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Edited Transcript of SHK.NSE earnings conference call or presentation 10-Feb-20 5:30am GMT

Q3 2020 S H Kelkar And Company Ltd Earnings Call

MUMBAI Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of S H Kelkar And Company Ltd earnings conference call or presentation Monday, February 10, 2020 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kedar Ramesh Vaze

S H Kelkar and Company Limited - CEO & Whole-Time Director

* Shrikant Mate

S H Kelkar and Company Limited - Executive VP & Group CFO

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Conference Call Participants

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* Alpesh Thacker

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Anubhav Sahu

moneycontrol.com, Research Division - Research Analyst

* Ashok Shah;LFC Securities, LLC;Analyst

* Chirag Dagli

HDFC Asset Management Company Limited - Senior Equity Analyst

* Nagraj Chandrasekar

Laburnum Capital Advisors Private Limited - VP

* Naitik Mody

Ohm Stock Broker Pvt. Ltd., Research Division - Research Analyst

* Rohit R. Nagraj

Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst

* Sandip Sabharwal;Ask Sandip Sabharwal

* Vicky Punjabi

JM Financial Institutional Securities Limited, Research Division - Research Analyst

* Anoop Poojari

Citigate Dewe Rogerson Ltd. - Client Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning, and welcome to S H Kelkar and Company Limited Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you. And over to you, sir.

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Anoop Poojari, Citigate Dewe Rogerson Ltd. - Client Manager [2]

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Thank you. Good morning, everyone, and thank you for joining us on S H Kelkar and Company Limited's Q3 and 9 Month FY '20 Earnings Conference Call. We have with us Mr. Kedar Vaze, full-time Director and CEO; Mr. B. Ramkrishnan, Head Strategy; and Mr. Shrikant Mate, VP and Group CFO of the company. We will begin the call with opening remarks from the management, following which, we have a program open for a question-and-answer session.

Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier.

I'll now invite Kedar to make his opening remarks.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [3]

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Good morning, and thank you for joining us on the S H Kelkar and Company Quarter 3 and 9 Months FY '20 Earnings Conference Call. I will initiate by taking you through the key highlights of the period under review. We will then look forward to taking your questions and suggestions.

I'm happy to share that we have reported a healthy uptick in performance during the quarter and 9 months ended 31 December 2019. The performance was led by steady improvements in demand across all our core businesses, increased client engagement and broad-based normalization in the domestic market. On a consolidated basis, our revenues from operations stood at INR 835 crores for 9 months FY '20 as against INR 773 crores in 9 months FY '19, a growth of 8% year-on-year. Quarter 3 FY '20 revenues came at INR 288 crores, higher by 13% year-on-year. We saw increased client engagement with existing and new FMCG customers during the quarter, which helped our overall performance. On the profitability front, the EBITDA for the 9 months ended 31st December 2019 increased by 6% to INR 132 crores and EBITDA margin stood at 15.5%. In quarter 3 FY '20, EBITDA stood at INR 45 crores, with margins at 15.5%.

The raw material environment in the domestic and global market has now broadly stabilized. A steady operating environment, along with several cost optimization measures that are being undertaken, should continue to help us augment EBITDA margins going forward.

Interest cost during the 9-month period increased to INR 21 crores and depreciation stood higher at INR 39 crores. The increase was primarily on accounting of commissioning of the new facility at Mahad and the adoption of the new accounting standards. I would also like to share here that the company initiated the final closure of our fragrance ingredient facility in the (inaudible) in the Netherlands during this quarter. This follows the shift of operations for Netherlands to a quality and operationally efficient center in India, and the impairment of plant and machinery and other closures costs related in a onetime exceptional expense of INR 36.5 crores, which is net of expected realizable value. This impacted our reported profit during the quarter 3 and 9-month period. However, a substantial part of this expense is noncash impairment charge. Furthermore, the economic value of the investment has already been fully recouped and it has been integrated with our operations in the group. We are now actively exploring options to maximize the monetization of the planned infrastructure include by way of a slump sale or new venture in collaboration with potential business partners. With global demand for Tonalid rising, I am pleased to share that the replacement facility at Mahad has recorded an all-time high production during this quarter. This facility is now operating at full utilization levels, and in the long term, will help improve availability of key raw materials and flexibility we would need in our operations.

Adjusted for a onetime exceptional expense, PAT stood during the quarter at INR 25.2 crores, higher by 18%. In 9 months FY '20, PAT, excluding onetime exceptional costs, stood at INR 59.2 crores as against INR 67.7 crores in 9 month FY '19.

Moving on to our segmental performance. The Fragrance division delivered a 14% revenue growth in quarter 3 FY '20. The domestic business reporting a robust growth of 22%. In 9 months FY '20, domestic fragrance business supported a growth of 8% and overseas revenue grew by 13%. Operating profit during quarter 3 stood at INR 32 crores as against INR 37 crores in quarter 3 FY '19. In 9 months FY '20 operating profit stood at INR 94 crores as against INR 103 crores in the similar period last year.

In our Flavor division, the top line performance was stable, both in domestic and international segments during quarter 3 FY '20. During 9 month FY '20, domestic revenues came in lower by 20%, led by a subdued demand witnessed in the first half. Our overseas segment reported an improvement of 11% year-on-year. In quarter 3 FY '20, the segment reported operating profit of INR 4 crores, with margin at 16%. In 9 months FY '20, the operating profit stood at INR 11 crores.

Coming to our key development during the quarter. I am happy to share that the stabilizing markets and improving liquidity conditions have resulted in a normalized working capital, better collections and improved cash flow. Cash from operations stood strong at INR 121 crores during the quarter, and the overall improvement in overall working capital cycled. This has enabled the company to reduce its net debt as on 31st December 2019 to INR 303 crores as compared to INR 400 crores as on September 30, 2019. On a quarter-on-quarter, net debt has reduced by INR 97 crores. And our net debt-to-equity position has improved to 0.37x as on December 2019. We anticipate this trend to continue in quarter 4 to further strengthen our balance sheet and cash flows. And we are well on target to generate our promised INR 140 crores to INR 150 crores free cash for the full year.

As we look ahead, we continue to see an immense potential across all our business segments over the longer term, the macros are stabilizing and we see further healthy traction in terms of order inquiries and leads, especially from our large FMCG customers. We believe this, along with new products and brand launches in the FMCG sector, and implementation of our strategic growth measures, should enable us to report healthy and sustained performance in the domestic as well as international markets.

With this, I would now request the moderator to open the forum for any questions or suggestions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Nagraj Chandrasekar from Laburnum Capital.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [2]

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Just a question on the competitive dynamics in the sector. So if I were to take a medium-term view, it looks like there are more MNCs competing more aggressively in our space in India than there were maybe 5 or 10 years ago. And overall, 1 or 2 of them have gained share and several Indian companies have lost a little bit of share. I'm curious to get your take on this. Is this because the MNCs are taking incremental share in the clients we have, or is it the case that their clients or the products they are levered to are taking share from our products? So what has actually caused the shift in market share?

And second is this with this substantially enhanced competition and with all of these companies reviewing India as a very important long-term strategic deck for them, what is our right to win in this space? We're up against people who have deep institutional relationships with the MNCs at a global level that have very strong research and chemistry capabilities. So how do we position ourselves to be able to compete against these giants with really strong technology and perfuming capabilities?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [3]

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Yes. So I think -- let me answer that in a broader light. In the last 2 years, as a result of the demonetization and GST, there has been a lot of structural changes in the marketplace. A number of small FMCG brands or a smaller branch, found it difficult to adapt to the new environment in the similar manner that the bigger organized companies could do. So within our portfolio, and most Indian fragrance and other country portfolio, the larger customers continues to grow and the smaller customers had challenges. Now as a result of this, the overall market share of the large customers, which are -- so of kind of the global fragrance MNCs, have larger share with the larger customers, so they continue to grow vis-à-vis their Indian counterparts, including us in the domestic market.

To answer your question as to what do we see as our unique strengths and positions regarding the large global companies. I think we have a -- almost 100-year track record. We have been competing with them since they opened their subsidiaries in Indian market and in Asian markets since early 1990s. And for the last 30 years, we have been competing with them on all the accounts that we continue to service. And the proof of the pudding is in the eating. So we are definitely doing something right. We continue to innovate. We continue to have the like-for-like R&D spend. We may not have the same value of spend, but we are very focused to what our clients need. And with that, we are able to make the R&D and development spend matter most in the critical winning areas.

With that, I mean the track record itself is the best judgment of why we are able to compete and possibly continue to compete. Over the last 10 years, we have continued to invest on a global patenting regime. So we have more than 16 patents being -- molecules and patents being filed across the world, including the developed markets, such as U.S., EU, China, Brazil, Indonesia and India as the major economies of the world. And we have a strong research pipeline. We have a strong R&D support. We are continuously innovating in terms of products and our understanding of consumers is at a granular level, which allows us to compete much more focused way with our clients. And that has been our success, and we will continue to replicate the same going forward.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [4]

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Actually, okay. Just a follow-up. If I take the top 5 sort of MNC or just generally the top 5 FMCG players in India, how many of them would you have gained the share in, in the last 5 or 10 years? And how many of them would you have lost share in?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [5]

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I think the top 5 is a very small number. But if you take the top 20 FMCG companies in India, we would have gained share in the 20 as a group in the last 5 years, substantial market share of the top 20 FMCG in India.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [6]

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Okay. So you would actually gain share?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [7]

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So the overall numbers, we evaluate to this in a past call, maybe 2 or 3 or 4 quarters ago, and we talked about how the market has changed from the big companies. So kind of the 5 segments in the domestic business, A B C D E, E being the consumer, and how the business has migrated from the D&C to the B&E respectively, and that has resulted in a one-off de-growth for the smaller clients. We are now seeing last year of stabilization and continued growth for us in the coming market.

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Operator [8]

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(Operator Instructions) The next question is from the line of Chirag Dagli from HDFC AMC.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [9]

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Sir, what is the 9-month R&D spend?

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Shrikant Mate, S H Kelkar and Company Limited - Executive VP & Group CFO [10]

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INR 25 crore?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [11]

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It is roughly 3% of the revenue.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [12]

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This was largely in FY '19, sir?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [13]

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Yes. It is FY '19. So last 2 years, we have been 3% to 4% of our revenue as the R&D spend.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [14]

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Okay. And would you like to share some outlook on FY '21, sir? So how does it look now that operations have broadly normalized, your capacities are also now fairly well utilized? What is the FY '21 outlook, sir?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [15]

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I think from a longer term, we had a mismatch of the Netherlands operations in terms of cost and the market. So they were selling product to the global market and we're producing in the European context. We have now moved that to India and a plant in China. So our mismatch between the revenues and the cost structure and has -- structural form has been corrected.

So we are now -- all our revenues and operations are focused on the markets and the operations in those markets. So we don't have any negative cost structure on a structural basis. That allows us to be more flexible, more agile to the market realities, both growth and challenges that we face. In 2021, we foresee that we will have an -- continue our double-digit plus growth and improving margins. We have indicated already that we will touch 18% EBITDA plus, and we are very well poised to beat those numbers. I think in terms of the business challenges, we are now geared. We have the product mix. We have a very strong pipeline of products and projects that are coming on stream. So we see 2021 as a -- '21 as a year where the business will normalize post the effects of GST demonetization, and we should have a healthy growth and profitability.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [16]

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This 18% is for FY '21, sir, or this is more longer term?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [17]

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So FY '21, we have -- indicating 18% and above. And then longer term, we would like to see the EBITDA around the 20% range.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [18]

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Okay, sir. Perfect. And the Netherlands piece, is there a salvage value to this? You've taken some hit in the P&L. But do you think you will get anything when you sell the land...

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [19]

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From the total impairment, there is a INR 10 crore impairment cost and closure cost in terms of outlets and there is a INR 26 crore of impairment as an accounting entry. Now we are in talks in the various stages to utilize this equipment for other operations within Europe. And if that happens, then this impairment charge will not be -- so there is only a INR 10 crore actual cash hit remaining is an accounting -- it's on account of utilized plant, and we will hope to utilize the plant as a consequence of doing other activities in the future.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [20]

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It is likely that you would reuse this equipment rather than sell it upfront. Third point, and then the last...

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [21]

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That's right. Actual plant and machinery has already been written off, and we have bought it out to the Indian facilities. So whatever we can salvage and use, we will use in the Indian facility. The remaining value now is mainly land and buildings. And we will take that and utilize it as the case may be in the future.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [22]

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Okay. This is likely to be a joint venture kind of a thing for new products, something like that, sir?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [23]

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That's the idea. So we have the -- so the -- like I alluded earlier, the Netherlands facility was making products which were sold on a global market. We have now moved that operations to India and China. So all the products that are sold in the global markets are produced in either our Chinese plant or the Indian plant. And the Netherlands plant, as a result, will be vacated. And we will use it for specific tailor-made products for the European market. This could be our own market. This could be in a spillover from our Italian acquisition or additional joint ventures with the third-parties. So the options, we are exploring. And we don't have any specific point.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [24]

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Okay, sir. And the last question, sir, from my side. On the virus in China, how does this impact us?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [25]

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So firstly, let me put out our prayers to everybody who is affected by this and in a manner of putting that as our solidarity with the Chinese people and the people who are dealing with this. We are constantly in touch with our suppliers and with the various authorities in China. As of now, we don't foresee any disturbance for our operations in the quarter 4, right up to the end of April. We are closely monitoring the situation, and we should have a detailed update at the end of February. But as of now, we are covered with all raw materials and all the necessary Plan Bs to continue production in 0 disturbance manner until end of April. We -- as a result of the new year, we had already planned maintenance shutdown in our plant in China. So that was planned to be closed. We have continued to extend the closure as part of these steps taken by the government. But we had already increased our stock level and production capacity in Mahad, to take over the additional demand. We don't foresee any reduction in production or any adverse effect until the end of April.

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Operator [26]

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The next question is from the line of Alpesh Thacker from Motilal Oswal Financial Services.

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Alpesh Thacker, Motilal Oswal Securities Limited, Research Division - Research Analyst [27]

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So sir, there was an employee restructuring cost that was -- that has happened in quarter 2 and which was expected to be there in quarter 3 also. So were there any such restructuring costs this time?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [28]

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Yes. There are some part of the restructuring costs which are a result of the plant closure. We will have additional restructuring costs or completion or termination or severance scenario in the quarter 4, which I estimate to be between INR 4 crores and INR 5 crores for the year. And that will be the last ticket one-off restructuring that we are undertaking.

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Alpesh Thacker, Motilal Oswal Securities Limited, Research Division - Research Analyst [29]

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Okay. Okay. So for -- this would be related to employee costs, right, that we had taken up in quarter 2 also?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [30]

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Yes. We had taken some of it in quarter 2. Some of that has come in the quarter 3 as part of the Netherlands closure. Some of it will continue to spill over to quarter 4. As we restructure the businesses into specific business units, we are mindful that we do this in a manner that is proper and to ensure that the minimum disturbance to the business and the people who are working in the -- with the organization.

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Alpesh Thacker, Motilal Oswal Securities Limited, Research Division - Research Analyst [31]

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Okay. Okay. And sir, what is the status of the CFF consolidation?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [32]

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So we have -- originally looking to consolidate the company as of quarter -- by end of calendar year 2019. Within the group, the Board has decided to defer the acquisition of the 49% beyond the 2019 original time frame. We will now go back to the arrangement as discussed with the -- in the original agreement that we had between 2 to 3 years to acquire, and we will communicate with the sellers and agree on time lines on the next steps. Our best estimate is that sometime in the next year, first quarter, we should be able to close the CFF transaction for the balance 49% on terms which we will agree with the seller.

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Alpesh Thacker, Motilal Oswal Securities Limited, Research Division - Research Analyst [33]

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Okay. Okay. And last one, what would be the capacity utilization from Mahad facility and overall [branded] capacity utilization for our plants?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [34]

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For the Mahad facility today is at almost 80% plant utilization. For the balance facilities, we are around the 50% combined utilization.

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Operator [35]

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The next question is from the line of Naitik Mody from OHM Portfolio.

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Naitik Mody, Ohm Stock Broker Pvt. Ltd., Research Division - Research Analyst [36]

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Sir, for the FY '21 outlook, could you please comment on the more granular growth for both the segments, so fragrance and flavors as well as some sense on the domestic as well as export growth?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [37]

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I think the -- if I look at dividing the 2021, and this is the general expected growth rates, our growth rates on the flavors will be roughly 17%, 18% type of growth rates, both domestic and export. Domestic fragrance, on a larger base, we expect to do double-digit plus or about 12% year-on-year growth or thereabout. And the international fragrance, we are doing at a 15% year-on-year growth for this year, and we will expect to continue the same level of growth for the year, coming year.

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Naitik Mody, Ohm Stock Broker Pvt. Ltd., Research Division - Research Analyst [38]

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And how is the overall market in India is growing for both these segments?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [39]

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Same on the -- on both these segments, the growth has slowed versus the previous years. We are guesstimating. We don't have any specific detailed survey, but we are guesstimating that the fragrance growth is 6% to 7% for the year as an industry and we would have 8% to 9% as a growth for the flavor industry.

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Operator [40]

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The next question is from the line of Sandip Sabharwal from Ask Sandip Sabharwal.

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Sandip Sabharwal;Ask Sandip Sabharwal, [41]

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Can you give me some estimate of what is the capital expenditure you're looking at for next year?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [42]

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So we will conclude the CFF acquisition, which will be a capital expenditure to the tune of EUR 16 million to EUR 18 million. Apart from that, our normal capital expenditure on organic basis would be around the INR 16-odd crores level.

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Sandip Sabharwal;Ask Sandip Sabharwal, [43]

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Over the last -- so you have actually grown through acquisition in the past also. But over the last 2, 3 years, given the kind of increase in debt, it's led to a derating of the stock. So it used to get very high valuations when the debt levels are very low, but increasing debt has helped the shareholders of the company. So how are you looking at this scenario going forward?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [44]

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So as I mentioned earlier, we've already brought down the debt by INR 100 crores in this quarter. Continue to operate on a normal basis, the debt will quickly come down. The main scenario has been a kind of a double whammy, particularly last couple of years that there was force majeure on raw material and there was low growth in the marketplace. So we are now seeing signs that it is correcting, and we have put our business practices. The business falling in line with the current expected business growth. So I think we will come back to the free cash flow scenario and debt levels as it was in the past.

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Sandip Sabharwal;Ask Sandip Sabharwal, [45]

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So looking at what happened, which took you by surprise, both in terms of raw material slowdown in market and increase in debt levels, so would you be more cautious looking at acquisition in the future?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [46]

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I think not really because hindsight is 20-20. So if you look at the scenario of the acquisition, we did a couple of kind of investment, one was on the plant in Mahad, where we actually benefited from the disturbances in the global supply chain by having better realizations as the plant came on stream, as vis-à-vis the other acquisitions and CFF acquisition which we had done 2 years ago. Before the GST and demonetization, I think we had no additional data or additional way of knowing that this would happen in the future. So I think we have been conservative. Our debt equity ratio even in the worse situation is less than 1 is to 1 or 1 is to 0.5 even.

So we are very conservative as far as taking on debt for any kind of expansion. But I don't believe that the decisions we have taken are incorrect. It is just that the subsequent events have substantially changed the way the business and the environment of the business. So we have no way of anticipating those at the time that the decision was taken.

So if you ask me today whether I would have done something differently, I wouldn't have been able to do something differently. We had no other data points, but we will evaluate and make sure that we have additional risk parameters or kind of a wider what-ifs, in terms of our assumptions going forward as we're learning. But the kind of changes that have happened in the industry are not something which any industry plan would have taken into account.

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Sandip Sabharwal;Ask Sandip Sabharwal, [47]

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Okay. Lastly, in the fourth quarter, you saw a substantial decline in net debt levels. But this reduction is quite exceptional. So what kind of pace of debt reduction do you see could happen going forward?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [48]

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So I think this reduction, as you mentioned, is exceptional. We would not see the same pace of reduction going forward as we have brought down to more normal levels of working capital. Going forward, I think we will have 65% of our profit coming out as free cash flow, and I would anticipate INR 20 crores to INR 25 crores of debt reduction per quarter.

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Operator [49]

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

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Rohit R. Nagraj, Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst [50]

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Could you give us some color on the key ingredients availability and the prices, like turpentine, et cetera?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [51]

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Yes. So I think the scenario there is we have a proper availability as of the end of October, November. We have products in contract for our requirements. I will keep my judgment -- reserve my judgment in terms of making sure what are the effects of the coronavirus on the supply chain, particularly, as we mentioned, for [filing]. But finalizing -- we have stock in hand, and we hope and pray that things will normalize, and we will have a normal situation after April. As of now, there will be no hit to the immediate raw material price or cost for us. And we will take a -- relook at it in February and put out an announcement if there is a change.

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Rohit R. Nagraj, Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst [52]

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That is helpful. So we have not seen any price changes over the last maybe couple of weeks or 20 days after this disruption in China due to virus?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [53]

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We have seen a huge price spike in the market for lot of raw materials due to disturbance, but these are more panic buying and -- because the production operations are key. Should they restore before end of February to normal levels, I don't anticipate there will be any major change in raw material pricing thereafter. If they don't restore the plants and normal production in China and supply by end of February, then we will put out an exact view of what happens and if there is any change in the business.

I hope and pray that things are normalized and the people of China should be able to correct to this national and global crisis. And we will take all steps required to enable that our suppliers are able to restore their production quickly. And we will -- at this point, there is no disturbance for us till April, as I've alluded. We have covered all the raw materials. They are all in our go-downs around the -- in the ports waiting for (inaudible). But we will relook this at the end of February and put out if any change.

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Rohit R. Nagraj, Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst [54]

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Yes. In an unfortunate situation wherein the production does not come to normal, do we have the ability to pass on the prices to our customers, being this is a force majeure and customers will understand it?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [55]

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Yes. I think we are also in communication with our customers at -- on ongoing basis. They all understand the gravity and the scenario of the situation. So we will work together with our customers and alternate suppliers, alternate products to ensure that there's minimum disturbance to the business. Again, I want to reiterate that we are well covered with all the stocks and we don't see any disturbance until the end of April.

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Rohit R. Nagraj, Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst [56]

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Okay. That's good to hear, sir. Sir, another question on the strategy front. So you said that domestic fragrance market growth rate is about 7%, but we are outperforming both domestic as well as your local growth rate. So here, are we gaining the share from the MNC players or the smaller unorganized players who are basically going out of the system? Or how are we taking this market share from the players?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [57]

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It's a combination of both. We are continuing to win our share of new products that are put out in the market. And the brands and the products that we have in the current market are growing faster than the average of the market. So as a result of that, our market share and our growth is faster than the overall market average.

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Rohit R. Nagraj, Sunidhi Securities & Finance Ltd., Research Division - Senior Research Analyst [58]

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Okay. And one last question, on new product introduction. So what could be the revenues from new product introductions from last 5 years? And is there any change in terms of the product life cycle? So earlier, product life cycle was, say, 10 years, and now it has reduced to 5 years because of the customer preferences and the choice of new flavors or fragrances.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [59]

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I think there is no -- to answer your second question first. There is no change in the life cycle of products. We continue to have long life cycle products and our customers are working with establishing long-term brands in the market. That's the market which we operate in. There are a few products that do have a life cycle of 2 to 3 years as a process of customers. We have very limited businesses in these kind of 3-year life cycle products at least. In terms of the new products, in terms of 5-year data, I don't have that readily with me. If you look at, we normally evaluate the last 3 years as our new product, and we are roughly 12% to 13% of our new business or our (inaudible).

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Operator [60]

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The next question is from the line of Nikita Maheshwari from JM Financial.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [61]

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This is Vicky Punjabi here. Firstly, sir, on this international fragrances side, you seem to have seen some kind of a slowdown this quarter. Is this mere phasing? Or are there certain issues cropping up there?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [62]

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No. I think that's a seasonal quarterly scenario. So if you look at the international sequential, we have a 13% growth in the 9 months. Last quarter to this quarter, there is no real momentum change. It's a small, small difference in terms of the shipment going out on specific times.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [63]

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Okay. Okay. And sir, just on the domestic fragrances side, this quarter, the strong -- the growth has been strong, but there was a weak base as well. And I think possibly, that continues for the next quarter. But beyond that, what is the kind of growth rates that you're looking at?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [64]

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I think we will continue to do a 12% growth rate for domestic fragrance, that's our expected target for '21. And we are seeing good level of pipeline of new wins and good momentum across the entire segment in term of growth of our current business.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [65]

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But sir, I mean just on that because the end consumer markets are seeing a sharp slowdown right now, so where is this -- I mean I just wanted to understand what is the background of this 10%, 12%. I mean how do you get that confidence given the current market scenario?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [66]

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So I think the -- we have -- even if you look at the worst years, last year and the year before, we have grown underlying business-to-business at 12%-plus excess and even 15% growth. And we have degrown on certain segments and certain products. So at this moment, we have this churn of product mix and customer mix has already happened. And we are seeing, in the larger customers, even 15%, 18%, 20% growth. So I think the momentum for the 12% is already embedded in the business, in the brands and the products that we are working with. I also see that as a result of force majeure and the corresponding changes in the business environment, there is an automatic consolidation from smaller players to larger players in the Indian context as well, and that helps us as a number of customers look for reliable supply.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [67]

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And sir, just on -- I mean taking the same thought on Flavours segment which is even more fragmented, but out there, such a change has not really happened. I mean the trajectory in Flavours revenues has been very tepid. Can you help us understand what's happening there exactly? And what is the -- I mean how are we looking to revive that?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [68]

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So, I think the Flavour, we have alluded last time that we had a one-off problem with the citrus. I think we will have this quarter, quarter 4, as the first quarter where there is no sequential base effect of these one-off transaction or one-off decline in business on account of the orange oil. We will see the -- if you see sequential quarter-on-quarter and the underlying momentum in the business, we are very confident that we have good quality of new wins. We are working with the top MNC companies and domestic companies in the food FMCG. So our quality of product wins, quality of customer profile has improved dramatically in the last one year.

If you read through the capitalization, we have set up our new facilities in R&D and sales and marketing in the last year. This year, we have almost received between 15 and 18 large FMCG customers across the country. We have had one Innovation Day with their R&D teams. A number of product concepts which we started at the beginning of the year have been finalized and they're at various stages of launch. We have been also expanding our sales team in -- particularly Africa and Southeast Asia. So all of these initiatives are starting to show growth, and we are confident that our growth rates going forward will be excess of 15%.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [69]

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Okay. Sir, just one on the gross margin side. I mean we read that the raw material scenario is now more benign. But on the gross margin side, it is not really showing up. I mean we are seeing Y-o-Y contraction and we are seeing sequential contraction as well. And on that Mahad plant, I thought the Mahad plant would come onstream, and kind of with that fragrance ingredients facility now in-house, you'd see some margin benefits from there. But that is also not -- that also doesn't seem to be reflecting. Can you help us understand what is the things in play out here?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [70]

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In terms of the margin, so let me kind of raise what is happening. We are -- we end up with a starting opening stock and we end up with a closing stock. And the closing stock which is in the finished goods also gets valued with the new raw material in. So as we're seeing the decline, we are seeing some part of that also going to the closing stocks. There is an effect that the closing stock also gets valued correspondingly at a slightly lower level than what was the opening stock for like-for-like. So as these prices continue to decline, we are seeing some of the gross margin is getting into the closing stock. This quarter, we will see a stabilization of the prices on the basis of the new prices, and we will see the actual improvement in the gross margin in the -- this quarter.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [71]

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You mean to say that the -- at the consumption level, the lower-cost raw material will come in, in the fourth quarter?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [72]

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Sir, that has already started to come in. Only at the end of third quarter, since the consumption is at the lower, our finished good inventory is also valued at a lower. So this quarter, you will not see the big effect on gross margin. When we start to sell these inventories, we will start to see the gross margin impact. I mean as a result of our stock carrying, we have roughly 3 months lag between what happens in the market and what happens in the P&L. Whereas things improved in September, October, this quarter would be stable. Next quarter, we will start to see the results of that.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [73]

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Okay. Okay, sir. And just on the Mahad facility benefit?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [74]

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The Mahad facility, already has been a substantial improvement in our gross margin in the first half owing to the Mahad facility. In the last quarter, we have seen some annual contracts being -- there's being pressure on pricing on the ingredients as a result of the global normalization, so we have seen corresponding pressures. But I think now that the facility is fully operating, we should be able to generate the sales and the margins that extent. In a totality, our 43% gross margin will be compositionally different. There will be better margins on the formulations and slightly lower margins on the ingredients side. This will play out. And I think if we kind of stabilize that post the first quarter next year, the 43% may even catch a slightly better result, and we hope to bring it back to the 45% levels in long term.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [75]

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Okay. Sir, just a clarification here. You said gross margin will be 43%, better margin on formulation and lower on the ingredients. But the mix will be 43%, right?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [76]

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Yes.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [77]

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Okay. Okay. And on that working capital release, I mean it's a sharp release. This has come off because -- I mean aided by lower raw material costs? Or are we seeing some inventory reductions or something on that light?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [78]

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So it's a combination of reduction in inventory, reduction in price, reduction in finished good, turnaround times improvement, improvement in collections, which for me is a lead indicator of business momentum. So it's a combination of all the various factors. If you look at the kind of midyear last year, we had higher inventories, expecting the growth, growth did not happen, we were carrying through the inventories to kind of the next quarter. And particularly the second quarter after the elections results, we were hopeful that there would be a big momentum jump in the activity in the FMCG end consumers, which we did not see, but we had piled up inventory in readiness for that. So all of those, we have brought down to more normal scenario. If you again go back, last year, we saw a very big second quarter in terms of demand. And this year, we do not see a very big second quarter. So we've taken steps accordingly and the stocks have been normalized in that scenario.

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Operator [79]

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The next question is from the line of Anubhav Sahu from MC Research.

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Anubhav Sahu, moneycontrol.com, Research Division - Research Analyst [80]

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Sir, first -- firstly, a clarification. So you mean that both on cost-wise as well as sourcing that we have covered for raw material until April, right?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [81]

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Raw material, and what was the question?

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Anubhav Sahu, moneycontrol.com, Research Division - Research Analyst [82]

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Sir, on the raw material front, you mentioned on sourcing-wise, we are covered to April. So does it also cover on the cost front at all?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [83]

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Yes. So we will not have any specific additional costs until April on the...

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Anubhav Sahu, moneycontrol.com, Research Division - Research Analyst [84]

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Okay. And sir, this presence with us around a 3-month kind of inventory. So have you gone for a prebuying because of this situation? Or is it a new normal for inventory management given the raw material issues which we had in the past? So you were mentioning something -- this level of raw material in the...

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [85]

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Sir, if you go back in history, we have even had levels of 6-months-plus stock in our business model. So we have normalized it to more to kind of 3 to 4 months of inventory, which we believe is a more normal level of working capital going forward.

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Anubhav Sahu, moneycontrol.com, Research Division - Research Analyst [86]

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Got it. Got it. And sir, if -- in terms of raw material front, if you can mention on how much do we import and what is the current China exposure we have on that front?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [87]

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Yes. Roughly 20% of our raw material is imported from China directly. There may be another 10% which is impacted from raw materials from China, but we don't buy directly. So 30% of our overall basket will be affected by China in term of supply. Again, on a longer term, if the supply has not restored, then there will be another kind of a pricing scenario or availability scenario. But as of now, we are covered well without any reason to believe that we will have any supply issues.

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Anubhav Sahu, moneycontrol.com, Research Division - Research Analyst [88]

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Got it, got it, got it. And sir, I mean just to understand the situation better. I mean the plants from which we source from China as far as raw materials are concerned, what is the latest update you're getting? I mean -- and if you can also provide us a bit on logistics front. I mean -- because we are getting the news that the some plants may -- do start the manufacturing, but the logistics is a concern right now.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [89]

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Yes. So by general discussion, all the plants, and we are working with maybe 100 different manufacturers for different products. By and large, they are all closed by end of February. They have been indicated that the manufacturing will begin in phased manner after that. And they have indicated to us the shipment date towards the end of March, so 20th of March onwards that they will be in a position to ship out material. All of these are initial indications. We are constantly in touch with the vendors and their representatives to update. I think a more meaningful update towards the end of February, we will have a clear picture. And as I mentioned, we will have -- we have the stock in play at least kind of already shipped from China due to be received or in our stock until end of April. So thereafter, we will be able to evaluate end of February.

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Anubhav Sahu, moneycontrol.com, Research Division - Research Analyst [90]

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Got it, sir. And sir, also, I mean due to this China situation, are you getting any new inquiries from the export market? I mean does it give us some new opportunities in export market investment?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [91]

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Yes. It's a good question. We have a lot of inquiries coming up as a result of the China as alternate suppliers basis. We are also observing and not wanting to take kind of one-off kind of business which disturbs our production. So we will evaluate opportunities as they come. But structurally, on a longer term, I think the India supply chain has a higher rating in the global market now depending on the -- which was largely depending on China, sourcing the allocation to Indian manufacturers is going up from all our customers.

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Operator [92]

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The next question is from the line of Ashok Shah from LFC Securities.

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Ashok Shah;LFC Securities, LLC;Analyst, [93]

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Sir, we had earlier bought back our shares and not repaid the debt. And also, again, there are lots of restructuring going on and provision is being made. Sir, is it not a time right for -- as the company is going through some pressure, promoter should also reduce their salary or remuneration at least for the 1 year to bring back the company on a strong footing?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [94]

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So I think there is a question of remuneration, I will not answer anything as I am partly in conflict with the question itself. I will direct question to the NRC and they can put out a public note to the answer.

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Operator [95]

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The next question is from the line of Chirag Dagli from HDFC AMC.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [96]

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Sir, new segments like air freshness, paints, et cetera, were a big focus area. How are they doing? If you have any updates to share in terms of big account wins, et cetera.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [97]

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Sir, these segments are tracking well. We have a good revenue from this what we call industrial segment. And these are new areas of business which are not the traditional FMCG. And already, it is up 65% from last year, and we hope to end maybe in excess of INR 10 crores plus in this business. And these introductions have been well received in the market, particularly during the festival season. And we foresee that in the years to come, this will be a sustainable growth platform. This is a very large untapped market. So we will leverage that and grow this market.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [98]

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Who competes with you, sir, in this market?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [99]

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There are not many competitors. So this is a new segment we are pushing.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [100]

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Okay. None of the MNCs are present in there?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [101]

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To the best of my knowledge, I think, no. There might be 1 or 2 MNC who have this in terms of global, but not in all the segments. So 1 or 2 customers, there may be an MNC. But by and large, we are fairly unique in that offering.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [102]

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Okay, sir. And can you share, say, broad guidance where this business can be 3, 4, 5 years out?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [103]

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So let me say that the INR 10 crore represents only probably 3% to 4% of the immediate potential. So in terms of potential business, it is excess of INR 200 crore segment. It will not reach there overnight. So it will take time for the penetration in these products in the market. But we see that the segment itself could be a INR 200 crore vertical for us.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [104]

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Okay, sir. That is helpful. And this delay in CFF, is this because you are trying to integrate this with what you'll do with the Netherlands land and equipment?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [105]

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No. The delay was on account of certain conditions that we wanted to ensure. It was also a difficult scenario in term of the force majeure and raw material availability that we decided not to integrate CFF in this year until there was more normalcy on the business. Now that there is good visibility on the raw material and normalcy is more close at hand, we decided that we should then go and acquire the balance 49%.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [106]

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So this will happen in FY '21 second half?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [107]

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This should happen in FY '21 first half.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [108]

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First half. Okay. Is there a guidance you want to share with this -- on this business? What should we expect?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [109]

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I think we will put out a full pro forma on the CFF business end of February. Once these transaction details are concluded with the seller, then we will put out the business, the necessary numbers for 2019, and expectations and the strategic rationale as a separate note.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [110]

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Fair point, sir. Is there a tax rate guidance that you want to share with us?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [111]

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All our units are more or less at the 25% new tax rate plus surcharges, if any. So we are all at the same tax category.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [112]

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Okay. And what is the nature of the other income, sir, now at this -- and this base, is this base sustainable?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [113]

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Yes. This is -- the nature of this is some investment return and some scrap sale and things like this. So this is not really other income from any other. It is just -- it's a normal foreign exchange changes or scrap sale.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [114]

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So this INR 5 crores to INR 6 crores annually is a sustainable number?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [115]

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It is -- I would put a caveat that it is expectation based on how foreign exchange is normally moving. There could be a year or a quarter where it may reverse, so this is not so mark-to-market basis income.

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Operator [116]

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The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [117]

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Just a follow-up question in terms of us versus the competition. Could you give us -- when we look at incremental business that we are winning with clients, who are the competitors we typically see? And what kinds of products or what kinds of business are we particularly competitive in where we see us beating -- beating out the competition? And where are we relatively weak in terms of competition beating us out?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [118]

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It's a very, very good question. I think we are -- in the kind of FMCG space, normally, there are 3 to 4 people who bid for business. This is an average. In some cases, it may be 2, in some cases, it may be 7, 8, 10. But on an average 3 to 4 people compete on a business. We win, on an average, 15% to 18% of these projects that come to our way, which is 1 in 5 more or less. So we are running by and large at the same average as what is the industry best case or best average.

To answer your question more specifically. Is there specific segment where we have strengths or weaknesses? I think the answer to that is, very clearly, we have strong knowledge of the consumers in the markets that we are operating. There are specific products which have already been in the market in, let's say, U.S. market or European market and they have been rolled out into the Asian market, and we have limited exposure or a limited library on these products. So we tend to take more time. But at the end of the day, we are competitive across the board in these markets.

Our big strength comes from our understanding of the consumer preferences, our in-depth understanding of the Asian and Indian and African markets where we operate. So we're really agnostic to the technology or the category we can compete in, we are competing and winning across all segments.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [119]

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So you say that, in general, you are most competitive where the fragrance involved is some sort of -- has some kind of a local aspect to it, some kind of Indian traditional, cultural aspect to it because you have a good library there and you can create something that is well suited to that. Whereas if people are looking to create a fragrance that has a more international, a global sense to it, they may be better off working with some of the MNCs. Is that a fair characterization?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [120]

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No. That is wrong. We can compete and make international fragrances. It's basically, we understand the Indian and the Asian consumers. That is our strength. So whatever you need in this market, we can give you and tailor-make it for this market better than the globals. If you want me to make a fragrance for the United States of America consumer, obviously we don't have a starting point, have not done too much work in those markets. So our understanding and our strength comes from our market understanding and not from product R&D.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [121]

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But even within India, you're winning about 20% of the things you bid on, right? Somebody else is winning 80% of them. So even within India if I look, where are you most competitive within India? And where are you losing within India? That's what I'm trying to understand.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [122]

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Sir, there are 300 fragrance companies within India. If we are running and winning 20% of the market, and on average brief, there are 3 or 4 people competing, it means that we are winning 50% more than the average.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [123]

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All right. Okay. But there is no pattern that you can point to within India? Leave aside international fragrances, but within India, is there a pattern where you see that, look, for this kind of business, we're really competitive, it's very unlikely anyone would beat us, whereas for this other kind of business within India, we tend to lose a bit more. That's what I'm trying to understand.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [124]

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I think it's a question of a lot of parameters. If it was black and white like this, it would be very easy for me to answer. It is not black and white. It depends on the customer, customer relationship, price point, end customer, end margin, credit rating of the customer. Sometimes, we don't want to do a business because it competes with some other customers' or clients' business. So there is a lot of play. Let me just say that in every category we are operating, we are in the top 2 or 3 companies in the market in terms of ability to win.

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Operator [125]

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The next question is from the line of [Suresh Jain], an individual shareholder.

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Unidentified Participant, [126]

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Small clarification request regarding CFF acquisition. During -- after the Q1 result, it was announced that the acquisition was complete by acquiring the remaining 49%. But now we are coming out and saying that it has been deferred. So I get the confusion. Now it was not done after Q1 of this year?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [127]

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So in the quarter 1, first -- this year, the Board had authorized me and Shrikant Mate to negotiate and conclude the transaction in the second half of this year. And we tried to complete the transaction. Because of the specific force majeure and situation of the industry, we could not conclude the same in that time frame. We've gone back to the Board, and we will come back with the final approval and the vote on that by end of February.

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Unidentified Participant, [128]

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So is this INR 100 crore sudden reduction in the debt, is it due to this postponement of this acquisition?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [129]

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No. No.

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Unidentified Participant, [130]

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No. Okay. Sir, now that the debt has come down, so for -- there'd been no acquisition or no major CapEx during the next year. So the interest cost would be down by, let's say, almost 25% in FY '21. Is it a correct assessment?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [131]

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Yes. It will be substantially lower than this year. I would just allude again that we would do the CFF acquisition sometime next year, so that will get added back to the debt. But we have strong cash flows, strong free cash flow. So the debt levels are now coming down. And as the debt level has come down, further interest cost savings will further bring the debt level down faster.

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Unidentified Participant, [132]

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Sir, during the last con call, you had mentioned that the debt levels would remain at the -- whatever was the -- at the beginning of the financial year, have you not taken the CFF acquisition into account in that calculation?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [133]

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Sir, this -- now if we do not conclude the CFF before end of the year, our debt level will be below last year's level.

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Unidentified Participant, [134]

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Okay. And lastly, if -- sir, due to this new accounting standard as well as commissioning of Mahad plant, our depreciation costs have gone up. If you could give a sense of how much this will be for the next financial year -- for the total year?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [135]

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So I think it's a normal depreciation. The change was last year. Now this would continue to be in the WDV method. I don't have any specific answer to what the depreciation will be next year. But it is -- there is no change in the depreciation from last year when there was accounting order change.

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Unidentified Participant, [136]

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So that means it would be lesser than what it is of the current year? Right?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [137]

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Right.

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Operator [138]

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

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [139]

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Thank you. I hope we have been able to answer all your questions satisfactorily. And should you need any further clarifications or would like to know more about the company, please feel free to contact our team or CDR India. Thank you once again for taking the time to join us on this call.

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Operator [140]

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Thank you. Ladies and gentlemen, on behalf of S H Kelkar and Co Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.