Coromandel International Ltd
NSE:COROMANDEL
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Coromandel International Ltd
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Ladies and gentlemen, good day, and welcome to the Coromandel International Limited Q3 FY '21 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Sumant Kumar from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and very warm welcome to Coromandel International Limited Q3 FY '21 Post Results Earnings Call, hosted by Motilal Oswal Financial Services Limited.On the call today, we have Coromandel management team being represented by Mr. Sameer Goel, MD; and Ms. Jayashree Satagopan, CFO. We will begin the call with the key thoughts from the management team. Thereafter, we will open the floor for Q&A session.I would now like to request the management to share their perspectives on the performance of the company. Thank you, and over to you, sir.
Yes. Good afternoon, everyone, and thanks, Sumant, for organizing the conference call. I hope I'm audible. Just from this, firstly, I hope everyone is safe and healthy from what is called this black swan event. What I'll do is I'll first give an overview of the business environment experienced during the quarter, followed by the company's performance, and Jayashree will give the financials, and we'll follow-up with the Q&A session. So as you saw, during the second quarter of FY 2021, the Indian economy had declined by 7.5%. However, it was a sharp recovery from the decline it saw in quarter 1, which was 22.8%. And as you know, it also was [Audio Gap] by most of financial forecast, which was around 10%. The manufacturing sector has shown a growth of 0.6% over last year versus an expectation of contraction.I think agriculture was the signing star, and it grew by impressive 3.4% for the second quarter, backed by a very good Kharif season. The country after national lockdown gradually opened up in a phased unlock manner over a period of last 7 months. Latest economic indicators reflected a sharp V-shaped recovery for the economy. And we are hoping that there won't be any second wave, given now that the vaccination drive is on.You can see a revival of GST collections, power and fuel demand, increase in rail freights, increase in manufacturing PMI. However, the bright star was the rural economy, also thanks to the spending which has been done by the government, both in the agriculture sector, plus what is called the non agriculture sector. The economy continues to remain buoyant with conductive good Kharif season on top of what was a very good season last year.The Northeast monsoons have been normal during the quarter and have ended up 1% above average. In the company's addressable markets of the South, the rainfall has been above-average by 15% higher than the previous averages. The good monsoons have resulted in higher reservoir levels compared to long period average. Conducive weather has led to good crop sowing for the country on an already high base over last year. In the addressable markets, as we speak today, company's overall, the paddy is up by 3% and it's over 30% over last year. There are some structural changes, which have happened in the market, especially in Telangana with the advent of agriculture and increased irrigation facilities. However, excessive rains in some of our operating geographies led to a postponement of the Rabi season and skipping off certain applications.When we come to DBT and subsidies, the government has announced an additional allocation of INR 65,000 crores for fertilizer subsidy during the quarter to care some of the past due subsidy claims. The disbursement of additional allocation has commenced from January. Further, in the budget of FY 2020, the government has allocated INR 79,500 crores versus INR 71,300 crores of last year. Given the disbursement, we also had a record collection of INR 1,353 crores in the month of January.Coming now to the performance. Firstly, when we look at the fertilizer industry for the quarter, phosphatic fertilizer industry primary sales volumes were down by 4%. This quarter, it was 57.2 lakh metric tons versus 59.8 lakh metric tons last year. Last year, as you remember, we had a early Kharif.The consumption POS sales, which is a real indicator of consumption at the farm level, was also down by 5% over last year. This is 75 lakh metric tons versus 79 lakh metric tons over the previous year same quarter. Complex primary sale volumes for the quarter is at 28 lakh metric tons versus 26 lakh metric tons of previous year, showing channel inventory being built up.Major raw material prices continue to be firm. Phos acid prices for quarter 4 has seen a sharp increase and has got finalized at $795 per metric ton compared to quarter 3 prices of USD 689 per metric ton.For the year-to-date, phosphatic fertilizer industrial volume is at 181 lakh metric tons versus 157 lakh metric tons of the previous year, registering a growth of 15% year-on-year. Complex volume year-to-date is at 88 lakh metric tons versus 74 lakh metric tons of previous year, showing a 19% growth. DAP volume is at 93 lakh metric tons versus 83 lakh metric tons previous year, showing a 12% growth.Coming now to Coromandel's performance for quarter and YTD. Coromandel registered a strong performance in quarter 3 with this continuous emphasis on superior sales mix, farmer connect initiatives, increased operational efficiencies and better working capital management. Company's nutritional segment performance, the nutritional and allied business segment registered a very good performance for the quarter. On the sales front, in quarter 3, phosphatic volumes were up by 8% to 8.2 lakh tons. Manufactured phosphatic volumes was down by minus 5%, which was offsetted by imported fertilizer sales. We also had taken an ATL in 1 of our main plants, Kakinada. The company's market share in quarter 3 was 14.3%, up by 1.6 percentage points over last year.During the quarter, our phosphatic fertilizer plants operated at 86% capacity utilization. Like I said earlier, annual turnaround activities were taken in stages at our Kakinada plant during this quarter.Single Super Phosphate quarter 3 sales was at 1.6 lakh metric tons, which is a growth of 6% over last year. For year-to-date, YTD phosphatic volumes were up by 13% to 27.6 lakh tons. Manufactured phosphatic volumes was 24.3 lakh metric tons, and imported phosphatic volumes was at 3.35 lakh metric tons. Company's market share had come down slightly, although we made up in quarter 3, to 15.3% from 15.6% same period last year. Company's previous market share was again down marginally at 14.6% YTD against 15.1% previous year.During the 9 months, our phosphatic fertilizer plants operated at 80% capacity utilization, recording production of 21 lakh tons, which is slightly lower than the previous year. Overall, production was impacted by -- due to the partial lockdown in the first half of the year, and also the ATLs which we had taken. SSP YTD was at 4.9 lakh metric tons with a growth of 5% over last year.As a part of Atmanirbhar Bharat, the company has been focusing on accelerating its capital projects. A large evaporator plant is coming up at Vizag to improve the availability of concentrated phosphatic acid. The sulfuric acid plant has been successfully recommissioned at Ranipet in our existing unit and a pilot liquid fertilizer plant is being set up in Vizag.Our organic and specialty nutrition business have performed well with a focused product and specific crop based solutions. Partnership with seeds, micro irrigation and Farmer Producer Organizations has further strengthened our connect with the farmer.Coming now to the Crop Protection business. Crop Protection business witnessed a strong turnaround this year, growing at 26% on YTD basis. The domestic formulation and domestic B2B business has seen a robust growth during the year. New product continues to do well and now have contributed 25% of the domestic formulation business. We'll continue to strengthen our position in certain international geographies.The business continues to focus on leveraging the product portfolio and is working on a rich pipeline of new and combination molecules. We have received a registration of Quizalofop Ethyl, a selective systematic herbicide for soyabean and other vegetative crops.Infrastructure strengthening and capacity expansion projects are on track. Overall, the profitability of the business has improved due to better product mix, coupled by efficiencies in sourcing and manufacturing.The bio pesticide business registered an impressive growth in the mature European and U.S. markets. We plan to expand our Thyagavalli plant to cater to the increased demand for bio products. The R&D team is working on several new products and applications to expand this product offering in collaboration with leading agriculture universities.The retail stores have been fully functional during the year despite the COVID situation by having strict safety protocols and continue to support the farming community by offering agriculture solution, including products, farm advisory and mechanization services. Business has improved its operational efficiency and have leveraged technology to reach out to the farming community.The company has been at the forefront of spreading awareness of COVID pandemic in the communities around its plants and also reaching out to the large dealer and farming communities. We have worked closely with the government and local administration, including setting up of a special COVID ward at the Kakinada General Hospital.We plan to take our annual turnaround of our major plants during the upcoming quarter and fast track the capital projects. With the forecast of a normal monsoons and the rollout of COVID vaccination program in the coming months, we expect the economic activities to normalize in full year 2022.The company will continue to serve the farming community and will focus on improving its crop solutions and technology offering to drive farm productivity. Given the external environment which we had faced this year, I think it is a tremendous effort and performance done by the company.Now I'll hand it over to Jayashree for taking you through company financials after which we can follow it with question-and-answers.
Thank you, Sameer, and let me now provide updates on the company financials. During Q3, the turnover of the company -- the company recorded a consolidated total income of INR 3,542 crores, which is 8% higher versus the same quarter prior year. Nutrient and Allied business contributed to 86% share and the remaining 14% is from Crop Protection business, which is similar to what we had last year. In terms of subsidy-nonsubsidy share, it stands at 78%, 22% during the quarter. Previous year, it was 77% and 23%. For the 9 months, company's consolidated total income was INR 11,385 crores versus INR 10,296 crores same period last year, a growth of 11% on a year-on-year basis. Subsidy revenue is at 79% of the total revenue versus 81% during the previous year.On the profitability front, the EBITDA for the quarter was at INR 501 crores against INR 432 crores of last year, which is a 16% growth on a year-on-year basis. EBITDA margin improved to 14% from 13% during the previous year.The margins were supported by good sales mix, smart sourcing as well as operational efficiencies. Share of non-subsidy business EBITDA improved to 30% from 27% of the prior year same quarter.Net profit after tax for the quarter was INR 334 crores. This is in comparison to INR 265 crores for the corresponding quarter last year, growth of 26% on a year-on-year basis.For the 9 months, EBITDA was at INR 1,760 crores vis-à-vis INR 1,341 crores in last year, 31% growth on a year-on-year basis. Subsidy share of EBITDA at 74% for the 9 months vis-à-vis 76% during the previous year. Profit before tax at INR 1,573 crores, against INR 1,064 crores of the last year. Net profit after tax was INR 1,173 crores, with a growth of 41% over last year, where the number was INR 831 crores. As regards subsidy, the total subsidy outstanding as on 31st of December 2020 was INR 2,853 crores. This compares against INR 1,670 crores during the previous year. Subsidy outstanding includes INR 552 crores relating to channel stock pending POS acknowledgment and INR 2,114 crores is the amount that we have claimed and pending with the DoF. During the quarter, the subsidy received from the government was INR 786 crores. The comparative figure last year was INR 972 crores. Overall for the 9 months, subsidy received from government has been INR 2,091 crores versus INR 3,325 crores last year.Collection for the first 9 months has been lower, primarily due to lower allocation for NPK fertilizers vis-à-vis urea subsidy. The government has further allocated INR 65,000 crores for fertilizer subsidy. The company has received INR 1,366 crores in the month of January from this new allocation.Interest cost. Good business performance, working capital management and lower borrowing costs resulted in lower interest. Net interest for the quarter was at INR 12 crores. This is down from INR 37 crores last year. Interest costs for 9 months is at INR 62 crores, which is lower from INR 198 crores during the same period last year.Balance sheet continues to remain strong. Our debt equity ratio is 0.01 as of December 2020. Company continued to maintain deposits which are earmarked for specific growth related investments.On the ForEx front, during Q3, rupee remained in a broad range of INR 73.01 to INR 73.88 vis-à-vis dollar. Rupee appreciated by 0.95% during quarter 3 due to steady FPI inflows. Coromandel continues to follow a very active hedging strategy and it is dynamically covering the exposures, managing the portfolio well.In terms of financial performance, it has been a great quarter overall. We thank you for your interest in Coromandel and joining us in the call today. We can now open the session for question-and-answers.
[Operator Instructions] The first question is from the line of Dhruv Maheshwari from Premji Invest.
This is Anshuman. My question is regarding CapEx plan. Now that we are at -- first thing is on the nonfertilizer side. So what is the plan in terms of next 3 years to increase the share of the nonfertilizer nonsubsidy part? And what kind of CapEx would be required? And what benefits do you expect from any PLI scheme which may come forward?And on the fertilizer side, I'd like to know that government has reduced the subsidy allocation to NPK. So how do you read into this particular allocation?
Okay. Thanks, Maheshwari (sic) [ Anshuman ], for your questions.
It's Anshuman.
Anshu, yes. Sameer, do you want to take it? Or...
No, go ahead.
As far as the CapEx plan is concerned, we had earlier mentioned that we are looking into an average of about INR 350 crores to INR 400 crores of CapEx spend during the year, which is fiscal year 2021. Having said that, with COVID coming in, in the beginning of the year, we had consciously taken a call to slow down on some of the capital expenditure because we wanted to restrict the number of contract workmen who could come into our facilities.Having said that, during this quarter, the CapEx has gained momentum, and there are plans to accelerate it further. We are currently in the process of getting our business plan for the next year finalized. And on an average, we could look at, for Coromandel as a whole, somewhere close to INR 400 crores to INR 500 crores of capital expenditure in the coming year. Once the plans are finalized, we will be able to get you a little more visibility on this.On the nonfertilizer side of the business, the main business for us is going to be Crop Protection, as you know. And here, the business has very good plans in terms of increasing the capacity at the 3 technical plants that we have, further adding on multipurpose plants.As we had alluded earlier, there are number of molecules that have recently gone off-patented, which the business has identified for technical manufacturing. Apart from it is also adding up of formulation capacity. So those plans are intact and will be followed through in the next 2 to 3 years' time frame.This will also help in a way to work through the PLI scheme that has been announced by the government so that we can manufacture technical and further improve on our exports. We have also added resources in some of our key markets, which will help us to connect much more closely with our customers in these markets, generating demand, thereby accelerating further investments in capital projects.As far as fertilizer business is concerned, it's indeed a good news that the government has announced and approved INR 65,000 crores of additional subsidy to clear the old backlog. As you know, every year when the budget is announced, there's always an opening backlog that gets carried forward. With this additional subsidy that's being allowed, it is going to enable all the past dues getting cleared.As I was mentioning, during January, we received about INR 1,366 crores of subsidies from the government, partly towards clearing some of the outstandings from -- on account of subsidies. Now we expect further disbursements to happen in February and March. And there onwards, we expect that it should be only the DBT claims that would be processed and cleared by the government.The question is whether it's going to be in 1 month or 1.5 months or 2 months is something that we can discuss about. But it is going to get almost all the subsidy claims online. There could be a bit of a time lag, but not like what we have experienced in the past. So that's a good news, which is also going to help the fertilizer companies manage their working capital better. I hope this answers your question, Anshu. Thanks.
So just a clarification. So what would be a sustainable outstanding on this receivables?
Yes. We expect somewhere around INR 1,000 crores. Again, this depends upon 2 factors: One is the inventory challenge, which is pending first acknowledgment. Depending on the season and off season, this inventory could vary.The second thing is the DBT claims that have been submitted to the government, and they may have some time to process it; the third 1 is the freight claims, which normally, there is a lag in terms of announcement of the freight rate.So in my view, about INR 1,000 crores, at best it could be about INR 700 crores. So you can look into a broad range of INR 700 crores to INR 1,000 crores.
Okay. From current level of INR 2,300 crores?
Yes, yes.
Okay. And just 1 clarification on the CapEx. So this INR 400 crores you mentioned, was it only for fertilizer? Or it was for both fertilizer and the chemicals?
So we had, for this year, for overall Coromandel, including fertilizer as well as Crop Protection.
Okay. But going forward, when you do the PLI, then this could be significantly higher?
Yes, we expect it to be.
[Operator Instructions] The next question is from the line of Vishnu Kumar from Spark Capital.
Ma'am, circling back on the previous question on the CapEx. We understand that we are doing some debottlenecking. In general, the climate seems to be that government wants to restrict urea and also to rein in the fertilizer urea subsidy part, which all bodes well for our NPK demand.So when do we really expect to hear from you? Or is there any pipeline that you're working on to increase the capacity in a big way?Because on the current debottlenecking, we don't see that our -- we have the ability to kind of materially expand the volumes. So is there any plan to materially expand the capacities? That's the first question.
Thanks, Vishnu, for the questions. As we mentioned earlier, we are currently focused on getting both Vizag and Kakinada go through the debottlenecking exercise to free up capacity.The second action that is also being looked into is to work on the mix. So that could also help to increase the throughput because there are certain grades, as you know, could have a better output compared to the others. So these 2 are the immediate focus areas for us.It's good to see that the government is slowly getting the subsidy arrears out. And hopefully, at some point in time, we'll also have the subsidy getting moved to farmers directly instead of to the corporates, in which case, clearly, NPK manufacturing will become far more attractive.What we are also doing is to secure our sources. As you know, we have 2 joint ventures: One is TIFERT and other one is Foskor, which helps in getting our phos acid supply apart from strategic tie-ups for sourcing with several other fertilizer manufacturers. We've also gone ahead with increasing our capacity of PAP at Vizag with 2 plants now. And there is a little more scope to increase the output in these plants.What is key to add further NPK capacity is also to see how well you have your backward sources integrated. So that's the exercise currently we are going through. And once that's through, possibly with the changes, the conducive environment, the company would be open to looking into further capacity expansion.
Okay. So once we backward integrate whatever is required, then probably we'll go ahead and look into additional capacity expansion. Is that the right understanding?
Yes.
Got it. And on the -- my second question is on the phos acid, which has increased recently based on Sir's opening remark. so have the prices on the ground started to reflect this increased phos acid? Or it will take some more time for DAP and other products to get adjusted?
At this point in time, there's not been any pricing action that has been taken by the industry to increase the prices of DAP or other NPK materials. I'm sure with this type of price -- with this type of increase in raw material costs, it will start getting reflected in the prices.
So technically, when do we get the first phos acid supply, which will cost us at $790 as in my question is more to understand the first production, which goes into the market, it will be probably March or April only, which means you still have some more time or indirectly trying to understand whether you will have some margin impact in the next couple of months?
Right. The phos acid price that has been settled at $795 per metric ton is for the quarter. Typically, the prices get settled in the first week or even sometimes in the last week of the quarter. Sometimes, there's been a delay. This quarter, there has been a delay and the price got settled just about a few days back. So the supplies that have happened during January was all based on a provisional price, and it will get adjusted at $795. Therefore, this quarter, prices for phos acid import would be at $795.
Okay. Okay. But mostly this production that you are doing will go out probably 1 month, 1.5 months only from now?
Exactly. Yes. Because there will always be opening stock. Plus you also -- for us, there is also the advantage of our own phos acid production where you get the rock and then you convert it. So with the opening inventory and conversion, the impact would be relatively lower.
Got it. So in the next 1.5 months, should we expect some price hikes at the end market level?
I don't have a ready-made answer as of now, Vishnu. As I mentioned, with the raw material prices firming up, the industry would definitely be considering a price revision.
The next question is from the line of Ankur Periwal from Axis Capital.
So 2 questions. One, on the Crop Protection side. Now given our earlier thoughts of expanding into the new molecules, both combination as well as taken from the global players there, our thoughts on, one, the revenue CAGR over -- in this business over the next 2 to 3 years as well as the margin profile, do we expect the current margins to maintain? Or probably it will normalize going ahead?
Thanks, Ankur, for the question. I think we -- as we mentioned earlier, the focus for Coromandel is on few growth engines, Crop Protection being a significant 1 there. Definitely, with the plans to increase the product pipeline, getting into new technical manufacturing, we expect the growth should be in the double-digit -- mid to higher end of double digit.As far as the margins are concerned, you would see that the margins have actually expanded over the last year and the current year. We expect this to maintain the momentum. I would think EBITDA margin of anywhere between 17% to 18% on an annual basis is something definitely we can look for.
Sure. The second 1 on the fertilizer side. Now given the hardening of raw materials there, while I take your point in terms of the pass-through of this hike over the next maybe 1 to 2 months, but if I remember it right, earlier also, we had mentioned the full benefits of the phos acid integration may -- can further be applicable to other plants as well.So your thoughts on the fertilizer margin side, and we have seen a sharp jump in the 9-months margin YTD. Do we expect this number to sustain or improve further? Or your comments on that side?
So when I look into fertilizer margin, typically, we look into a full year because there are going to be seasons where the margins are going to be higher because of the operating leverage. On an annualized basis, I would still maintain that we should look into a INR 4,000 to INR 4,200, INR 4,500 type of an EBITDA per metric ton. I think that is a sustainable margin that we should look for.
Ma'am, the reason I asked that number was, while your guidance remains at, let's say, 4% to 4.5%, the YTD number is even higher than that. So should we take the YTD numbers or your guidance there?
I think it will be somewhere in between.
The next question is from the line of Varshit Shah from Emkay Global.
I want to circle back to that CapEx question. So is it possible for you to guide qualitatively how much you are putting CapEx for the backward integration of the fertilizer segment? That would help us because I think we still have room to fully backward integrate the Kakinada facility, am I right?
Varshit, thanks for the question. The backward integration, major CapEx was on the phos acid plant 2 that got completed. We have 1 project, which would further help us in using the concentrated acid is the tank evaporator, which is currently being -- the project is currently being worked out.Apart from that, there has also been improvement or additional capacity in terms of the storage, which is also important. As the PAP plant functions fully, we will need capacity to store the acid, use it either in Vizag or transport it to Kakinada for our operations. So that's what is currently being planned and is part of our current capital expenditure.As far as Kakinada is concerned, it is not a fully integrated plant like Vizag and it would continue to remain the way it is. It's about getting more operational efficiency by debottlenecking our trains. That's the current capital expenditure program as far as Kakinada is concerned.Because putting up a new phos acid plant would also require putting up a sulphuric acid plant. It's a -- and then the question of where do you source it, environmental clearance. So in our current plan, we do not envisage a total backward integration for Kakinada.
Sure, sure. That's helpful. And my second question is on capital allocation. Given that extra cash inflow you would have on account of subsidy clearance and assuming that the government adheres to the paying out next year as well, how do you see capital allocation evolving in terms of your free cash flow after you allocate here for the CapEx? And you're still left with surplus cash of more than INR 1,500 crores. So can you just throw some light what you plan to do with that cash? Is it -- you keep that reserve for any inorganic opportunities and wait for it? Would that be the right way to assume?
Right. We would be utilizing the cash flow to self-fund our capital expenditure programs. Currently, we are working through the budget for next year, and we do have some aggressive plans in some of our businesses to see how we can expand it faster.We are also open to looking into other growth opportunities as long as it is synergistic with our business and complements with our business model. So between these 2, we believe that it will be good use of the cash surplus that the company would be generating.
The next question is from the line of Deepak Chitroda from PhillipCapital.
So, ma'am, I have a question on outlook for next year. So as you know, I mean, we had a very fantastic year of FY '21 with a very good volume growth and obviously, monsoon as well. So what is your sense towards FY '22? Are we going to see similar kind of a volume growth and of course, in terms of the operating margin as well?
So I'll split your questions into 2, right. One is, let me talk about the fertilizer business, and the other 1, we'll talk about the non-fertilizer, primarily Crop Protection. On the fertilizer, we've seen that the overall demand and offtake this year has been quite high, so has been the acreage increase. With back-to-back good season, both Kharif and Rabi, the acreages have gone up. The consumption of fertilizer NPK has also gone up. You would have also seen this year that there's been a good amount of import of NPK, both DAP as well as complex fertilizers.Currently, IMD is forecasting a normal monsoon. If the normal monsoon is there, the acreages are going to be good. So the water level in the reservoirs are pretty good, moisture levels continue to be healthy. So from that standpoint, we should see the consumption and the growth in demand to continue.The only watchout that we should bear in mind is the raw material prices that has gone up. If that is going to be a continued trend and the price increase is to be passed on, we will have to wait and watch and see how the farmers' buying behavior would get influenced.There also, in April, we will see how the government is going to announce the subsidies because the NBS rate gets fixed. If it's going to factor in some of the additional raw material prices, well and good. Otherwise, if it's going to be just market prices, what's going to be the situation from a demand standpoint is something that we'll have to wait and watch.As far as Crop Protection is concerned, I think that business will continue to have a pretty healthy growth in my mind, given 2, 3 factors: one, the new molecules in the product pipeline that currently we are working on should help us improve our product offering to our customers. This is both for exports as well as domestic B2B and formulation.Second, we are also strengthening our teams in select geographies, including recruitment of locals there, so that we can better connect with the customers in these global geographies and offer our solutions to them. Third, we are looking into combination molecules also for registration in global B2B and B2C market.So all of these should actually help in sustaining and further growing the revenues in the Crop Protection segment.
Okay. Sure. So now my second question is about the subsidy, ma'am. So I mean, obviously, the additional allocation of INR 65,000 crores is definitely going to clear the past years. But looking at the allocation for next year, if you see is about INR 80,000 crores, which I think would be slightly lesser, and if we basically -- and towards this year, FY '22, probably we'll be starting with the same issue of carryover liabilities.So do you think that government probably might address maybe direct cash transfer or something like DBT on a pilot basis? So what's your sense on that side?
First of all, with this additional INR 65,000 crores coming in, the old dues will get wiped out. I think we're all in sync there. The addition that's being announced for '21, '22 should be sufficient for that year's consumption, hopefully. Because if the old dues are all cleared, it is only meant for the coming year. So we will not have this huge backlog that used to continue on a year-on-year basis. So that's number one.The second thing is when would DBT 2 happen, meaning government would directly transfer subsidy into farmers account vis-a-via transferring into the corporates. We've been talking about it for some time now and government and the ministry has been open about it. There have been, as I understand, some serious deliberations around getting these subsidies directly through transfers into farmers.I think it's a question of time. I believe it will be sooner than later, but 1 will have to wait and see when the government is going to take actions on it. Like we mentioned in the past, school of thought is, should this subsidy be based on the fertilizer that the farmer buys? Or should it be X thousand rupees per acre of land? Or should it be X thousand rupees per farmer?So there are multiple iterations that are going on. And we are hopeful that at some point in time, the subsidies will directly move into farmers in the best interest of both the farmers as well as the government.
The next question is from the line of Trilok Agarwal from Birla Sun Life Insurance.
Yes. Ma'am, just to get this fertilizer allocation and the next year figure, so what would be our working capital in terms of cash conversion cycle, which will come down beginning from [Technical Difficulty]? Could you just give us some sense? Or it will be similar to what is currently happening in terms of you raise the bill and then you wait for the government to clear the subsidy?
As far as subsidy is concerned, currently, whenever the farmer buys from the retailers and acknowledges through the POS machine is when we can generate the claims. So this can happen on a weekly basis. And then towards the end of the month, it gets trued up and submitted to the government. So the government then will process it. And typically, we have been receiving the DBT claims, say in about 30 to 45 days. This used to be the case for the first 6 months. Afterwards, when the government gets little dry with your resources, then the backlog begins. Hopefully, with all these past dues getting cleared, I believe that in about max 45 days, all through the year, government should be able to process the DBT that is being submitted -- the subsidy that's being submitted to them.So to that extent, as I was mentioning, the dues from government should come down. Depending on the season, whether it is season or off-season, I expect the number to be between INR 700 crores to INR 1,000 crores. From that standpoint, yes, it's going to be very helpful on the working capital front.
And what is -- and you -- are you guys after -- I mean, any thoughts on the DBT -- you think this DBT will continue in the form of existing wherein company will have to collect and -- company will have to raise bills and get it and not directly to farmers? Is it correct?
Yes. The current scheme is, companies will have to claim the subsidy from the government, until they introduce DBT 2.0, where the government will start transferring subsidy to farmers.
And basis on your -- is there any development on that front? Or do you -- it's still under process and there's no time line to it?
I just explained on this. I think the government would come up with a direct transfer to farmers in our belief sooner than later. Time lines, honestly, don't have an idea at this point in time. But there is active discussions going around in the government circles as we understand.
Probably, Jayashree, they'll just throw a pilot in certain states and then take it up.
Yes.
Like it's done for DBT 1.0.
The next question is from the line of Abhijit Akella from IIFL.
Congrats on a good quarter. I had just 2 questions. One is there are some news reports that government might be kind of considering capping the amount of fertilizer that is purchased by an individual farmer going forward to about, say, 50 bags per month or something like that. So is this something we've actually come across at the state level? And do you sort of expect this to possibly have some impact on volumes in FY '22?
Right. Abhijit, this has -- already the direction has come. And as you know, we also have our Mana Gromor centers which sell directly to the farmers. But what's going to happen here is, 1 particular farmer -- firstly, obviously, this doesn't impact any of the marginal farmers, which are really talking about 85% of the farmers in the country, which have 2.5 to 5 hectares in land. It will only impact some of the bigger farmers if they have to do this.Now there are 2 factors which will operate here. One is, of course, they will -- may have multiple Aadhaar cards because a lot of land is normally within the HUF, and they will actually then buy according to that, number one.The number two is that some of the farmers will also prebuy, so that during the main season, he doesn't have. And this may not just be this 50 bag per [Technical Difficulty] because of the shortages, which was experienced in some parts of the country, the big farmers will actually prebuy so that when the time of application comes, he is not out of stocks. So that's where we feel this is going to happen.I think the government move is more to cap and this is mainly on urea, it's got nothing to do -- I mean, while it applies to NPK also, is to cap some of the diversions which are happening or continue to happen as far as urea is concerned.It's already implemented. January, it got implemented. In fact, our sales in January have been -- including consumption sales, have been very, very good, given the fact that we had a delayed Rabi.
Right. Right. That's helpful. And my second question was on the Crop Protection business. You mentioned that new products have now risen to about 25% of the domestic formulations business.
That's right.
For next year now, I mean, the growth that we are envisaging, mid- to high teens kind of growth rate, is it largely driven by the new products growth itself?So just trying to understand what line of sight or how much visibility we have into this mid- to high teen growth rate for next year? Is it largely driven by the new products? And if so, where should we expect this new product ratio to sort of trend towards going forward?
So I'll divide the questions into 2 parts, right? Firstly, we are talking about our domestic market, right? Now 1 of the things which we had in the domestic market is like our market share currently is quite low and partly got to do with the fact that our product portfolio is currently more towards the insecticide side.What we are doing, like you have seen, whether it is with co-marketing or with our own manufacturing and combination molecules, we are expanding the product portfolio, crop-wise. So for example, in early on, say, in a crop like paddy, we're addressing 30% of all the incidents, we are going up till around 80%. Same will apply for other crops which we are looking at. That's one.Secondly, we are now being very focused. We have what is called center of excellence done and -- firstly, for sales and distribution. There, we are looking at -- when you look at our overall Crop Protection, there are 5 states which actually account for over 60% of the Crop Protection consumption.The good news is 3 of these states is where we also have our Mana Gromor center, which is AP, Telangana, Karnataka. And the other ones are Maharashtra and MP. Now obviously, some of the crops are different. So we are now looking at fast-tracking our own penetration and distribution. And we have done quite well into this state, which, like Jayashree alluded to, is to increase our own presence in these particular states and strengthening our presence not just with the sales team, but also with our agronomist teams to create the demand. So that is 1 factor which will lead to.The second factor is definitely our endeavor. And I'll just talk about another thing is obviously to fast-track the growth of our new products. And there, again, we have a full center of excellence of looking at launches and sustaining those launches with the sales and marketing team. So we're getting it right first time and sustaining that.And therefore, we expect this ratio to continue to grow because we want to be increasing in because most of these new products are new molecules and safer molecules, and that's where we want to grow or combination molecules.Having said that, for example, this year, we have done very brilliantly in a product which is superior for Mancozeb combination, especially in markets like East, which our presence was very weak and towards what is called the potato crop or in Gujarat and Rajasthan towards the groundnut.So the scope is -- the opportunity is a lot there. We are taking each 1 of them and systematically working on that, so that these are long-term sustainable growth. At the same time, we are seeing a traction in our B2B business, which is business, but there also, we are actually going for branding. So we have what is called -- we are the only manufacturer of pymetrozine in the country.And we have also expanded the capacity as few other players are coming in. But what we are doing is in terms of branding is to do a P2P model. So we actually are doing the branding and formulation at our plants for those so that we can sustain that.And that business itself has done very well because they are regarding us as new products and quality suppliers and dependable suppliers. So that's the whole strategy as far as the domestic business is concerned. Does that answer your question?
Yes, yes. That's very, very helpful.
And also the ratio will continue to improve. We also need to ensure sustainability because it's 1 thing to say, okay, 25%, but how sustainable is it, how many molecules? And when we look at new products, we look at the launch last 3 years.So some of the -- some of these products will then become normal product. And then we'll continue to do. We have a rich pipeline of new products coming. So we'll continue to work and grow our posture.
The next question is from the line of Rohan Gupta from Edelweiss.
Sir, couple of questions. Ma'am can answer it though you have already elaborated. I just want to understand little bit more in detail, like the current year subsidy provisioning by the government for the NPK is roughly down by 10% giving a very clear indication that when they announce the rate in April, the per kg subsidies are going to be down by almost more than probably 10%.On the other hand, we have seen phos acid from almost $700 to $800 indicating almost INR 3,500 per ton increase in phos -- for DAP cost and assuming that another INR 1,000 reduction in subsidy we are almost INR 4,500 going to see the cost increase for our DAP and also subsequently on NPK. That is almost INR 22,000 that we had to take the price increase of at INR 4,000 to INR 5,000 per ton, significant increase for the farmers.My question is, sir, are we in a position -- are farmers in a position to absorb these cost increases? Or we have to take some initial margin hit before we completely pass on to the end customer? Because we had -- the season is going to start in just a couple of months. So I just want to have your views on that.
So first -- yes, Jayashree, I'll just say something and then you can. Firstly, what you are seeing is quarter 4, which is a non-season, right, including on raw material prices and all. And normally, we have seen historically, prices can go up. The main issue would be what will happen -- take phos acid, what will happen to the prices when the [Audio Gap] and how the demand is going.As far as we are concerned, we have a couple of strategies as far as phos acid is concerned. One is we will be increasing our throughput from our own captive acid because rock and phos acid prices don't follow -- they don't follow tandem.And we are looking at phos acid coming in, even from our Vizag plant, which is basically in terms of backward integration. And some of the weak acid, we are already using for certain grades. Some of the grades require concentrated acid, and we are putting up a tank evaporator so that we can increase that throughput.The other thing is we are looking at alternate asset sources and in terms of getting into, and the team is working on various type of sources in terms of getting that, including increasing our throughput from our JV partners when the season begins. So that is the second part of -- as far as phos acid is concerned.So we'll have to wait and watch how the prices of phos acid work out. But there are other materials also which goes into production, which has good value. Last year, we had a huge advantage as far as sulfuric acid is concerned. There is some firming up, but we have also taken long-term contracts on that. So that's the other part of the -- as far as the raw material cost is concerned.And Coromandel is in a very good position to actually -- and we are not into DAP. DAP will probably get imported. Most of the time when the prices go up strongly, then the farmers will resort to what is called more balanced nutrition, then using products like DAP, which is very high on P, right? And therefore, and our grades and our unique rates are amply positioned to conquer that market as such.Not only that, one of -- in some of our other markets, a straight alternate to DAP is Single Super Phosphate, which is locally manufactured and even the raw material, most of the sources are local. And that is something which we are promoting even by having what is called products like Groplus, which are very useful for the farmers and promoting that.So we won't be that worried about DAP. The main reason is our marketing team and our agronomist team continuing to maintain the demand for these products as such. Yes, so that was in terms of the demand side of the thing and how it's going to happen. Jayashree, you wanted to add?
Yes, Sameer. Rohan, to your point in terms of reduction in subsidy rates, I'm not sure from where you picked it. There is a reduction in the absolute quantum, right? But it doesn't mean it is going to result in a reduction in subsidy rates. A couple of years back, when the raw material prices were ruling high, the subsidy per metric ton was higher by INR 1,000 compared to what we are seeing now. So in all probability, the government typically invites and looks into the raw material prices for the previous months, quarters before they come up with a new NBS rate. That's why when I was initially responding to a question, I was mentioning that the NBS rates that gets announced in April, we're hopeful to see an uptick. About 1.5 years back, when the DAP prices were as high as INR 28,000 per metric ton, you should see that the NBS rates were -- the NBS was also higher. So there have been in the recent past, not too far along the way that the DAP prices were high. So that's 1 point.As Sameer said, you will see migration also happening to low P grades. And clearly Coromandel has a very good market share. We've got an excellent production system that's geared to give low-grade -- low P grades, which is what the farmers will typically tend to migrate to. So on both fronts, I wouldn't get too worried about it.
Just on the other thing, and we had question from other people on the demand side. At least what I've seen since I've come to the industry and being a farmer myself, people are using more agri inputs than ever before.Partly, got to do with the government support price and what they are getting, and there were things like pulses, there were things like oil seeds, where government has a huge program to stop imports of both pulses and oilseeds to come down, right, and to grow this and with assured irrigation, particularly in markets like us.You take a state like Telangana, the agri throughput has gone up by 2.5x. I mean, that's brilliant. And the agriculture area has only gone up by 7%. But irrigation has been assured. So Telangana has become 1 of the rice bowl of the country. And same is happening to other states. Once the Polavaram project comes in, in Andhra, you'll again have a whole dry area of Rayalaseema getting into irrigation.So the -- and plus with the activities of the companies and the education of the farmers, the agri inputs is only going to increase, right? I don't think -- and this is my thought here and which I tell my own team also, I'm telling you people also, don't get too worried about farmers using agri inputs, too monsoon-dependent, India is a continent. There's always scope to increase the sales and this is what we have seen in the last 5 years. So I won't get too fussed upon even demand generation.
[Operator Instructions] Ladies and gentlemen, we will take the last question from the line of Tejas Sheth from Reliance Nippon Life Asset Management.
I have 2 questions both pertaining to Crop Protection. How is the product selection or the product pipeline is really done? I mean, what all you really look at when you think that the product will be launched over next 2, 3 years? And obviously, how you play your strengths on that?
Right. So this is a normal, what is called a stage-gate process, right? It's a very scientific process, which is defined. We look at what the market demand is, what's going to be the future ailments which are going to happen, what are the competitive products?And this is a whole dialogue which happens with the sales, marketing and the product development team, along with our scientists, to see which are the products, and it goes through a stage-gate process of looking at how is it going to help the farmers. And then what sort of market share we have, we are going to achieve. And then what is our right to win in markets with our products and when we're going to come.So it's a proper stage-gate process which is done to ensure that we get it right. Like I said, now we are setting up center of excellence. This we worked with BCG to ensure that the end-to-end, it's like any other FMCG, that the end-to-end is totally geared up when we go for a launch of the product, and only then me and Jayashree will actually sign off on a proposal. So that's where it is.And the good thing is we have a very rich pipeline of products coming in. Then we look at an option of whether we make it or buy it. Or in some cases, we go for marketing, and then we go back on looking at manufacturing it to get the full value chain out of it.In some cases, we're also helped with the fact that we are in direct touch with the farmers with our Mana Gromor centers. And we get to them what are their needs, even always talks to them, we get to know what are their needs, what are the competitive products which are coming in. And then we see what's our capacity to do those things. We also have a China desk, now we're looking at a Japanese desk, we are talking to innovators to get this deep works in the line. So I hope I answered part of your [Technical Difficulty].
Yes. And secondly, one, obviously, getting your pipeline right. And second is getting your brand acceptance right outside the states where you already have strong presence through fertilizers. So how do you ensure that? Because a lot of dealers, a lot of trade partners, they don't want to indulge new brands unless you give them a very high credit period. Even farmers did take time to try new products at the farm level. So how you ensured that piece of the -- or that side of the business getting addressed?
So can I say that's a very traditional way of looking at sales and marketing, right? And I know most of the company do that. The better way what we do is, firstly, most of the products are -- go through what is called university trials. We also have our own farms where we actually compare it with the controls and see what is the efficacy.Loaded with that scientific data is when we build up what is called our brand story. And each of the brands should have what is called a USP, that how you better. And we normally try to avoid getting into me-too products. But even there, there has to be something superior in terms of our delivery and then the whole packaging and the branding and the marketing works out.And like I said, it's always -- even if it is a crowded market, you have to actually look at a big impact, right? You don't get into a major crowded market, you can then look at where else this application is to be used and currently, competition is not there and launch accordingly and build up your base on that.And one advantage, like you rightly said, is, 1 is on the fertilizer side, but it's not just about fertilizer. A lot of the things we are collaborating now with the seed companies, we are collaborating with other agriculture university to see how we can get.One other big advantage which we have, which we are leveraging is on our what is called bio pesticide business. So when we give a package to a farmer, we are taking -- take a comprehensive package, which includes a spray of bio in between, right, and make it more sustainable. So that's how we are looking at it. Hope that answers?
Yes, yes, it does.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.
Right. So firstly, I would just like to thank everyone. It's been a very difficult period for everyone. But I think as far as the agri is concerned, what COVID did was to bring the whole focus back into agriculture, not only for the government because it had to feed a lot of the migrant labor and also that but at the same time, the government could see the strength of a sector and the potential which exists. And that is something which has happened. We being 1 of the largest agri input player, not just with fertilizer or crop protection, but also into novel things like specialty nutrition, organic and also our own retail network, have taken good advantage of this opportunity.What we didn't talk about was in terms of marketing where we couldn't do farmers contact, we've actually gone for very leverage technology, gone for digital marketing, agronomist team are in touch. And that way, we have been very, very specific. We have been able to reach out to farmers and have a 2-ways dialogue with them, also using collaboration with the agriculture universities, other companies and all.And we continue to invest in this business and to bring prosperity of the farmers, which will, in turn, obviously, help the company in terms of achieving its growth. And overall, I'd like to complement the team also for they've worked in a very, very difficult situation. It's easy for us to be at home or be even in safe office environment. But out there, whether it's at the plant or it's in the field, obviously, it's a challenge but good news is that we continue to do well. Jayashree, anything else on that side?And nothing as far as LTS is concerned, our long-term strategy, has derailed us. In fact, a lot of times, we have to now strengthen some of the things which you were planning to do earlier whether it was with digital automation and other things, COVID has brought it to the fact that we need to just fast track some of these programs. Jayashree, anything else to add?
Sameer, you've summarized it well. I think Coromandel is well poised in the agri sector to deliver on its commitments [Technical Difficulty] long-term strategic plans are very well laid out.
Right. And 1 thing, other thing is that we are obviously looking at not just organic opportunities, inorganic opportunities. So you may have to wait for this space. The main thing was some of the acquisitions which we had done to make them profitable, we've done to stand on their own feet. So very happy with the Bio acquisition which we did and now we are almost [Technical Difficulty] even the manufacturing capability because the market is there. So all these, we are actually strengthening. And we hope to look at any inorganic opportunities which come our way. Okay. Can we close now?
This is the operator. The audio is breaking from the line of Ms. Satagopan.
Okay. We can close it, not an issue.
Ladies and gentlemen, on behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you. Thank you very much. I appreciate it, Sumant.
Thank you.
Thank you.