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Edited Transcript of SHK.NSE earnings conference call or presentation 22-Aug-19 5:30am GMT

Q1 2020 S H Kelkar And Company Ltd Earnings Call

MUMBAI Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of S H Kelkar And Company Ltd earnings conference call or presentation Thursday, August 22, 2019 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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* Ajay Bodke

Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst

* Kartik Mehta

IDFC Asset Management Company Limited - VP & Fund Manager

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Rahul Veera;Abakkus Asset Manager LLP;Analyst

* 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 day, and welcome to the S H Kelkar and Company Limited's 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 Q1 FY '20 Earnings Conference Call. We have with us Mr. Kader Vaze, full-time Director and CEO; Mr. B Ramkrishnan, Head Strategy; and Mr. Shrikant Mate, EVP and Group CFO of the company.

We will begin the call with opening remarks from the management, following which we'll have the forum opened 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 would now like to invite Mr. Kedar Vaze 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, everyone, and thank you for joining us to discuss the operating and financial results for the quarter ended 30th June 2019.

I am happy to share that we have started the new fiscal year 2020 on an encouraging note. During the quarter, we witnessed initial signs of recovery and a broad-based normalization particularly in the domestic market and a normal global operating environment.

During the recent months, especially post the election results, we also saw a strong revival in new product launches in the product domestic FMCG market. There was an improved traction in terms of order inquiries and leads especially for our mid- and large-sized FMCG customers. This along with increased momentum in client engagement and buoyant international markets led to healthy performance in our core Fragrance business. Flavours division also witnessed a steady movement in the quarter driven by increase client engagement and uptick in overseas markets.

Before we get into the operational highlights, let me also share a quick update on the [global] raw material situation. As you all know, in the last 18 to 24 months, the fragrance and flavor industry had faced unprecedented levels of uncertainty in raw materials leading to volatility in global raw material prices. However, in the last few months, the industry is witnessing some signs of stability in the raw material supplies, and the availability is easing out. And we believe if this environment continues over the next few months the raw materials situation will fully normalize across the global F&F industry. With this, we believe we will be well-poised to take on larger growth opportunities as there will be no raw material constraints for our group.

On the operational front, the company recently forayed into a new product category of industrial use for ambient fragrances for consumer durables and automobile accessory segments. This marks a significant milestone in our innovation journey. With this, we are confident to enter new areas of fragrancing and flavors which were hereto unknown or not on the market. We started this new category by initiating pilot projects with certain market leaders, and I'm happy to share we have been selected as the first partner by major Indian player in the white goods and industrial sectors. In the coming quarters, we are optimistic of expanding these offerings into the domestic market and which should further enhance the category's future growth prospects.

The company also launched an extensive portfolio of products both in Fragrance and Flavours segments using the online platform to target the retail market. The Fragrance division, we launched 25 new variants of roll-ons, taking total product portfolio to a large number of SKUs spread over Traditional, Arabic [and] French notes. In the Flavours division, we launched a new range of [fruit] flavors during the quarter. Both these product categories have received great initial response, and we look forward to targeting a wider and newer set of audience in the coming quarters.

Now let me take you briefly through the financial performance. Our total income during the quarter grew by 15% year-on-year to INR 271.5 crores. This was led by an uptick in demand in the domestic Fragrance business, steady sales momentum in domestic Flavours coupled with a broad-based normalization in the operating environment. EBITDA for the quarter stood at INR 47.8 crores with the margins at 17%.

Effective 1st April, the company has adopted the new mandated accounting standard Ind AS 116 which led to lower rent expenses in quarter 1 FY '20 by INR 3.9 crores. Adjusted for this, as per earlier accounting, EBITDA increased by 21% to INR 43.8 crores, and margin grew by 78% -- 78 bps to 16%.

Depreciation and finance cost increased during the quarter, owing to commissioning of the new facility in Mahad, where the adoption of new accounting standard resulted increasing depreciation by INR 3.3 crores and a finance cost of INR 1 crore. PAT was higher by 6% at INR 19 crores.

Coming to our segmental performance. Our Fragrance division delivered a 15% revenue growth during the quarter driven by healthy uptick in demand in the overseas and domestic markets. Domestic Fragrance witnessed a healthy growth of 10% while international business grew by a solid 26%. Our operating profit stood at INR 36 crores, registering a growth of 21%. This was majorly driven by higher revenues and cost-optimization measures undertaken by the company.

In our Flavours division, the revenue for the quarter stood at INR 28 crores, up by 14%. Domestic business grew by 7%, and overseas business grew by 20%. Operating profit was steady at INR 4 crores with margins at 13%.

Overall, from the medium to longer-term perspective, we continue to see immense potential in all our business categories. Although there are cautious sentiments in the domestic FMCG industry currently, our business outlook remains stable with improved order inquiries and leads. From a longer-term basis, a healthy revival in the domestic industry followed by an improved momentum in client engagement for new launches should help drive our performance both in the domestic and global markets. A steady raw material situation in combination with company's initiatives to improve working capital and operational efficiencies will enable a healthy earnings growth momentum going forward. On the whole, we look forward to delivering healthy and sustainable results in FY 2020 and onwards.

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 Rahul Veera from Abakkus.

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Rahul Veera;Abakkus Asset Manager LLP;Analyst, [2]

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Just want to understand, with the pressure on the domestic clients as well -- plus we are getting on to the front end to direct retailing so [plants like Veera] or any other fragrance companies, would there be any cannibalization or direct competition with them?

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

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Our retailers have always been there. It's 6%, 7% of our business. We cater to completely different set of customers than the FMCG companies. They are -- this is just like -- just to give a sense, for example, our flavors are taken via the e-commerce platforms to remote parts of the country where small entrepreneurs are using to make cakes or local bakeries are using these flavors. So these reach is an additional add-on reach to our products. There's no competition within our FMCG partners.

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Rahul Veera;Abakkus Asset Manager LLP;Analyst, [4]

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Right. Sir, on the domestic side, what kind of indications are you getting from the clients, like -- and after the indications, what are your estimates in terms of volume growth for FY '20?

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

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As I have mentioned in the last call, we have full double-digit -- a strong double-digit growth put in volume and bottom line for the year, domestic as well as export. We don't see any change from that.

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Rahul Veera;Abakkus Asset Manager LLP;Analyst, [6]

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Okay. Okay. Sir, in terms of the next 2 years, do you think we'll be going for any acquisitions? Or you will go for the debt retirement? I mean what will be our strategy going ahead?

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

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I think we will be cautious on our acquisition strategy. We will not be aggressive. We have a completion of the Creative Fragrances & Flavours acquisition lined up for second half of this year. Post that, we will look at other alternative options or acquisition targets if something comes up. However, please be mindful that we need to anticipate the muted growth rates on a global basis. We will be accordingly cautious in our [outlooks as far as] acquisitions.

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Operator [8]

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(Operator Instructions) The next questions is the line of Rajesh, who's an individual investor.

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Unidentified Participant, [9]

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At Mahad, we missed [Tonalid] a few other additives. So do that -- is that -- other than Tonalid we make some more additives?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [10]

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What's the question?

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Unidentified Participant, [11]

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No, no. At Mahad's facility, other than Tonalid, do we make any other additives?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [12]

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Yes. So we have effectively 3 facilities: Vashivali, [Shastri] and Mahad in India, and one in China where we make [garlic] and most of other ingredients for fragrance and flavors.

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Unidentified Participant, [13]

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So we make, other than Tonalid, also some other ingredients. Correct?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [14]

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Yes, we make almost in excess of 200 ingredients across the 3 factories.

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Unidentified Participant, [15]

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So that was one question. The other -- second was just to get a perspective, if the quality, the [innovation] technology, the R&D which is the same compared to [chemco] and any other multinational company, what could be the price difference in any new offer to FMCG customer in comparison to these multinational FMCGs?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [16]

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So our business is completely built around the platform of innovation and differentiation, so the products are not comparable. So there is no price comparison like-for-like. All I would guide is that from an operating efficiency cost basis, our operations in India are one of the most efficient cost structure plants in fragrance and flavors, so we have a very good cost base. And most of our products are proprietary and we continue to be innovative when we go to clients in terms of innovation from a consumer preference. And pricing is at par or competitive with the global FMCGs.

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Unidentified Participant, [17]

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Okay. Third question is the sales of the Italy Flavours company has already been merged with Kelkar?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [18]

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This quarter, no. It is standing as an associate company. It's a one line profit share at the end of the accounts.

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Unidentified Participant, [19]

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So when would we expect this to happen?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [20]

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When we acquire the remaining 50% -- or the remaining equity, then we will pick up the consolidation.

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Unidentified Participant, [21]

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Okay. And if I'm allowed to ask the last question, sir. Do we have any other group of companies engaged in the same line of business?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [22]

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You mean promoter companies?

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Unidentified Participant, [23]

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Yes.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [24]

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No.

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Operator [25]

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Next question is from the line of Vicky Punjabi from JM Financial.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [26]

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Sir, on your revenue commentary side, it seems a little -- I mean it's in contrast to the environment that we are seeing. So most of the FMCG companies have been complaining about a slowdown while you are saying that there is good double-digit growth that you are expecting. What exactly -- actually is giving you this kind of a confidence here? And what's actually changed over the last 6, 7 months that during the quarter actually saw a strong bounce back on the domestic Fragrance revenues?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [27]

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I think there is -- let's also be mindful of the base effect because the quarter -- comparable quarter last year was on a smaller base. So I would try to look at the first half of last year as my starting base. And in that basis, we will continue what we have already for the first half like-for-like. We will end up with a -- close to 8% to 10% growth on the domestic front. The key point is that there are a lot of new launches and brands which were approved in the past 2 years but we did not see actual launch. I think post the clarity in the elections, most of the brand launches or launches of the product were expedited. We also see that in the last 2 years, most of the work that we have done on setting up our supply chain and maintaining our service level has been appreciated by clients. And there -- given us higher wallet share of their business, which has meant we are growing faster than the general market.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [28]

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Okay. And sir, just a similar thing on the raw materials side because your commentary is stating that the raw materials situation is now more stabilizing, and you're expecting favorable scenarios in terms of raw material pricing (inaudible)

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [29]

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I'm sorry, go ahead.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [30]

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Yes. The gross margin during the quarter we saw actually a compression, actually another 100 bps kind of a compression. So why was this so? And what is the outlook here?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [31]

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So I think if you compare gross margin of last year first quarter, then there is apparently a compression. But last year first quarter, as we had alluded, was supply disruptions which had caused us to focus on higher-value, higher-margin products, and the bulk of the May, June orders for large volume products had to be shift in July, so we had seen that shift of sales from the first quarter to the second quarter. And likewise, the revenue in the second quarter was much higher, and the margin was lower. So on an average run rate basis, we have maintained our gross margin vis-à-vis last year. But sequentially, we have improved between Jan-Feb -- Jan quarter to April quarter, a small basis we have been able to improve our gross margin. More than the price correction, I think the cost correction, I think the availability of raw material is easing up which allows us to go after large growth businesses.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [32]

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Okay. And just on the cash flow front, so I mean in the first quarter, you have an EBITDA of around INR 46 crores, and the cash flow from operations that [you mentioned] is only INR 6 crores. Why is there such a mismatch?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [33]

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Again this is a mismatch from the raw materials. Mahad, we have ramped up so there is a huge amount of inventories that has come in as the starting inventory. Once this plant is running and we have built up the stock, it will be -- it will start to come down. And we also witnessed the raw material situation where -- because of the price increases and availability concerns, we had increased our stock holding. And as we speak, this -- as I mentioned, the raw material situation is easing up, so we will be able to control and reduce the overall inventory and have better cash -- free cash flow going forward.

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Vicky Punjabi, JM Financial Institutional Securities Limited, Research Division - Research Analyst [34]

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Sir, what is the -- I mean what are your thoughts on the debt level? Is there a plan for reduction of that? Or how are you looking at it right now?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [35]

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Shrikant, you want to answer?

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Shrikant Mate, S H Kelkar and Company Limited - Executive VP & Group CFO [36]

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So as we look to complete the transaction on CFF, there could be increase in debt but with focus on compressing the working capital. Our expectation, as we speak now, is to have more or less same debt level like end of the year as it was at start of the year.

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Operator [37]

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(Operator Instructions) The next question is from the line of [Amar Moria] from AlfAccurate Advisors.

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Unidentified Analyst, [38]

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Sir, just firstly on the growth, which you've indicated like in the first half because in the second quarter for '19 was a very high base. So you said you that you will be able to grow around 8.3%, 8.4%. So sir, when you say double-digit growth, does this mean the second half is going to be significantly better than the first half?

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

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I think if you -- firstly, just a correction, 8% to 10%, as we've indicated, I don't know where the 8.3% number is coming. But 8% to 10% on over first half is where we see. If you look at last year, from a revenue, it was not evenly distributed quarter-on-quarter because of raw material scenario in the markets. So we see first half, our revenue, particularly second quarter was much higher. And third quarter and fourth quarter again was in line with the normal as a blueprint. So we see the growth comparing with last year will be in a double-digit plus. But we also see that it won't be on a quarter-on-quarter comparable from last year. So this quarter-on-quarter, first quarter was 15% for us. It wouldn't be 15% if you compare last quarter to this quarter. So we see a sequential quarter 3% to 4% growth in the last 2 quarters, and we would try to drive the business in a similar manner going forward because these disruptions have been in the last 2 years quite high. I think without it, we will have a more normal sales mix.

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Unidentified Analyst, [40]

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Got it. Got it. So sequentially, we should target 2% to 3% kind of a growth. That is the assumption, right?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [41]

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I think 3%-plus growth sequentially we should be able to deliver. That kind of translates to 11%, 12% for the year. And at this point, we have been indicating double-digit 12% is -- so I would put it, the indications are not up by 2% and same looking at the 12% out of this. And we need to be mindful that at some point if there is a cost correction and price correction. We may see a revenue decline by 1% or 2%. And although the gross margin and profitability would remain intact.

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Unidentified Analyst, [42]

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Okay. Okay. And sir, we were targeting around that CFF consolidation by Q3. And once it happens, I believe it has a quarterly run rate of around INR 50 crores [or so]. And you also indicated that once it is done, probably a lot of the costs will be round off. And I know we can see a like-to-like mark -- profitability on the bottom line also. So is it going to happen? Because what I see here is that CFF will be kind of margin accretive business on the PAT front, even though it may be equal margin on the operating margin front?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [43]

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So our initial calculations, well, have seem to indicate that it will be an EPS accretive acquisition from when we [operate at 100%]. I will be mindful of -- I mean if you take on the basis of the current performance continuing in the future, and so as we go into the acquisition, we are looking at an EPS accretive which also considering what is the interest rate that we eventually are able how we fund the acquisition. But by and large, I don't think it will be EPS negative. Definitely, it will be on the positive side. How much positive really depends on the interest rate hedging costs of doing the transaction and finalization, but it...

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Unidentified Analyst, [44]

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Your costs? Yes, yes. Go ahead.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [45]

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Go ahead if you have another question.

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Unidentified Analyst, [46]

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Yes. I just wanted to understand that currently if CFF has had around 3.2% kind of a PAT margin, right, based on the reported annual number. So -- and if you can see like-for-like net profit, it's around 8%. So that is the reason I'm asking, like are you going to mitigate some of the cost that will pull margin, net profit up? How's this going to happen?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [47]

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So I think probably the net profit level will remain around the 8%, 8.5%. But we will be able to save some costs of management when we have 2 centers and we have multiple levels of management, so we can bring some synergies from that. We can also bring some synergies from raw material and development costs across both the companies.

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Unidentified Analyst, [48]

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Okay. So meaning, you are seeing that this 3.2% PAT margin at CFF level can come up to the 8% level in -- over a period of time or whatever the costs here you're talking about, synergies?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [49]

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Yes. I think the 3.2% margin is a definition of (inaudible) the nature of trading.

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Unidentified Analyst, [50]

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Okay. So you retained something at your end also?

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

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We don't retain anything at our end. The nature of the business is different. Once we consolidate, we will be in a better position to give you a correct view.

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Operator [52]

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The next question is from the line of Kartik Mehta from IDFC Mutual Fund.

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Kartik Mehta, IDFC Asset Management Company Limited - VP & Fund Manager [53]

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Sir, I missed your initial remarks. I don't know whether you have touched base on the MNC tie-ups you were talking about last quarter. Anything on that?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [54]

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So we mentioned last -- the global and large corporate businesses, and we're continuing to work with various global and local large corporates on their projects. So there is no change in that. We continue to work. The momentum is there. We continue to get official briefs and continue working for them.

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Kartik Mehta, IDFC Asset Management Company Limited - VP & Fund Manager [55]

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So just to get more clarity, you have already started supplying product. Are they in a trial mode, or they already absorbed in some of the costs?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [56]

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No. This is an early development level, so it will take anywhere between 9 to 15 months for concluding business.

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Kartik Mehta, IDFC Asset Management Company Limited - VP & Fund Manager [57]

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Secondly, sir, in the last 2, 3 years, our company has gone through all together -- all sorts of problems all together starting with your GST demand related -- the small and marginal FMCG companies getting impacted because of GST and raw material side disruption. And also we kept on expanding our capacities and -- by way of inorganic way which has impacted the balance sheet to some extent. So we have turned from net cash to net debt company. So going out to the next 3 years, can we have some color that -- after you look at -- because you have seen all the pains and you have already corrected that time -- timely and relatively. So what is the thought process on the revenue, profits and balance sheet for 2, 3 years perspective? Because I believe the operating leverage is pretty large in your business. If you have a double-digit revenue growth, your profit growth should definitely be higher than the revenue growth. It cannot be mimicking the revenue growth.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [58]

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So I completely agree with you on that. As we continue to grow, and we typically talked about 1 or 2 percentage points better growth in the EBITDA and PAT. I want to keep my view up to the PBT and EBITDA which is something which we see. I think as the tax environment keeps changing, so I don't want to look at a very long term scenario on tax. But on the growth, if we do incremental growth faster than say 8% or 9%, we will have operating leverage which kicks in. And EBITDA and PBT will be faster growth than the growth of revenue.

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Kartik Mehta, IDFC Asset Management Company Limited - VP & Fund Manager [59]

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Right. And on the balance sheet front, you said that this year that is going to be similar to the beginning. Over the next 2 to 3-year perspective, what is your thought process? Because I believe that you are largely done with most of the expansion in organic -- inorganically. And internal capabilities obviously, you keep on developing, but a large-sized CapEx should not be there, so -- unless and until you have something else in your mind. So what is your -- if you can give some color on the 2, 3-year perspective on the balance sheet front.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [60]

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I think as Shrikant has alluded, we will be in a position to bring the debt level more or less at the same level in the end of March as we -- as in the beginning of the year. And this implies almost INR 150 crores of cash -- free cash flow generation and reduction in debt through the year. And then we are confident to achieve that number and run that through the system.

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Kartik Mehta, IDFC Asset Management Company Limited - VP & Fund Manager [61]

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Sorry, that is for this year. I was referring to the thought process for the next 2 years because you would be obviously having some boardroom strategies.

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

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Subject to no specific -- major disruption or some major change like we have witnessed, we should be back on our normal track record of [100] free cash flow generation year-on-year. And then we can look at paying down the debt and look at larger growth opportunities which affects this which should come on.

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Kartik Mehta, IDFC Asset Management Company Limited - VP & Fund Manager [63]

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While you're on the revenue front, you seem to be more confident this kind of double-digit growth. On the raw materials side supply disruption from China and all, how is the -- you said it's stabilized, but when we say stabilize, the prices are still similar to the last year? Or do you think that they already started going down?

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

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So I think the actual prices with the industry are not started to significantly change. For the availability, so when we looked at last year, when we had a second business for growth and we wanted to buy additional raw material, it was added incrementally higher price. I think that [extras] -- plus a surcharge pricing has gone as the availability is normalized to that extent but in few products. And we see that if the strength continues, then it depends on the overall growth and supply/demand scenario. And if growth is okay, then -- and this is on a global basis, so we are waiting and watching. If the global growth remains muted, we will see some softening of prices. If the global growth remains at 3% to 4% for our industry, we will see a stabilization of prices. So today, we have no surplus or shortage or premium for availability in the marketplace. We have seen across the board availability ease out. There are few pockets with price decreases, a few pockets there are still higher prices. But overall average, the availability for growth is there, so we are confident to go after large volume business without having to worry about raw material scenarios.

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Operator [65]

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The next question is from the line of Rahul Veera from Abakkus.

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Rahul Veera;Abakkus Asset Manager LLP;Analyst, [66]

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Sir, just trying to understand in terms of client profile over the next 2 to 3 years, currently of -- because of all these large contracts that we've been talking about. Will these top 10 concentration increase, top 10 share, top 10 clients initial -- the proportion?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [67]

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I think it will increase. Definitely, it will increase compared to the past. But we will still have a fairly diversified business because we are working with almost 4,000 plus clients. And even though we will talk about concentration vis-à-vis historical context, we will not have any client more than 10% of our revenue.

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Rahul Veera;Abakkus Asset Manager LLP;Analyst, [68]

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Okay. Sir any -- I mean where would you think that like the big contract coming in and when would the generation of revenue start for this contract that we've been working on?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [69]

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When we talk about big contracts, typically, it is a phased manner introduction. It doesn't happen all at once. It's not like on, off. It will have a phasing for the introduction. I think there will be 6 to 9 months of delay between the development and the launch of the product and so on and so forth. So the one which I alluded from a larger ticket should have 9 to -- anywhere between 9 to 15 months from today when the revenues will be fully ramped up.

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Operator [70]

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

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [71]

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Sir, in your business, are you seeing any impact of -- on the export side of the business, of this whole trade tension between U.S. and China? Any positive impact -- negative impact? Is it playing out in any ways?

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

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So I don't think there is any direct impact for us at this point. We will have to keep observing this on a product by product scheme and if there is any slight movement, I understand that most of our products with all the tariffs are in similar region and similar to India and China, for example. And there were tariffs differential in certain markets like U.S. or Europe. Between India and China, we would begin to benefit. Being mindful of the fact that now we have the operation in China and operation in India, we are well-placed to take advantage of the tariffs and accordingly plan our production and supply chain. So I don't think there will be any adverse business scenario. There may be some favorable scenario, but we will, by and large, be near 0.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [73]

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Then in your key export markets, what have been your experience with the demand momentum?

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

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So again, I think the demand momentum for industry as a whole has been muted, but our performance in the overall industry in the last couple of years has given us a higher priority in the -- as a supplier or vendor, and we continue to grow faster than the industry in our global businesses.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [75]

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And sir, lastly, on the CFF business, barring the synergy you talked about on the overhead front and all, what kind of synergies do you see? Any raw material -- on the cost synergies that you talked about? Are there any -- over the next couple of years, what kind of revenue synergies do you see in the business?

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

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I think the market of CFF is fairly complementary, so there is not so much revenue synergy in terms of their market and our market, market share consolidations. So it's a different market which they operate in. But on the product development, sharing costs, sharing of product development, cross-selling their products in our region and our products in their region. And in terms of procurement management, overall management costs, we see that we can drive synergies. And it has also allowed us to take global account business across major parts of the world. So everywhere between Europe and China except North America and South America we now have operation base. And we can cover and supply any large accounts through Europe, India and China.

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Operator [77]

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The next question is from the line of Rajesh. He's an individual investor.

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Unidentified Participant, [78]

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Sir, I have 2 questions. One is since most of the sales are B2B, is it true that we will not be able to increase the margin beyond a certain level?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [79]

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I think the industry as a whole, while it's B2B, it's very much a consumer preference industry, so end of the day, our business win and loss is based on what the consumers like and what the consumers are willing to pay for each kind of fragrance or flavors. So the margins are fairly stable, and we don't look at ourselves like the commodity vendor for FMCG companies, we are brand partner to develop the product that sells and that creates the wow for their FMCG products. So in that sense, it's not a cost element as much as the brand identity element of creating the product pool. And it is also normally a very small percentage of the overall cost of FMCG products. So we see our margins, and globally, margins continue to be stable around that 20% EBITDA plus level. We continue to be there. With the flip side of that is we need to continuously invest in R&D and continuing to look at consumer and new products and new technologies, which we are doing. And so we are in -- not in a generic me too market. We're very much in a proprietary innovation market.

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Unidentified Participant, [80]

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Sir, as you mentioned, our product costs are -- I don't know how much percent of our customer product cost. Even then, we had first time during last year passing on the increase in the raw material prices. Why is it so?

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

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Because 25% price increase is unusual.

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Unidentified Participant, [82]

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Okay. So that was the reason why they reduced it for some time?

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

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Yes. I mean it is an unusual -- it's a force [multiplier]scenario. And we've been trying to be the best possible scenario that the net impact to the end consumer is minimal, and there is momentum of the FMCG products in our business is all about brand momentum. If you have a big change in the product mix or in the pricing or in consumer offering, then there can often be market share loss. And it is very difficult to regain market share. So we have to be conscious of trying our best together with our customers to protect and grow market shares. But in such a scenario, we are acting as a buffer between the cost increases to -- in the value chain to the consumers.

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Unidentified Participant, [84]

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Okay. Sir, my last question is regarding the GST implementation. We are hearing in a lot of other sectors having lost the cost [EBIT] rates. Many smaller and who are -- smaller players who are in the inorganic segment are closing down. Are you seeing the same thing in this fragrance and flavor segments also?

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

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So in the last call, we've already talked about this churn in the customer mix. I very much see the same trend.

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Operator [86]

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The next question is from the line of [Amar Moria] from AlfAccurate Advisors.

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Unidentified Analyst, [87]

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Sir, just wanted to get -- more on this large-sized accounts of the MNC accounts which you were targeting and you had indicated that they are around this scale and you will see a gradual scale-up. So sir, will this be -- is this kind of account would be the similar margin account? Or you have to use some discounts to gain these kind of clients?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [88]

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So I mean between the clients that have a product type. As volume products typically (inaudible) for gross (inaudible). So as I already mentioned earlier, the larger volume products are at a lower gross margin, but you have lower operating cost per kilo. And at the end of the day, the margin -- net margin on the product remains in a very close bank.

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Unidentified Analyst, [89]

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Okay. So basically, sir, you will be supplying more as a large scale sized product? Because I am also under the impression that we will be also looking for [these tenders] kind of a product where we can squeeze some extra dollars from the client. So wanted to understand how that strategy is working for us, how many patented products are now commercialized in the client and if you can give some sense on that.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [90]

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So we are not in the business of selling our patented products. We use the patented products in our development to make our final products. It is still the patented products that is in-house technology which we use for our development.

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Unidentified Analyst, [91]

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Okay, sir. But then those kind of products, you have extra margin that you make through this kind of technology?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [92]

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So all our products have certain amount of in-house proprietary technology or products. And those are -- they're already kind of in this [sort of proprietary] products is patenting, and the innovation is already part of our product offerings for many years.

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Unidentified Analyst, [93]

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Okay. So basically -- so scale it's the only thing which will bring the margin. Other than that, there is nothing. So basically, we have to sell out something at the client just to get the scale.

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

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I've not really understood your question. Let me reiterate what I'm saying. If you have a product, let's say, 1 tonne in a year. As it grows and it becomes 100 tonnes a year, 1,000 tonnes a year, then the proportionate larger volume products have lower gross margin for the same product. For the same product, as you go higher, the gross margin on the variable cost for the specific raw material and direct cost, it's coming down as a margin, but the operating cost to manufacture that also keeps coming down. So that margin remains the same.

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Operator [95]

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(Operator Instructions) The next questions is from the line of (inaudible) from Prabhudas Lilladher.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [96]

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This is Ajay Bodke from Prabhudas Lilladher PMS. Sir, I have a couple of questions. In the opening remarks, you said that the company is expecting a strong double-digit growth for FY '20. Just a clarification there. With the expected consolidation of the CFF business from the third quarter of the current financial year, I presume that the guidance is ex of that consolidation.

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

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Come again?

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [98]

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Yes. You mentioned that CFF business should get consolidated from third quarter of the financial year. So [if we] leave that aside, on a like-for-like basis, you are expecting that strong double-digit growth for FY '20. Is that the right understanding, sir?

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

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That's correct. It's not on the combined entity growth, it's organic growth like-for-like.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [100]

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Secondly, I think I missed -- in reply to one of the queries, you mentioned the INR 150 crores of free cash flow generation for FY '20. Is that the right number, sir?

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

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That is the target.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [102]

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For the current financial year?

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

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Yes.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [104]

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Okay. And lastly, sir, in the presentation, you mentioned the forays that you have made into 2 new segments. If you could just briefly dwell upon the kind of market opportunity, in the medium to long term that these 2 sort of force multipliers. If I could, sort of be for the company, both the branded small pack segment as well as the industrial use of fragrances, sir?

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

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So the branded small pack segments, we have already been present and continue to be in that market for a number of years, which is roughly percent, 6% to 8% of our total revenue. In that segment, we have made some forays in the e-commerce channels. It's very early to say how much of that business will develop in the e-commerce, but we see that as the new area. I would sort of look at the current business and say 25%, 30% of that, roughly INR 20 crores is potential on e-commerce. That will play out over a period of time, so we see 3 to 5 years ramp-up time. And it could be potentially INR 20 crores, INR 25 crore of extra business with the same current product portfolio. You mentioned and alluded to what we call industrial use of fragrances. So typically, we are broadbasing our fragrance and flavors offerings to areas which are not traditionally fragrance and flavor client of or businesses. This include a wide variety of industrial segments which are popular consuming or sort of variable consumer durables, white goods, automobiles, homes, ambience or everything, construction material, anything which is used in the house, which is kind of the nature of a consumer durable. So a typical industry has always been focused on the FMCG or consuming product where the volumes are higher. But we are also seeing significant traction where fragrance or -- and/or flavor can create USP in the industry which is historically not a fragrance and flavor industry, so textiles, automobile, all the consumer durable. Or eventually, these products are consumed by consumers where the fragrance and flavor is important part of the product offering. But they are not of a nature of every month consumptions, so they will be capital groups kind of a nature. And we have seen good traction in this segment. We are putting additional research on delivery systems, on fragrances and flavors to encash on this trend or create this trend in the market.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [106]

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So what is the current capacity utilization of the Mahad unit?

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

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For the Mahad Unit, it is at around 75% capacity utilization.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [108]

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And how do you see the ramp-up there?

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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 are comfortable at the 75% capacity utilization.

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Operator [110]

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(Operator Instructions) And that was the last question. I would now like to hand the conference back to the management team for closing comments.

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

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Thank you. I hope we have been able to answer all your questions at this time really. Should you need any further clarification 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 [112]

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Thank you very much. On behalf of S H Kelkar and Company Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.