Rallis India Limited (RALLIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Rallis India Limited Q3 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. Good day, everyone, and thank you for joining us on Rallis India Limited's Q3 and 9-month FY '21 Earnings Conference Call. We have with us today Mr. Sanjiv Lal, the Managing Director and CEO; Mr. Nagarajan, Chief Operating Officer; and Mr. Ashish Mehta, the Chief Financial Officer. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in the results presentation. I now invite Mr. Lal to begin proceedings for the call. Over to Sanjiv.

Thanks, Gavin, and good afternoon to everyone. Thank you for joining us on our call today afternoon, and I'm joined for this meeting, along with Nagarajan; and Mr. Ashish Mehta, our CFO. Let me begin the call by highlighting the key operational developments, following which Ashish will walk us through the financial performance for the quarter. To begin with, we believe that the rabi season, despite the cyclone that we had experienced, has panned out reasonably well. The cyclone did result in some disruptions, excess rainfall, some crop damage across certain geographies, but the market environment broadly has been fairly encouraging, and growth has been conducive. Amidst such positivity, we believe that the domestic agrochemical industry is growing in the range of 10% to 11% during the current fiscal year. The overall pace of growth, though, may taper down compared to what we've seen in the past couple of months. Moving on to Rallis-specific developments. We are very pleased with our performance for the quarter, having delivered a top line growth of 7% and operational profitability growth of about 8%. The performance is broadly in line with our stated objective of prioritizing growth by introducing new products and widening our distribution reach. With regard to new products, we have been guiding the introduction of at least 2 new 9(3) products each year for the next couple of years. And as most of you must be already aware, we had introduced 1 product, Kriman, during the first half of this fiscal. One more will follow in Q4. In addition to that, we have also launched 2 new fertigation products under our crop nutrition portfolio with the brand name AQUAFERT, and this is addressing the grapes crop as well as vegetables. We've also introduced 2 biopesticides. This is a new category that we have entered during Q3. We have also introduced an in-licensed product during the year, soybean herbicide by the name of ENZIP. And as you're aware, we have identified wheat and soybean as segments that we need to strengthen our portfolio. Moving on to the international business. Having registered highest ever sales of all products, barring Metribuzin in H1, I am pleased to report that the business momentum continues to remain strong. Inquiries for product volumes from customers remains encouraging, and the order book for majority of our products remains robust. We continue to operate at full capacity for most of our key products, namely Hexaconazole, Pendimethalin and Acephate, as also Metribuzin. We have debottled the capacity of Hexaconazole during H1 and further added to the capacity of Pendimethalin. Moving on to Metribuzin. Volumes for the same have started picking up. Order book as well is gaining traction, and we maintain approximately 15% market share globally in Metribuzin. We are planning for the reorganization of the equipment so as to put all Metribuzin production into a single plant with some additional features of mechanized material handling in the April to -- February to April time frame. And to mitigate this planned disruption, we have been working towards building up inventory of Metribuzin and also have part coincided the changeover with our usual maintenance shutdown in April. Also in an attempt to diversify and further strengthen our expansion of our business, we're also looking at adding 2 new products under this business during H2 of the next fiscal year. Moving on to contract manufacturing. We believe the current business environment provides a good opportunity for us to expand our manufacturing in the segment. Government's agenda towards driving initiatives manufacturing augurs well for the business. In terms of the existing products, as indicated in our earlier calls, demand for PEKK will continue to remain soft. And with the airline industry showing some rebound, we expect that over the next 1 year, things should start normalizing. We're also looking at seeing how we can expand our products beyond the aviation segment to derisk our business, along with our key customer for this product. Moving on to the seeds business. Having delivered 7% growth in H1, our performance for Q3 has also been satisfactory. Hybrid maize has reached approximate INR 100 crore milestone, along with paddy, which was already INR 100 crore category for us. Volumes for mustard seeds as well has been quite encouraging. We have launched 2 new products in maize, 1 in bajra and 1 in chillies during the first half of the fiscal. Further, our collections continue to be much better compared to the previous year. R&D pipeline is also shaping up well with strategic crops, such as cotton, rabi, maize and vegetables. And as we've already mentioned that the R&D process will take its own time, and in a couple of years, we do expect to start seeing results from the work being done by our teams in hybrid development. On our CapEx, I would just like to say that we had announced projects for approximately INR 525 crores of the INR 800 crores earmarked for the expansion. The proceeds are directed towards building a formulation plant at the Dahej chemical zone, a multipurpose plant at the Dahej SEZ, debottlenecking existing products; a new R&D center in Bangalore; and investments in automation, digitization of our manufacturing operations as well as modernization and expansion of our effluent management system. All these projects are on track, and we expect to propel the growth post completion. To conclude, I would just like to state that the business is shaping up well. We are making steady progress towards achieving our desired objectives, delivering growth and creating value for our stakeholders. We are undertaking required investments to enhance our product offerings, reducing raw material dependence on China and developing new products offering of further domestic business as well as seeds. Seeds is also improving steadily, and we are targeting new products and segments, which should help us address the present seasonality in the business. And with that, I would just like to request Ashish to talk about the financial numbers before we open it up to the Q&A. Ashish, over to you.

Thank you, Sanjiv, and a very good afternoon to all who have joined this call. First, I'll summarize the overall results for the Q3 FY '21. Revenue was at INR 570 crores, registering a growth of 7% over previous year's INR 533 crores; EBITDA at INR 60 crores versus INR 56 crores in the same period in previous year, registering a growth of 8%; profit before exceptional item was at INR 56 crores versus INR 48 crores in the same quarter in previous year, registering growth of 15%. Profits for the quarter were impacted due to a onetime charge of about INR 8 crores on account of substandard and nonsellable stocks. Exceptional item includes profit on sale of assets. I'll now give a brief of how each of the business performed during the quarter under assets. The Crop Care. Revenue from Crop Care was at INR 529 crores, registering an overall growth of 5% over previous year, with a volume growth of 10% and a price correction of 5%. International business. Demand challenges in Metribuzin still continued in the third quarter as well. However, revenue was at INR 184 crores versus INR 182 crores in the same period in previous year. There was a good volume growth of about 18% with a price correction of 17%. Major volume growth seen in Acephate, hexa and Metribuzin, 75 WDG. Even we saw a very small volume growth in metric tech as well. In the international business, contract manufacturing registered a revenue of INR 30 crores versus INR 48 crores in the same period in previous year. There was a drop in our polymer business, and we continue to see the same trend in FY '22. In the seed division, we registered a top line of INR 38 crores, at INR 41 crores versus INR 30 crores in the same period previous year. This was largely driven by volume growth in maize and bajra, coupled with better price realization. Profits for the quarter was impacted due to onetime charge of roughly about INR 6 crores on account of substandard stock. Plan growth, nutrients and organic manure registered a top line of INR 36 crores versus INR 33 crores, a growth of 10%. Due to the better working capital management, cash from operating activities was at INR 201 crores. Cash and cash equivalents as of December 31 stood at INR 382 crores versus INR 263 crores in the same period previous year. Overall, working capital days improved to 79 days versus 83 days in the previous year. Inventory levels were high compared to previous year, largely due to stocking of critical raw materials, planned Metribuzin stocking to meet the demand for Q4 FY '21. However, receivable days also improved to 73 days from the previous level of 97 days. Work in the new formulation plant at Dahej chemical zone is at full swing, and we expect to start commercial production by end of March '21. Work on setting up the new MPP plant at SEZ zone is also progressing satisfactorily. Thank you, and over to Gavin.

[Operator Instructions] The first question is from the line of Aditya Jhawar from Investec Capital.

I have a couple of questions. Firstly, on the export, Sanjiv, you mentioned that in this quarter, there was a plan to increase a further CapEx of about INR 65 crore. So does that mean that we got some incremental new orders in this quarter, which can translate into revenue in the next couple of years? And related to that is that keeping this new CapEx announcement, what is the annual CapEx plan for FY '21 and FY '22?

Aditya, in terms of our CapEx plan, maybe I'll just request Ashish to fill in on the numbers. See, much of our project work is now at a very advanced stage when it comes to projects like the new facility at the Dahej chemical zone. So the cash outflows and all will now start happening during this quarter as well as well as overflowing into the next quarter. So there is some skewness, which is going to happen during FY '22. And apart from that, our capacity expansion for Hexaconazole is complete, metri is complete, except for this reorganization, which I mentioned and also some increase in capacity for our Pendimethalin plant which we've also undertaken. Apart from that, other products at Ankleshwar, all that will also get completed in terms of capacity expansion latest by April of this calendar year. So our ability to book per orders against our capacity is certainly increasing. We had also set up additional facilities at the Dahej SEZ during the last financial year, which we may not have spoken about. This is related to some of the WDG formulation and SP formulation for metri. And that capacity has also started getting utilized with some of our business -- some of our exports of the WDG -- metri WDG tried already happening during the current Q3. We've already been able to meet some of the export requirements of our formulated Metribuzin product for which we had got the registration during the course of this financial year. So Ashish, would you like to just add to the CapEx spend?

Yes. Aditya, the INR 65 crore largely relates to the additional CapEx we had to seek from the Board on the MPP project. The earlier one, it was about INR 80 crores, INR 81 crores, and we have seeked additional CapEx for the MPP, which is being set up in the SEZ zone. And the others were all small capacity expansion or process debottlenecking, all that thing. So that is first question, what I have addressed. The second one is that for the 9 months, the actual CapEx outflow is about INR 90 crores, while the confirmation of procurement orders or the purchase order is around about INR 150 crores so far. The cash flow is only INR 90 crores. We expect in the next 3 months for the -- this current quarter, the cash flow should be around about INR 40 crores, INR 42 crores, INR 45 crores, if not less. And then the balance cash flow will happen in the next financial year. I believe in the first quarter, there will be quite a bit of a cash flow. Overall, for FY '22, as we are in the process of finalizing our budget, we expect a larger cash flow than what we would be ending for the FY '21.

[Operator Instructions] The next question is from the line of [ Tarang from Old Bridge Capital ].

Two questions from my side, both on the seeds business. First, on the revenue. What has led to this 38% volume growth? Is it -- you'll have gotten into new markets? Or is it gaining market shares? Just wanted to understand the underlying reasons for this volume growth in maize and bajra because I've seen it in Q2 as well and now we're witnessing it in Q3. And the second is on the margins. So despite a significant volume growth, and even if I adjust for the INR 6 crores of substandard stocks, we've actually seen an EBITDA decline in Q3. So what cost element went up for the EBITDA decline in the seeds business? So these 2 questions from my side.

Yes. Hi, Tarang, this is Nagarajan here. To address your first question about the contributors for the growth, we have had some increases in our maize and millet what we mentioned in the -- mustard what we mentioned in the note. But really speaking, I don't believe there is anything fundamentally that has actually contributed to that beyond these increases that we have got in this particular year. And remember that these are actually on really small base of INR 30 crores that we had. So we are not seeing that as structurally something has changed. If you adjust -- the second question, what you said, if you adjust for the onetime charge, you were saying that the EBITDA for the seed business has gone down?

Yes. It's gone down from -- if I adjust for the INR 6 crores, it is still negative INR 16 crores against negative INR 11 crores in the same period last quarter.

Okay. Maybe, Ashish, you want to just respond on the EBITDA after adjusting for the...

Yes. I mean while the -- you see the -- if I compare it with the incremental increase of revenue by INR 11 crores, then that should have been equivalent increase in the EBITDA and the percentage also. But there is a onetime charge. And also, there is a cost increase in terms of employee costs due to alignment of policies with the Rallis, and that also has an impact. And then there are certain expenses on sales, promotions and marketing and other things -- activities and all that. So these are all operational expenses, which needs to be incurred. And that is why you see a little bit dip in the margins.

We have not -- at an overall call, we have not seen any major fundamental change in the operations of the business. Like what Ashish said, we have definitely harmonized our policies after the merger between the seed division and the rest of Rallis. There has been a cost push on account of that.

The next question is from the line of Ritesh Gupta from AMBIT Capital.

Just 2. One is that on the Metribuzin pricing side, what is the outlook there on the Metribuzin pricing side? And the second one that I have is that in terms of your gross margin improvement in the crop care division, what has driven that gross margin improvement? Is it just a product mix improvement? Or is it some sort of API prices led gain?

Yes. So on the Metribuzin prices, certainly we are finding that they are firming up in the last few months. So if you really look at this year versus last year, so Y-o-Y, if you did a comparison, 9 months of this year versus 9 months of last year, what we are finding is that there is a significant drop that has happened in terms of the Metribuzin prices. On an average, the prices last year were about INR 2,100 per kg. Now it is about INR 1,300 per kg. This is Y-o-Y, 9 months to 9 months. So you can see that it's a 40% kind of a drop. But if you see within the quarter, that is within quarter 3, the beginning of quarter 3 to the end of quarter 3, there is a firming up that we are seeing. We do expect that this will continue, this trend will continue. And we do feel that, overall, the Metribuzin prices will look up compared to how they have been in the last 9 months. Second point, what you were asking is about the gross margins, the initiatives that we have taken. So yes, I think we have actually taken different initiatives for the different businesses. So with regard to the domestic business, what you said is absolutely correct. We have had some mix focus. We have tried to sort of focus on some of the larger GC products, wherever possible, of course, and that has helped us in terms of improving the GC. We also have, to be honest, witnessed extremely volatile raw material prices in quarter 3, in fact, even higher so than they were in quarter 2 or quarter 1. So what we have done is, we have also, therefore, adopted a very, very close approach to pricing our products. Wherever it has been possible, to transmit the cost increases, we have done that. Of course, it doesn't mean that in every product, we have done that. We have, in certain products, actually altered our prices downward as well. But on an overall basis, I would say that we have taken pricing action wherever feasible as well. So those are broadly the 2 initiatives as far as the domestic business is concerned. As far as the international business is concerned, as already, Sanjiv mentioned, the demand outlook has been quite positive from a volume standpoint. So even in the case of Metribuzin, the demand has actually been quite good, and we have been able to, as Ashish mentioned, reach the same revenue levels as last year, same quarter, INR 180 crores to INR 184 crores, despite the prices rolling significantly lower. As I mentioned, in the case of Metribuzin, they are 40% lower. But in other cases, they have been lower, too. But then, what we have tried to really focus on is in the other products, wherever it has been possible to offset the significant reduction that has happened in Metribuzin, both on the price front and consequently on the GC front, try to address it in the other products, and we have been successful with few of them. So overall, we have been able to maintain the GC levels at a similar level as last year, overall for the international business. Although in the case of Metribuzin, we have had a significant price pressure. So effectively, you could say that it's a bit of pricing action and focusing on what we can do under the demand conditions that prevails with regard to other products. So that's really what we have done in the international business. So broadly, these are the initiatives that have helped in the GC front.

Understood, sir. And just on the -- on the MPP plant expansion that you're doing, these are largely to do with the capacity expansion and some of the APIs that you're doing? I mean the Acetamiprid and Lambda Cyhalothrin, et cetera. Is it where the MPP expansion going in? Or this is for on track manufacturing built which where it is going? I mean I'm talking about the INR 65 crore expansion.

No, no. That INR 65 crore expansion is for setting up a completely new MPP plant, which is not for expansion of existing products like Lambda Cyhalothrin, what you mentioned, but it has nothing to do with specific contract manufacturing. It is about, what you can call, exports business.

So you are building a plant, so that -- just a clarification on that. You're building the plant to basically seek business on the contract manufacturing side.

It could be utilized. It could be useful from that standpoint as well. But really speaking, we also are looking at new products that we can produce from that multipurpose plant on exports basis, not necessarily on a contract basis.

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

Congratulations for...

Mr. Shah, can you speak closer to the handset, please? Your voice is not audible.

Can you hear me now?

Yes.

Congratulations to the management for good delivery on the domestic front. Sir, my question is a, so the kind of growth of reported is 15% in the domestic business, is this largely the same in the domestic B2C business as well? That's the first question. And what was the key driver of this growth? Was it largely because of the product mix, which you alluded to, resulted in higher realizations because you sold out better margin product in a niche product? So what was the reason for this kind of 15% growth? Was it -- it is quite significantly higher than the industry average.

Yes. So yes, we are seeing that actually largely on the B2C business. As you know, that is the principal component of our domestic business. To some extent, I think the product mix has helped, but I think it is also the volume throughput that we have had. In fact, much of the growth we would attribute to volume increase. Remember that we have had a rather positive rabi season, and we have also been well prepared, I should say, with regard to the availability of our products. So I think it is largely driven by volume. To some extent, yes, because of the portfolio mix. But the portfolio mix has a bigger role to play in the margins more than in the top line.

Sure. And was there any additional, let's say, pest [indiscernible] demand, pest pressure Y-o-Y, which resulted in higher volume growth? Or largely, it was at the same level?

So, in fact, pest pressures, in some cases, have actually been a little lower. So I would say that it has been -- I guess, we have been able to focus in certain geographies a little bit more closely. We've been able to generate a lot more of demand. I don't think the pest pressure has been higher than last year.

Sure, sure. That's the follow-up last line. So you would also have benefited from the expanded distribution, which you have created. So even that would have contributed to this. Would that be a significant contribution? I mean I'm not asking for a number, but would that have helped you grow faster than the market?

Yes. I think that is, to some extent, also contributed. It's a combination of -- more than the channel expansion, it is also about the demand generation, what we call crop advisers. We have actually had a lot of difficulties, as you know, in the first 2 quarters because of the lockdown. Some of that started reviving towards the end of Q2, and in Q3 also, we were able to do a little bit more of physical movement. So therefore, demand generation as well as trade enhancement, yes.

[Operator Instructions] The next question is from the line of Abhijit Akella from IIFL.

Yes. Just a couple, sir. One is on the capacity expansions that you've talked about, the Acephate, Hexaconazole and all the others. If you could just characterize the market demand supply environment for these, are we seeing firmness in the market environment? Or is there any risk that our expansion could lead to some kind of situations similar to what have with Metribuzin in a couple of quarters ago?

Well, at this point in time...

He said Acephate. There is no Acephate increase.

Yes, that's right. There is -- yes, in the CapEx program that we have got, no, I don't believe we envisage anything. We have Acetamiprid and Lambda, Lambda Cyhalothrin, that is not something we envisage any major pressure. In fact, Hexaconazole expansion has been completed. And as Sanjiv already mentioned in the opening remarks, that is also running now at full capacity. We do expect it will continue. Pendimethalin capacity expansion, we do not expect the kind of situation that we witnessed last time around with Metribuzin. No, I don't believe that we will expect that in the foreseeable future.

Okay. Got it. That's helpful. And the second thing was just on -- in your opening remarks, you alluded to maybe some slowdown in the domestic industry's growth in the next couple of months compared to what we've seen in the last couple of months. So I just wanted to get your sense for whether -- I mean this season has been more front-ended for the industry or for Rallis, and therefore, 4Q could be a bit softer than you see in 3Q.

Abhijit, I think the only point I was trying to make is that overall growth of the agrochemical sector in India is unlikely to be at the fantastic growths that we had witnessed in Q1 and some part of it in Q2 as well. But it's going to be just about 10%, 11% growth. So ultimately, that is what the average for the entire sector will be. So whatever are the placements, top levels and all, the consumption will be at the 10%, 11% only.

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

Sir, first question is on your CapEx. So out of roughly INR 550 crore CapEx which you have already done, sir, can you quantify that how much has gone so far in MPP and how much in formulation, assuming this INR 65 crore which we have further announced? So if you can just give some number on that? That is the first question, sir.

So Ashish will give the detail, but the MPP cash flows are still small because the construction is just about getting started. We are currently completing all the detailed engineering and the construction is going to start. As far as the new SEZ formulation plant is concerned, the construction is well on its way. The cash flows are already being articulated by Ashish a little while back. And all going well, we expect to be able to commission at least one of the multiple lines during this financial year. That's our target. We're just putting all our resources in place to ensure that happens. But things in these difficult times of this pandemic can change things over the next couple of weeks as well. So we are just working towards getting one of our lines commissioned. Ashish, you would like to...

Yes, Rohan, see, for the formulation plant at the chemical zone, about INR 100 crores to INR 110 crores is committed. That is on setting up the 3 to 4 formulation lines. That is one big chunk. The MPP is around about INR 120-odd crores. The R&D building is roughly about -- including the cost of the land which we have already purchased in some time in August last year is about INR 90 crores. The hexa, Acetamiprid and other would be around INR 65 crores to INR 70 crores. And the metri expansion already we have completed. There, we have already spent about INR 30 crores to INR 35 crores. And then there are about INR 15 crores to INR 20 crores for the land grading and all that, which is not part of what you call the capacity or this thing, but there's a minimum infrastructure what we require. So overall, I'm just giving a breakup of this. There are many small. I've covered these.

Yes. Yes. Yes. Sir, just on this formulation plant, you are saying this will be completed by March '21, I mean, just in a month's period, and MPP is going to be completed by end of this year, right?

Yes, that we expected an H2 commissioning for next financial year.

Okay. And sir, just a second question on this -- the further investment in the INR 65 crores. Though you have clarified that you are looking for CapEx, I mean, this plant is willing to cater more to the export, sir, what I -- I think that we have yet not decided that what will be the product, which will be manufacturing all this and what will be the markets or what chemistries we will be using on this. So I think that is MPP plant investment is more ahead of -- I mean it's a preplanned investment, but the product is yet not decided. So should we think something like that? And can we have more such plants and more such MPPs to put in advance where we will cater to the market depending on the market scenario later on, but the product may be decided later on. So I'm just talking that are we forefronting our investment without finalizing the product? Is that the thought process that are we having right now?

So no, that's not exactly the way it is going. We do have a product which we will be producing in that plant. We have not articulated it, but we do clearly have a product that will go into the new MPP. And we did mention that by the time this plant comes up, we will be ready with the commercialization of at least 2 new active ingredients in this new facility.

[Operator Instructions] The next question is from the line of [ S. Ramesh from Nirmal Bang ].

My first thought is, can you share what is the contribution you got from new products launched so far in the 9-month period compared to the same percentage from new products last year?

Well, I think what we do track is something called the ITI, right, the innovation turnover index. So what we can, at this point in time, share is that at the end of December, this index has reached 12%, 12%. Last year, full year, it reached 15%. I'm talking about the cumulative number, the 12% will be expected to increase. At this point in time, although we have had a difficult year in terms of being able to do demand generation for the newly launched products of last year, the response has picked up, like I mentioned earlier. We are hopeful that we will cross the last year's ITI number.

Okay. Now the second thought is what is the current thought process in the government on extending the PLI to agrochemicals because we hear a lot about it from different forums. So is there any finality? And what are the kind of measures you expect if some clarity is available on that?

So as of now, this is still work-in-progress on the PLI for the agrochemical sector, nothing yet has been finalized. But as far as Rallis is concerned, we are not particularly focused on whether that PLI comes or doesn't come, plans continue to be there for growing with or without the PLI.

The next question is from the line of Chintan Modi from Haitong Securities.

So first question is with respect to this CapEx for towards the formulation plant and MPP, could you give us a broad range in terms of what kind of asset turnover that this can generate at peak utilization?

Actually, we have responded on a similar kind of question in the past. What we are focused on is not the asset turnover. We evaluate our investments on an IRR basis. So we do have situations where you could have a large asset turnover, but somewhat low margins. But the effective cash flow from that investment may be still justifiable. So we really don't compute nor do we managerially use that as a thumb rule for our evaluations.

Okay, sir. And second question is with respect to the INR 6 crore of write-off that we have taken. Is it that it has been reported for the first time or should be treated as purely as an exception for this year?

Yes, it is an exception for this year. It is an exception for this year. It is not -- I didn't understand when you said reported for the first time. It is an exception, which is actually cost because some of our seeds turned substandard.

So does this -- is this scenario kind of can come up in next year also kind of -- it's a recurring that is particular to third quarter or fourth quarter or something like that?

No. I mean I think maybe I can just provide a little bit more of a background, so that you can appreciate the context. So when you take production of seeds, you could take it in different seasons. You could take it in kharif season or in rabi season. Normally, people take it in rabi season. But if you do take it in kharif season, you are actually exposed to a possible risk depending on the weather vagaries, some things working out in your favor, some things not working out in your favor. In this instance, it did not work out in our favor. Therefore, we don't expect that it is a recurring kind of an event.

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

Sir, in the presentation, on Slide #7, we have talked about strategic initiatives on domestic business. If you could just elaborate on those 4 points and what is the time line with which we are likely to garner these benefits?

The strategic initiatives, there are -- this is listing, both domestic and international, which one are you referring to?

The domestic business. I mean how do these pan out over the next foreseeable future? And what kind of benefit are we expecting? Yes.

On the domestic business, yes, I think the first point there is about digital campaigns. We have commenced customer connect through digital campaigns from Q1 actually this year. That is continuing. What we are finding is that there is likely to be a settling down over a period of time in a hybrid mode between physical and digital campaigns. So to be candid, I think we should say that we have learned a lot in the process of experimenting with digital campaigns. And we will apply those learnings going forward, and we will end up in an end state, which will have a combination of physical and digital campaigns. New brand architecture has been introduced for many of our products. About 11 products have been introduced by December. We expect 2/3 of our products to be on the new brand architecture by March, by Q4, and then the rest of it will follow, the remaining 1/3. So this is an attempt to simplify our communication and make it much more memorable. So this exercise is underway and it should get completed by H1 of next year. Focus on new product launches and portfolio optimization, yes, we have talked about this in the past. We have identified the gaps in our portfolio. Wheat and soybean, as was called out, are a couple of crops where we do have some strengthening to do. Our R&D is focused on new formulations, which will help us as well as we would depend on alliances, co-marketing, other routes in order to introduce those new products. This would be a continuing activity. As the pests evolve, as the opportunities emerge, and as some of our products fade out, we will continue to focus on this. Connection between distributors and company, yes, I think this is something which we kicked off about now almost a year and 9 months back. We had refreshed our credit terms, our policies for doing business with the company, including the reward and recognition kind of programs. This has got a little bit interrupted, particularly the R&R portion because of the pandemic, but we have tried to kind of do things what can be done digitally or locally. This is something which we would expect will revive in the coming year, assuming the pandemic goes away. Refreshing of the distribution channel and adding distributors to enhance growth in underserved geographies, yes, this is a very important area of focus. Like we have mentioned earlier, this will be carried out co-terminus with our portfolio augmentation because we do believe that we need to have both in place to be able to capture the opportunity, having the product, but without the distribution is as good as having the distribution and not having the product. So this is something which will progress. We are not focused here on the number of distributors. We are more focused on being able to capture the opportunity with the quality distributors that we require. So that's really the update. So that will also continue. That will continue because the product launches will also continue.

The next question is from the line of Sameer Deshpande from Fair Deal Investments.

Congratulations for good number. I would like to know this raw material price volatility. Do we still import from China, such as raw material?

Yes, we do. Our reports we had mentioned earlier is roughly about 50%, 55% of our total procurement bill. We do, and we have a significant dependence on China.

Sir, is there any currency fluctuations, which are also affecting us?

It is affecting us because there is an appreciation of the Chinese currency that has happened, which plays a problem -- which creates a problem for us. Yes.

So -- but we are not in a position to source it from some other country? It is specific to China only, we need it.

Yes, you are right. See, some of these are available only from China, and we have not been able to -- in some cases, been able to source from others. But of course, there are many other products where we are able to source, but there are a few products where our dependency on China is very high.

Okay. And now the export, last time, the product pricing was a bit of a problem, and it seems to have improved. So the outlook for the Q4 in terms of domestic as well as exports, will it be better because last time we had this COVID impact and we had a loss? But this year, will it be better than this latest quarter?

Well, I think we have shared the experiences that we are going through. Now projecting for Q4, I guess, we are not providing you a forward guidance. But at this point in time, certainly, it's a lot better. The current context is a lot better than what it was in the beginning of the quarter.

I just to add one thing because in the last year, fourth quarter, since pandemic happened in this third week and fourth week of March, there were naturally immediate disruptions in the transportation and all that thing. And hence, it had impacted our dispatch of materials, which we had reported also in the same year results. Over the last 9 to 10 months, a lot of things have stabilized. And we don't foresee such type of problems coming into the fourth quarter. I just wanted to add on that.

Yes, out of that turnover, what is the export -- is how much percentage of your turnover currently?

It's given in that slide, no, investor slide. It is already provided in that slide, investor's deck.

The next question is from the line of Vishnu Kumar from Spark Capital.

This is Somaiah from Spark Capital. Sir, first question is on the margins. I mean can you help us understand this 15.5% margin that you've given for the crop protection. Can you just give a ballpark split between the exports and domestic, how to rate this 15.5%?

So I think we have talked about the growth in revenue, not on the margins, saying that it is 15%.

The crop protection, we have a margin EBITDA -- I mean margin, right, which is 15.5%, it's a 200 bps Y-o-Y expansion, from 13.4% to 15.5%. Just wanted to understand what would be the broad breakup of exports versus domestic here?

I mean I couldn't follow your question. I mean I didn't understand. We don't give a separate margin for crop care or seeds that way. From where are you quoting these numbers mean?

In our presentation, so with respect to the crop protection business, right, we gave a split of the EBITDA for crop protection and the seeds business, the crop care division.

That is an overall, yes, yes. What -- you're talking about that?

Yes, yes. Overall crop care. So what I'm trying to understand is, between domestic and exports, how would the number read? At overall crop care, we are 15.5%. So how would it read between domestic and exports?

Let me give you a context. In the exports, post the sales, we don't have any expenses, right? Whatever expenses are there on headcounts or other administrative expenses. But in the domestic market, you have a field force, so you have a lot of activities going around and all that. So if you were to compare at an EBITDA margin for international business, definitely, it will be higher than the domestic business. But when you compare the actual impact, the gross margins would be different, but the EBITDA will be higher for the international business because there are no expenses being incurred post the sales.

Got it, sir. So somewhere 200, 300 bps higher when compared to the domestic business...

Maybe if I can add to what Ashish says, the way we -- maybe what I can explain to you is how we think about it, so that you can use as a springboard to kind of assess how you might want to look at it. What we focus on is the GC margin, right? On the GC margins, on the domestic side, because we have a formulations business, predominantly formulations business, which is much more value-added compared to the active ingredients exports, B2B exports that we do on the export side, the GC margins tend to be higher on the domestic side compared to the international business. Thereafter, the rest of it, we actually focus on a fixed cost basis because that is the fixed cost that we incur in the -- in terms of salaries, in terms of sales and marketing, what is that, SG&A kind of things. And those are the way -- that is the way we actually look at it. So we don't actually break out an EBITDA number between international business and the domestic business. That's why we are a little bit struggling to give you our immediate response, but this is the way we think about it. We focus on the GC, and then we focus on the individual elements of fixed costs.

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

So I have 2 questions. Firstly, on the seeds side. So sir, if we look at the last 2 quarter numbers, that means, I mean, the Q2 and Q3, so you mentioned that there is no fundamentally change for the seeds business. So is there any exceptional during this quarter? I mean if we look at the growth for Q2, Q3, it seems a little bit higher. So is there any exceptional things into that? Or should we assume that this is a normalized thing, and we can expect this kind of growth in the coming period as well?

Yes. There is no exceptional thing. You see, in the case of seeds business, as you are aware, typically, if you look at the a Q1 numbers, the way we reported, I'm just clarifying this, so that you can get a better view of how you can model it. What happens is that at the end of Q1, the returns are not fully available in the company, right? Because that's still June and the placements are still underway. So what we do is to actually take certain policy based or normative returns, which we true-up at the end of Q2. So at the end of Q2, that is at the end of H1 is when you really have a good picture about what the returns have been. Similarly, when it comes to Q3 and Q4, you really are having a similar situation because you do have certain markets like Tamil Nadu, for example, where it is actually a late kharif market. So you actually go on normative returns for specific markets and specific crops which you again true-up in Q4. So what would be more helpful to look at is on an annual basis, the numbers or on a H1 and H2 basis. Fundamentally, what I was mentioning earlier, there is nothing that we are finding different in the operations of the business for us to be able to call it out to you.

Okay. And just a follow-up to that. Out of your overall seeds portfolio, I mean, which business segment do you foresee, carry force around double-digit growth? Is it maize or bajra, or I mean, vegetable seeds, if you can share thoughts on that?

You are talking about where we have had double-digit growth in this year?

Our expectation...

In this year and the expectation of this.

Yes. I think we -- as you are already aware, we have cotton as a very important focus area for us. This year has not worked out as well as we had hoped. We certainly will have significant growth expectations coming from cotton, significant growth expectations coming from cotton. Vegetables is another area which we also want to focus on. So those are strategically 2 important areas where we would expect a strong growth. Paddy has been a strong area, and maize has really done well this year contrary to our original thinking that because of commodity prices being low on maize, we might have had certain challenges, but really speaking maize has been quite positive. So one would expect that cotton, vegetables, paddy and maize, in that sequence, as the important growth drivers.

Okay. Okay. And the last one, I just missed that breakup on the quarterly basis, this domestic and international. So can you share the breakup of revenue, domestic crop protection, crop nutrition and the international B2B [indiscernible] ?

We gave overall breakup between international business and the domestic. I think it's already available in the investor's deck.

I mean crop care includes crop protection plus crop nutrition?

Yes, yes, yes.

So can you share the breakup of domestic revenue, the crop protection and the crop nutrition?

I've given in my opening remark, no. I've given the breakup now in my opening remarks, what was domestic formulation business, what was PGN and organic compost seeds and everything. I've given in my opening remarks.

The next question is from the line of Deepak Kolhe from B&K Securities.

Congratulations, sir, for a good set of number. Sir, first, my first question is, what are the reasons for lower depreciation costs in this quarter? And second is -- second question is that is it possible for you to provide the domestic formulation and B2B absolute sales figure for Q3?

I'll answer the first question. On the depreciation, it is basically a classification of entries, largely arising out of impact of Ind As 116, which is the lease accounting. Maybe I can explain you separately, but just to give a context, if you were having a lease of any third-party arrangement, and if there is an increase in the number of years over the lease period, then there's a particular way -- how do you account for the lease accounting and then capitalize the rent at NPV value and then start charging off interest and the depreciation to the extent of the revenue at the rent what we pay. So it's basically not an item for third quarter since it's applied to the YTD numbers. If you see the YTD numbers of depreciation, is almost same, INR 49 crores versus INR 48 crores of last year. So it's only a classification defect. It's not that the depreciation has come down because of a sale of any asset or anything like it. It's just a classification.

Okay. What about the second question on the domestic formulation and B2B absolute sales number?

B2B is -- you're talking about the international business.

Yes, sir.

We don't give a breakup of B2B and international business and also the contract manufacturing. We give a breakup of what is the total exports versus the domestic sales. That is available in that slide deck. And for the institutional sales in the domestic market, it's not a very, very large number. It's a very small number.

The next question is from the line of Deepak [ Pitroda ] from PhillipCapital.

So first question is about, sir, about our sales and marketing costs. What is your expectation now as we are now like moving towards the normal situation, maybe, say, next 1 or 2 quarters? Do you think the kind of a benefit which you have basically received in terms of the digital marketing and all, that is going to be increased? I mean the cost will be going to increase over the next couple of quarters or so?

Definitely, in terms of travel and communication, there will be an increase because we will be able to have more people traveling. What has happened is that in things like advertising, we have also relied on television, for example, a little more than normal. So maybe that will be a rerouting of expenditure between different media channels. Instead of using television commercials, maybe we will depend more on local demand generation activity. So there will be some heads where there will definitely be an increase. There will be some heads where there will be a rebalancing. Things like digital, for example, they are not that high in terms of expenditure at this point in time. In our portfolio of sales and marketing spend, they will go up because we do expect that there is a place for digital that we have all collectively learned. So that will go up. Overall, if you ask me, you should expect that the cost for sales and marketing should go up for -- on an annual basis, right, on a year base, yearly basis.

Sure. Sure. And my second question is about some thought process towards FY '22. And I'm sure that it is very early to comment. And obviously, it largely depends on kind of a monsoon outlook we'll have for the next year. But any thought process during that? Like what will the demand outlook kind of a growth we are expecting because considering the very high base of FY '21?

So as we've discussed in the past also, if you look at overall agriculture in the country over the last many years, year-on-year, the food grain production has been increasing despite the vagaries of the monsoon. And we have got multiple agro-climatic regions in the country. So while there may be stress in one part of the country due to drought conditions or excessive rainfall, there is some kind of a balancing, which thankfully happens in our country, which has led to year-on-year increase in agricultural output. And even if you see the growth of agrochemicals, it's been about 8% to 9% in the past. And this year because of all the support that has been given to the sector and good liquidity in the market, we are expecting maybe 10% to 11% growth. So in a ballpark, I would say, anywhere between 8% to 11% is the kind of growth that we can continue to expect a year-on-year basis in this agrochemical sector.

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

Thank you. So on an overall basis, I would say that the rabi season has been supportive of agriculture. We, ourselves, have had a good outcome so far in Q3. The difficulty of our field teams actually visiting and engaging with the farmers has continued to be there. We do see some improvement in that situation going forward as the case counts in the country are becoming more manageable. We do also expect that the immunization program that the government is taking will, in due course of time, bring us back to a level of performance where our people are able to move around more freely. But yes, there are certain learnings that we have all had through this digital approaches, which have worked well for us. And as have been articulated by Nagarajan, we will be looking at a mix of both physical as well as digital interaction with our customers, both at the distributor level as well as the farmer level. I guess that is going to be the new way of working. And I think it is something that even the farming community is getting used to. So we hope that this kind of hybrid model of engagement will contribute into the future. We look forward to a good tailwind for the rest of the rabi season, and we will meet again in the month of April over this call for the financial performance for the full year. Thank you very much, and back to the moderator.

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