refuse it.

The next question is from the line of Varshit Shah from Emkay Global.

Sir, my question is, can you decipher the international degrowth of 29% into how much of that decline can be attributed to PEKK and Metribuzin, so that we can know the health of the business, which is ex of these challenges?

Yes. May I request Naga to take that question.

Yes. So let me address it in this way. As it was already mentioned by Ashish, the Q2 revenue of last year, I'm just restating it, again, for international business, was INR 217 crores, right? And this year, the Q2 revenue is INR 154 crores. So the drop is something like INR 63 crores. We would attribute 80% of the drop to Metribuzin. So Metribuzin is the single biggest contributor to this drop. Like Sanjiv already mentioned, there is volumetric gain we have obtained in other international products. However, there has been a price pressure in those products as well. So there is actually some reduction if you look at it from a revenue point of view, although there is a volume growth in certain products. Clearly, some portion of that is getting compensated by price increase and volume increase in some other products for the international business, but the net effect of that is pretty much a wash, if you keep aside the Metribuzin impact, right? So the Metribuzin impact is the single biggest impact. The second one is, of course, PEKK. PEKK, we have not been having any shipments, consequent to the airline industry pretty much shutting down in terms of CapEx purchases. We have also mentioned Metconazole, which is another contract manufacturing product. We have mentioned it just to sort of indicate that, that is actually one of the contributors for the difference between Q2 of this year and Q2 of last year. However, that is not a large portion of the difference, and we do expect that there is a timing impact in the Metconazole portion, which means that we do have confidence that, that is not a -- let's say, an impact like contributed by COVID or anything like that. So really speaking, the 2 big drivers for international businesses drop: one is Metribuzin and the second is PEKK.

Sure. My second question is on the -- on this CapEx plan for the year. So in terms of spend for the current year, I think largely the amount is going to be towards the Dahej formulation plant. Any indicative color on what kind of revenue potential that can scale up? I know that formation plant is a highly scalable, so difficult to put number? Or is it just more like a capacity you put in place and then this will give you a domestic growth, which is going to come over 2 years? And secondly, the main question was on the gross margin expansion. So the gross margin expansion, I think one of the reasons is also that the product mix is slightly more in favor of domestic B2C business, which is a higher-margin business. So out of the gross margin expansion, how much of it would be more due to product mix? And what is the reason for the balance expansion? I mean, is it just raw material prices coming down? Or is there something else?

Okay. So on the first question, which you asked about our formulation plant, yes, we are expecting the phase 1 of the formulation plant to be concluded by March of this year. There has been some disruption contributed by the rains as well as by the manpower difficulties that our contractors have faced due to COVID. So the phase 1 line is -- the phase 1 lines, we have multiple lines in the formulation plant. The phase 1 lines will be completed by March as we see it at this point in time. Progressively, there will be a revenue loading. The way we have modeled it, obviously, is in terms of looking at the kind of returns that we can expect from this formulation plant over a period of time, the classical IRR kind of calculation. Revenue profile is based on the assumptions that we have made. So to give you some kind of a background, we do expect many of our new products, new formulations to come out of this particular plant as well as additional requirements of our existing formulations. These would also be expected to come out of the plant. At this point in time, I don't think we are able to very precisely put down, let's say, the revenue in the first quarter of next year or something like that. So I guess we will be able to come back or project that even better once the lines are in place. As you would imagine, there have been significant challenges because of COVID initially. And I think the range have also contributed to some disruption. So we are right now focused on getting the project up and commissioned -- phase 1 commissioned by end of March.

Varshit, to answer your second question on the gross margins. If I were to talk about the international B2B business, if I remove the Metribuzin impact last year and this year, if I don't calculate that, the margin were same as last year for the international B2B business. Even in the products like, say, Asataf or acephate tech, we've realized better prices. There were price corrections seen in some other molecules, but because of larger volumes going up in the technicals as well as some of our branded products like Asataf and Contaf, Contaf Plus where the margins are higher, so the contribution overall was almost maintained at same level or a little better than, I would say, last year. And hence, it gets reflected in the better margin realization.

Sure, sir. And just one last, if I could squeeze in. Any color you can give on the ramp-up of the Metribuzin capacity? And that's it from my side, and tentative plant...

So metri capacity, I would say that we would build to fully utilize it only towards Q1 of next financial year. As I mentioned, that we are building up inventory. There is also annual maintenance cutdown that is planned during Q4 of this financial year. There we will also be doing some amount of reciting of some of our plant and machinery, which will permit us and allow us to expand both the Pendimethalin capacity as well as the Metribuzin capacity going forward in 2 different buildings. So there's a bit of work that we have planned during Q4. That's why we are building up inventory. But the entire capacity, our expectation will be fully utilized from Q1 of next financial year.

The next question is from the line of Rajat Setiya from VRDDHI Capital.

Sir, on the seeds and domestic crop protection side, if you can talk about how has the industry performed in this quarter? And also, what is the situation in terms of inventory in the industry as well as for us?

Rajat, in terms of inventory level, our assessment is that we will be more or less normal only. And as far as the others in the industry are concerned, we are yet to see the results and performance of other companies. We did have some inputs coming from Q1, where we had already stated that our cotton seed business has not done as well as we had planned, while some of the others had done fairly well and had shown good growth. So that was a concern for us that our cotton category has not grown. But this year, our maize has done particularly well. We were quite happy with the way it is performing. Vegetable seeds business is also picking up. As you're aware that we had created a separate business group for our vegetables business. That is also progressing along quite well. May I request Naga, if he has got any insights to share on what our assessment on the competition is?

Yes. Like what you said, Sanjiv, we don't have information about how their numbers are going to show up or how their performance is going to be. But as you know, the sowing area has actually gone up this year by about 5%, which is actually quite a substantial increase. If you look at the trends over the last years, rainfall has been copious. So we do think that things are quite positive as far as the overall agri sector is concerned or have been positive for the kharif season. The reservoir levels at the end of September seemed to be at the same level as it was last year. Remember that last year, also, rabi was actually a good season. So we do expect this year's rabi to be similar to last year's rabi. Generally speaking, I would say that the situation is quite positive. From our own point of view, like we have mentioned in the crop protection business, crop protection business, if you were to look at it on a H1 level because I think Q2 to Q2, actually, there is a movement of material that happens in the second -- in the quarter, and it's a little bit confusing to actually just compare quarters. So we would say better to compare at the H1 level. So H1, in crop protection, we have had actually around 14% growth, right? If you add Q1 and Q2 together compared to last year, only crop protection. Remember that we call crop care as something which is crop protection plus the crop nutrition. So crop nutrition has actually grown even better. Actually, PGN and Geo Green have grown by close to 30% in H1 of this year. So that's a bit of a surprise for us because if you remember, there was this feeling that crop nutrition products, which are somewhat more discretionary in nature compared to crop protection, which has a mix of prophylactic as well as curative components, the belief was that crop nutrition would probably be a little bit more impacted this year, consequent to COVID and people will probably prioritize purchases of crop protection products. But I think we have been a little bit surprised on that count. It has actually ended up growing better. So we think that perhaps the overall rural economy has been a lot better than what -- at least what we anticipated, and that has kind of witnessed in crop nutrition. So we should expect a similar kind of a trend for many of the players. This is from a demand side, I would say. From a supply side, there have been, as you know, tremendous challenges in terms of making material available in the different retail outlets. Demand generation has been a bit of a challenge. We have already mentioned it that our ability to scale up our new products, which we had launched last year, has been quite severely hampered because of the absence of physical movement. So a large portion of our growth in crop protection has actually come from, what you can call as, old products. So this, I think, is perhaps likely to be an industry trend because the new products that were launched last year or even this year would have probably got hampered in terms of demand generation. On the seeds side, we have -- if you again, look at it on a H1 basis, we have had a growth of about 7%. We had already mentioned that in the end of Q1 that we were not very satisfied, let us say, with the kind of outcomes that we were projecting at that point in time for our cotton portfolio, that has played out as we had expected. So unfortunately, cotton has had -- has been a bit of a challenge for us. In the industry, we would expect that cotton may have been similar to last year in terms of overall packets sold. But I think what may have happened is that some of the larger players may have increased their market share. So we would say, at an industry level, in the case of cotton, there could perhaps have been a little bit more consolidation in terms of the larger players becoming bigger. On the maize front, I think like what Sanjiv already mentioned, we have crossed INR 100 crore mark in H1. Maize is our second crop to do so. We already -- you are aware that in paddy, we do more than INR 100 crore. We had hoped that cotton would be actually the second crop to cross INR 100 crores, but that has not to be. But I think on the maize front, the understanding we carry is that contrary to, again, classical expectations because if you remember, commodity prices on maize were rolling poorly. Oil prices have gone down. Thereby having a collateral impact on corn prices globally. All of those have actually been proven wrong. We have ended up actually having almost a 25% growth in H1 on maize, but we would attribute this to our product performance. Already, I think it was mentioned that the maize growth has come on the back of our performance in Tamil Nadu, where our product fit seems to be quite good. So we would say that as a learning from the industry point of view, well differentiated, strong performing products, we have continued to do well. There has -- we don't see that down trading, which is kind of the view that was expressed for FMCG, for example, has actually played out in the case of agriculture. So we think that maybe it is a more classical customer response that we have seen. So I hope that gives you a little bit of the thinking that we are having on the industry side for crop care and seeds.

Rajat, just to add one more dimension that while our field teams have been engaging with the trade as well as the farmers, we have prioritized the safety of our teams over the business. And as has been mentioned, that the kind of support that was needed for some of the product launches of last year, we could not do that because of the availability of our teams to engage directly with the farmers in the field. But we understand that some of the other industries, where the field teams have been more active in the field. But I think as an organization, we have prioritized the safety of our people over the business.

Yes. Sir, on the CapEx side, we have spent significant CapEx, I think, for the international business also in the last 2 years. However, now compared to our own expectations and demand for a key large molecule, we have seen, has been moderated in this quarter. So is it -- do you think of the planned CapEx for the international business? And related to this is, all the heavy lifting in the international portfolio has been done by 3, 4 molecules. So -- and in the past, we have talked about having a pipeline of new molecules. So if you can talk a little bit about those pipeline of new molecules for the international business? And where are we in terms of commercialization? And how big those molecules could be just to help us understand the portfolio construct going forward in this business here over the next 3, 4 years?

So Rajat, in terms of our new products for the international business, I did mention that our new multiproduct plant should be coming up for commissioning only during Q3 of next financial year. And because our existing capacity, whether it is for Pendimethalin or Metribuzin, these are all fully booked in the sense that these plants will be running to capacity. So our new commercializations will happen only towards Q3 of next financial year. I may also add that we will go through a process of product registration, which take -- has their own cycle times. There are certain markets like Vietnam and Turkey, which are easier to access because of a more liberal registration regime, which is there in those countries. So the volumes during the initial years will be small, which will ramp up over a period of time. So I would just like to advise caution, when we are trying to build models. And I would also like to add that our R&D pipeline for AIs is very healthy. And we will start commercializing at least 2 products during Q3, Q4 of next financial year. So we will be adding to our portfolio of products. And as far as our existing product portfolio is concerned, the 2 key products that we're exporting, which is pendi and metri, both of them are herbicides. And of course, acephate is an insecticide. Unlike some of the other herbicides, which are facing some pressure from the environment, largely Glyphosate and Dicamba, there is nothing negative about both these herbicides, Pendimethalin and Metribuzin in the international market. So we see a good growth trajectory for both these factors for herbicides for the international market. Pendimethalin capacity, also, we are in the process of expanding. Metri capacity, we've already expanded. And once the situation normalizes in terms of our exports, we will take a decision on further expansion of metri capacity as well. So as an organization, we are positive on both these herbicides for the international business.

Shall I just add to that.

Yes. Naga, please.

We've also added capacity, Sanjiv, on Hexaconazole as well.

I just mentioned that Hexa was also the highest ever export that we did during H1, and that capacity has already come on steam. Back to you, Rajat, and the moderator.

The next question is from the line of Rohan Gupta from Edelweiss.

Sir, a couple of questions, sir. First is on this CapEx front. So when the new management joined and then we talked about INR 800 crore CapEx. Out of that, you had mentioned roughly, so far now, INR 525 crore has been tabulated that were highest it has to go. I believe that large some of that is going to the Dahej phase 2 plant, which is going to commission next year. Just wanted to understand a little bit more on that balance INR 300 crore because you initially planned that over next 3 years to 4 years, all the money is likely to be consumed in terms of CapEx. So do we have some clarity that where we are going to invest this INR 300 crore? And in terms of product, any development has happened?

So Rohan, see, broadly, if you look at our CapEx, as you have pointed out that the chemical zone, the formulation plant will be taking a large chunk of it. Another large chunk of it is going into the SEZ, where we are building the multiproduct plant. Another large chunk of it is going into the new R&D center. So these are 3 large tranches of investments that are happening. Apart from that, there is a fairly large charge, which has gone in for revamping our existing AIs at the Ankleshwar facility. Apart from that, there is a whole lot of investments which we're doing around automation of all our plant and machinery. We're also investing in mechanization of some of the material handling which we are doing. So the key capacity expansions are in the SEZ and the CZ. The other investments are for the future, which is really the R&D and also for our existing product portfolio to further strengthen that. And we also indicated that we will be acquiring land for expanding our seed production facilities to facilitate and enable us to grow that category more rapidly in the coming years as well. Naga, would you like to add something more?

Yes. I just want to add 1 comment, Sanjiv, for the benefit of Rohan, since you asked that question, yes. The amount of CapEx is between INR 525 crores and INR 550 crores. That is our cumulative. You can say a portion for which we have clarity in terms of the INR 800 crore investment plan that we had, and Sanjiv has already articulated it. But one development, which I want to also share with you, is that there has been a churn in that INR 525 crores to INR 550 crores. Meaning, we had when we had shared with you in the previous meeting, had a certain set of projects, which was accounting for the total. We have had a chance to relook at that and modify it a little bit. And therefore, after modification, it still continues to be at INR 525 crores to INR 550 crores. The figure remains the same, but there has been a change in the constitution of the different projects. Yes. For the balance INR 250 crores, we will certainly be developing the plans as we go along. Like I mentioned, we have had an opportunity to churn the constitution of this INR 525 crores. We constantly keep doing it, and it will happen over a period of time because it is a 5-year plan for that INR 800 crore CapEx, Rohan.

Sir, second, once again, related to CapEx only. So sir, in last 6 months, we have seen that at the country level, we have seen various challenges, and even globally also that China, the threat and the dependency on China that the global companies are trying to reduce that, and we are also facing some border tension. So that's where we want to reduce our dependency as a country as well as the chemical is concerned. So do you see that in the last 6 months, there has been any change in plan or the thought process in your company in terms of investing further in the business? And over next 2 years, do you see that there are increased opportunities in terms of investment or any new molecules or the new intermediates, which you have identified that you plan to go ahead in terms of making further investments in the business in next couple of years? So especially last 6 months because a lot of things have changed globally as well as in India.

So Rohan, you make a very good observation that lot of things have changed. The government is also looking at how to strengthen manufacturing within the country. So this whole approach towards Aatmanirbhar, Make in India. And also, they have already announced some PLI schemes for the APIs and for the electronic industry. I understand that the government is also considering a PLI scheme for the agrochemical industry. So we have also been engaging with the government on that. So as an outcome of the derisking of portfolios as a country, I think there will be a movement and Rallis is very much looking at opportunities for expanding capacity into intermediates as well, whether it is for our own requirement or whether it is to be a merchant supplier of those active ingredients. But those things are still work in progress. We have nothing substantial or material to report at this stage. But I would just like to say that we are looking at the space of intermediates as well as part of our overall portfolio.

The next question is from the line of Madhav Marda from Fidelity.

Now my question basically was, given this China + 1 strategy that is playing out globally, are we seeing increase in inquiries for any more molecules that we can potentially do contract manufacturing for ahead of the existing molecules that we have? Is there like an increase in the inquiry flow for us?

Yes, Madhav, there is considerable discussion that is currently ongoing. Nothing has yet been firmed up or frozen. But this is something very much on the discussion table.

Understood. And the kind of molecules that we take up would be more on the generic side or we might do more processed synthesis kind of work as well? What would be the thought process in terms of what kind of orders we would like to take?

No, no, we are very flexible. We are quite happy to do only off-patented AIs. We are quite happy to support any of these global measures even with their intermediates. We have our strength in manufacturing. We have our strength in R&D, and we are quite capable of handling the entire manufacturing gamut whether it is for intermediates, whether it's off-patent or whether it is for even new innovative molecules. But this really depends on the partner as to what is it that they would like Rallis to support them on. But we are extremely flexible.

And sir, even given that...

This is the operator. Mr. Marda, may we request you to come back in the queue for a follow-up, please. The next question is from the line of Abhijit Akella from IIFL.

Yes. I just wanted to check regarding the domestic business breakdown that you shared earlier on the call, this INR 486 crores versus INR 451 crores from last year. Would it be possible to give us just the domestic formulations number within that?

Ashish, could you just...

Yes, yes, yes. I think in my opening remarks, I did say in my opening remarks, what was my domestic crop care, 1 minute.

Okay. Was it this INR 436 crores versus INR 408 crores, sir?

Yes, yes, yes.

Okay. Sorry, my mistake sir. I missed that. And the other thing I just wanted to check, sir, there has been some news flow regarding the Chinese maybe cutting generics prices in a very aggressive way to either protect their market share in the generic AIs or maybe gain market share. So are we seeing any signs of that? And is that one of the factors impacting our realizations on our international portfolio?

Yes, I think realizations have been generally under pressure. I wouldn't contribute it to specific reason what you are talking about. Like what was already mentioned in the case of Metribuzin realizations have actually come down Y-o-Y by almost 40%, right? But I think they have also been accompanied by a conferment reduction in the raw material prices as well. So I think it is -- it's on both sides, both on the AI pricing as well as the raw material pricing. We have had similar experience with regard to Pendimethalin as well. So I don't think we could attribute it specifically to the reason that you mentioned, but generally speaking, there has been a reduction compared to last year. That's one of the reasons why our export revenues are tending to be lower despite a volumetric growth in terms of the constituent AIs.

Right. Got it, sir. And just 1 last thing and then...

This is the operator. The next question is from the line of Nirbhay Mahawar from N Square Capital.

Hello?

Yes, go ahead Nirbhay.

Yes. Sir, we have one question on domestic business front. We have seen dramatic reduction in the working capital, I think, down to 65 days. So just wanted to understand what is going right, is it a company-specific development? Or is it because the terms of credence for the industry was much better?

So Nirbhay actually there are a couple of things playing out here. One, of course, is that we did introduce trade terms last year, which have worked very well for us. We did some further tweaking of the same trade terms, which made it even more interesting. But fundamentally, I think the liquidity in the system in the rural economy seems to be good. Perhaps maybe the trade is investing more in the business considering the kind of emphasis that the government has given on culture. They're also investing a little more seriously in the business. So overall, the liquidity in the system in the rural economy is very good. Maybe I'd like Naga to sort of add to this so that we can give some more ideas as to what can be done there.

Yes. I think you said it correctly, Sanjiv, I think there is one, definitely an external factor. We think that the money that is -- the avenues available for investment of money has actually certainly come down for the general body of trade, if you were to call it like that because many other industries are not really providing that opportunity. So that's certainly a factor. What we have done, we have certainly, like we have been sharing over the last couple of calls, refreshed our channel policies. We have made it attractive to collect money. And even more so, we are focused on it in the first half. Because if you remember, one of the things that I think came up earlier was about our outlook towards CapEx. We are still fully, fully resolved to drive the CapEx for the growth. And we are feeling that it would be a good opportunity to use the money released from the working capital to fund our CapEx program. So we are actually focused on collections, and collections have significantly improved. That is one factor. Secondly, we have also stocked up on inventory. I think we mentioned it in the investor presentation also. We have actually increased our inventory to cope with raw material inventory I'm talking about, to cope with the COVID-related challenges and the other kinds of disruptions that we were talking about. So the net effect of all that is that the working capital has gone down to about 65 days from about 100 days, 104 days, I think it was last year. So that's the overall picture Nirbhay.

Fine. Sir, one more follow-up on the international business. We have, in our earlier communication, we have guided that international business is going to be 40% of our overall revenue mix. And last 9 months, we have seen a decline in that part of the business. So as far as longer-term guidance is concerned, do you maintain that international will be 40% and domestic will be 60%?

Yes. I think...

Because CapEx seems to be guided for that.

So I think in the immediate term, the issues we have already articulated. But I think in the medium to long term, a 60-40 between domestic and international seems to be a good place for us to have a portfolio of businesses which can withstand the cyclic nature of some of the issues that we may be facing, whether it is a monsoon in India or whether it is floods in some other parts of the world. So we feel a 60-40 would be a good place for us to be. Yes, over the last 2 quarters, the situation has been adverse, really because of the price of some of these international products that we are selling as well as the inventory, which we've already articulated. So we had been at around 35% during the last financial year, which has got eroded during the last 2 quarters.

The next question is from the line of Amar Mourya from Alf Accurate Advisors.

Yes, hello? Am I audible, sir? Hello? Am I audible? Hello?

Yes. Please go ahead, Mr. Mourya.

Yes. Sir, in terms of this CapEx, which you had guided of around INR 525 crore, can you give us the breakup for that? How much you're going to spend in formulation, how much in the multipurpose? How much you had utilized for the revamping of Ankleshwar plant?

So Mr. Mourya, I did mention some broad areas that our key investments are going into. Perhaps, we should just leave it there rather than going into specifics in terms of rupees, crores per project. So we may not be in a position to share that kind of granular detail. Is it okay with you, Mr. Mourya?

Okay. Okay. And secondly, sir, if I may squeeze one more. If I -- if we consider the PEKK and the Metribuzin revenue, which -- I mean, which we had seen the impact in this particular quarter, would the revenue growth would be something in the line what we had seen in the domestic business or much higher than that?

So Mr. Mourya, your question was not very clear, we want to understand what is it.

So I'm saying if I tweak the impact of PEKK and Metribuzin in the current quarter revenue, on a like-to-like basis, would you have seen the growth in the international business?

I think, yes, yes.

I think that yes, I think Ashish had articulated.

Yes, yes.

But maybe he will just repeat it so that there is clarity on this for all on the call. So in the area, what happens if you remove Metri and PEKK from our international business, how has the like-for-like compared?

See the growth measure was or growth in the main molecules of Acephate has gone up by 17%, Pendi tech has gone by 46%. So while Metri tech volumes did come down, these 2 products has really taken care of the drop in the volumes. So that is the -- overall, if you remove the impact of Metconazole, Metri, there is definitely a very handsome volume growth.

The next question is from the line of Nitin Agarwal from IDFC Securities.

Sir, on the domestic business, this was a fairly good season from a monsoon perspective from a kharif season perspective. After our growth for the year has been about 10%, 12%. Some of which you mentioned has been impacted by a COVID-related destructions. Sir, may I ask the pressure is too core, well, I mean, in a good year like this, what should be an ideal growth for us if these destructions have not been there? And in terms of what pace do you see domestic business growing for you over long-term, sir?

See, listen if one looks at Indian agriculture. I think we need to start there. If you look at the crop protection industry over the last couple of years, broadly, it has been growing at around 8% to 10%, right? And this has been a good year. So one can expect that maybe the 8% to 10% will start moving like 10% to 12% growth in the -- in this particular sector because there is going to be some amount of time, which will be required for the agricultural practices in India to really come at par with global practices. And here, I'm talking about specific consumption of agrochemicals per hectare of land. India tends to be on the lower sides, 0.6 kilograms per hectare compared to some benchmarks, which are maybe 5, 6, 7 kilograms per hectare. So we are very far away from those kind of international benchmarks of application for agrochemicals per hectare of land. But overall growth, because this is a good year, my assessment and our view is that it can grow between 10% to 12% during this particular crop season of kharif and rabi.

And sir, going forward, do you see any major lift up in this number or this is where one should be or one is modeling and thinking about domestic growth at 10% to 12% sales growth for us also should be like a ballpark number to run with.

So I think, as I mentioned that in the immediate term, it may be 10% to 12%. But in the longer term, it is expected to accelerate even better as the kind of focus that the government is bringing on, doubling farmer income, the kind of support that is coming through the various reform schemes and all. So there is going to be more money in the hands of the farmer to be able to invest better in his crops, to invest both for productivity as well as quality because we certainly feel that the kind of wastage, which happens today due to crop loss, can be significantly reduced by better agricultural practices. So as the money with the farmer keeps improving over time, his ability to invest in his crop will keep improving. So this 10%, 12% growth will, in the medium term, go up, of course, over a period of time, it will normalize, but we certainly see the trajectory in terms of growth of the sector, both for crop protection as well as crop nutrition as well as use of better quality seeds. These are all the focus that the government is also trying to bring apart from the whole conversation about organic farming and all which is there. But certainly, organic farming and use of organic -- and use of chemical fertilizers will need to move hand-in-hand. It's not that organic farming will replace use of chemical in the -- even in the medium to long term.

The next question is from the line of Ranjit Cirumalla from B&K Securities.

Can you repeat the name please?

Sorry, we couldn't hear the name moderator?

Ranjit Cirumalla from B&K Securities.

Yes. Just one quick question. The OpEx, the other expenditures on a sort of higher base is up around 4 odd percent. So just wanted to get some sense, is there any ForEx angle to it? Or is it just a normal thing because during these COVID times, we were expecting a bit kind of a flattish the expenditure. So some bit of clarity on that would help.

Other expenses you are talking about?

So I'm not very clear. The question was not very clear but if it is related with CapEx...

Other expenditures, sorry. So OpEx other expenditure.

Other expenditure.

Other -- okay, OpEx, other expenses.

OpEx other expenses see while there would be savings on travel costs because travel has not happened in last, say, 4 to 5 months. But then lot of amount has been spent on reaching out to the trade, the farmers, customers on e-platforms. So while money would have been saved because of no travel or no overseas travel. So a lot of amount has been spent on this and compared to previous years this thing, I think there's hardly any increase that way in overall basis.

The next question is from the line of Archit Joshi from Dolat Capital.

Sir, in the earlier comment, you had mentioned that of the other herbicides like Glyphosate or Dicamba are facing certain problems in the overseas market. Sir considering that wouldn't our products like Metribuzin or Pendi should be growing -- taking advantage of the situation. And also, if you can share some sense of yours on how the global landscape is looking for this entire pack of herbicides, considering that some of the other herbicides also have seen a pricing pressure. So if you would like to share any thoughts on that.

So yes, I think on the herbicides front, there are different products, as you know, which is having different kinds of challenges. Glyphosate and the Dicamba have very different challenges. From our point of view, we do believe that Metribuzin has a good positive future. And that is why we have invested in the capacity expansion. However, at this point in time, there is certainly a lull in the demand and we are expecting it to catch up. And over a period of time, we feel confident that our capacity utilization, like what we can produce will certainly be absorbed by the market. Whether it will substitute Dicamba or Glyphosate, well, that's a very different question. It may not. Because I think the requirements of the different farmers for different particular requirements are probably different. So it won't be an alternative in that way, but it will certainly be having its own market. So that's on the Metribuzin front. Otherwise, on the global level, I think agriculture in many, many parts of the world has been somewhat less affected compared to the other businesses. We think that, that is showing up in terms of the volume growth that we are getting in many of our products. And again, remember that the volume challenges we are facing in Metribuzin is not COVID-related. It is more related to the weather conditions of last year. So that is not really a result of COVID. So I think at an overall level, the export business looks as it looked 6 months back. There is, I don't think any impact of COVID per se, at a macro level, yes, you would have specific pockets that there will be challenges. And there would certainly be supply challenges. We have faced supply challenges as well. But from a demand point of view, I think we feel that it is as it was before COVID.

Right, sir. Sir, just add on to the previous question. Sir, there have been news flow regarding the 27 products that were banned by the central government and only the export licenses were rolled out in favor of the industry. Sir, in a case wherein the registrations of the products that we manufacture, for example, Pendimethalin. If those are suspended or canceled by any chance, would that impact our exports with the other clients that we are catering to will find the foreign markets, would we have a pushback in terms of procuring the materials from an Indian manufacturer whose license or registration has been canceled for a particular product? That was my last question, sir.

No Archit, the question of canceling license for export doesn't arise at all because subsequent to the draft ban order on these 27 molecules, there was a notification, which had come that this particular draft ban does not impact any exports. So that issue is not there at all. Apart from that, the government has still not taken a decision on these 27 molecules, and all industry players have resubmitted the required data that had already been made available to the regulator related to the information that they had sought over the last couple of years, almost 80%, 85% of the data had already been collected on an overall basis. And there were still some data collection, which was happening because it takes a number of seasons before all the data becomes available. So this 27 molecules banned for domestic is still work in progress. It is -- there's no final decision on it. And as far as the export of any of these 27 is concerned, there is no issue whatsoever. Thank you, Archit, yes.

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Yes. Sir, just a follow-up on the earlier question in terms of the permanent reduction in operating expenses. So have you seen any permanent reduction happening? And you mentioned about the transport cost, which has reduced but any permanent in nature? And a second is again, in terms of the expenditure on our SHE initiative and ZLD plant from the CapEx part?

On the permanent reduction on OpEx, no, I don't think we see any permanent reduction because what has actually largely reduced is the kind of money that is involved in travel. Certainly, there has been some reduction in on-ground promotional spend, which have all got hampered. However, we have had to -- like what Ashish already mentioned, depend on televisions, for example, television commercials or mass media, you can say, in order to cope with the challenges. So it doesn't necessarily show up as a saving in an effective way on an overall basis. But we do expect travel to revert to the normal levels post settling down of the pandemic. There will certainly be some changes consequent to things like work from home and being able to do certain meetings and calls on the -- through the AV medium and so on and so forth, conferencing and so on. But I think -- but we think that it will probably be an improvement in terms of -- or an add-on to the way we have traditionally done things rather than really resulting in dramatic reduction because certain activities like field promotion or even B2B engagements with customers, for instance, require us to physically be present the online engagement comes up short in regard to the requirements. So on a permanent basis, I don't think there will be any substantial reduction. What was your second question?

So in terms of SHE and ZLD of our equity.

Okay.

Yes. What about that? What was the question?

So are all the facilities are ZLD and the incremental CapEx, how is it planned in terms of the SHE component in it?

So on the ZLD, we have 2 of our facilities, which are ZLD. The others are yet to be completely made ZLD, but they are all in compliance with the discharge norms. And I had also mentioned that we are doing substantial investment in automation, which also helps to improve the safety of the plant and machinery. And these are also investments that we are doing. We're also expanding as part of our overall capacity. Overall capacity expansion of our manufacturing facilities. We've also involved expanding the effluent management facilities as well. So when we talk about CapEx for growth, it also includes all the CapEx required for environment and safety management.

All right. And just a small clarification, last quarter you had mention that the Metribuzin inventories in North America, were pretty high. So how is the current pace? And what confidence does it gives that probably by even of next financial year, we'll be able to utilize our expanded Metribuzin facility?

But I was not able to understand the question. Now that you are...

No I also have not been able to understand.

Can you repeat your question, Rohit, because it was not very clear?

Yes. So last call, you had mentioned that Metribuzin inventories were high in North America. So what is the current status of that? And so -- and based on that, what confidence does it give to us in terms of utilizing our Metribuzin facility at optimal level by Q1 FY '22, as we mentioned in earlier remark?

Yes, I think that is true. I think we did witness large inventory levels. And how confident are we feeling? I guess, the confidence is, I would say, more than 50% and why is that? Because we have, as we have mentioned to you, received our own registration for Metribuzin in the U.S. market that allows us a larger market aperture so that is one. And secondly, in Q2, while the volumes have been lower than Q2 of last year, the volumes were about -- at the level of about 2/3 of last year. So I think we think that there will certainly be a revival over a period of time, and we should be able to utilize our Metribuzin AI capacity to the fullest extent. In addition, I think we have also received our registration for our formulated product in Brazil market, Metribuzin-based formulation, solo formulation. That will also absorb, though it's a small amount, it will absorb in the initial days. That will also absorb a certain amount of the Metribuzin AI for that purposes. So I think we are confident.

The next question is from the line of Dhavan Shah from ICICI Securities.

So I have a question on Metribuzin only. So would it be possible to share the inventory of Metribuzin in terms of the tonnage and the overall demand of the Metribuzin for the entire market? And how long will it take to absorb the entire inventory over the period of time. And the overall realization...

I'm sorry to interrupt you, but we won't be able to share you inventory figures because as you can appreciate, it is competitive information from a pricing point of view, particularly in a B2B business.

Okay.

Dhavan, I can say the inventory in the consuming markets, we do not have any line of sight to that at all.

So what's your expectation? I mean, how long will it take to absorb the surplus inventory from the market? Will it take 2 quarters, 3 quarters? I mean, is there any time frame in your mind? I mean, if you can share?

So as it is what's happened last 2 quarters have been very subdued. We have seen some pickup in inquiries which have started coming now. So we expect that H2, there should be some turnaround of this particular category. And our own assessment is that from next financial year, things should be pretty much back to normal.

Okay. And out of your announced CapEx of roughly INR 525 crores to INR 550 crores. So how much of that has already been spent? And what will be the upcoming CapEx? I mean, for FY '22 and '23?

Dhavan, in this year's plan for CapEx is around INR 160 crores to INR 170 crores. That is the CapEx outflow. Major -- actually, because of the COVID, some of the CapEx outflows could not happen. But seeing the progress in the third quarter now onwards, we believe that we will be able to meet that requirement. And the other equal amount or little more would happen in next year between the first and the second quarter, largely the first and second quarter of next year, major cash flow will happen.

Okay. So roughly INR 350-odd crore CapEx will be spent over the period of these 2 years? I mean, the FY '21 and '22?

Yes.

And roughly INR 100-odd crores CapEx has already been spend of this INR 800 crores right now? Or...

Yes. If you see the cash flow, which has been reflected in yesterday's results, almost about INR 80 crores, INR 87 crores, INR 88 crores have been spent on CapEx.

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

Thank you all for joining our Q2 call. From our perspective there it has been a very good quarter, apart from the issues that we have articulated related to our international business. Our domestic business has been progressing quite well in terms of the expected growth. Our seeds business is also picking up. We do continue to have some challenges related with our seeds business for the rabi portfolio. We did mention in our earlier calls that over the next 1 year, we should see an improvement in our rabi performance as well for the seeds business. On an overall basis, rabi looks promising from a crop care perspective. And our seeds portfolio will take its own time, as I mentioned. International business, our strong products continue to do well. Metribuzin has been problematic. We do see some signs of its turnaround. And on an overall basis, I would say our capital program is perhaps delayed by 2 or 3 months because of the various issues that we have discussed in this call, but it is largely intact in terms of the commissioning of these facilities towards Q4 of this year for the CZ and towards Q3 for the SEZ. With that, it's back to the moderator and thank you all once again.

Thank you very much, sir. Ladies and gentlemen, on behalf of Rallis India, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.