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Edited Transcript of SHK.NSE earnings conference call or presentation 6-Nov-19 5:30am GMT

Q2 2020 S H Kelkar And Company Ltd Earnings Call

MUMBAI Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of S H Kelkar And Company Ltd earnings conference call or presentation Wednesday, November 6, 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

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Conference Call Participants

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* Ajay Bodke

Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst

* Ashok Shah;LFC Securities Pvt. Ltd.;Analyst

* Chetan Gindodia;AlfAccurate Advisors;Analyst

* Dhavan Shah

ICICIdirect.com, Research Division - Research Analyst

* Dhiral Shah;PhillipCapital;Analyst

* Naitik Mody

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

* Rohit R. Nagraj

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

* Swarnabha Mukherjee

Edelweiss Securities Ltd., Research Division - Research Analyst

* Ambareesh Baliga

Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research

* 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 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.

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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 Q2 and H1 FY '20 Earnings Conference Call. We have with us Mr. Kedar Vaze, full-time Director and CEO; 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 hand the forum 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'd 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 today to discuss the operating and financial results for the quarter and half year ended 30th September 2019. I will begin by taking you through the key highlights of the period under review and we will then look forward to taking your questions and suggestions.

We have delivered a stable set of results during the quarter and half year ended 30th September 2019 despite subdued sentiments witnessed in the domestic market. On a consolidated basis, our revenues from operations stood at INR 548 crores in H1 FY '20 as against INR 518 crores in H1 FY '19 registering a growth of 6% year-on-year. Quarter 2 FY '20 revenues came in at steady INR 276 crores compared to INR 282 crores last year.

While the external demand environment was tricky, we witnessed increased client engagement with existing and new FMCG customers. All of this translated into account wins in the Fragrance division across product categories, especially Beauty & Personal Care, fresheners -- Car fresheners, Air fresheners and Soaps during this quarter. As these products grow in the market, we anticipate improving contribution to sales performance in the future.

On the profitability front, EBITDA during H1 FY '20 grew by 10% to INR 87 crores. EBITDA margins stood at 16% higher by 66 bps. In quarter 2 FY '20, EBITDA stood at INR 39 crores with margins at 14%. The company expensed nonrecurring costs of approximately INR 4 crores owing to higher employee costs and other expenses during the quarter. Similar initiatives will be undertaken in second half of FY '20, which will further see expensing of nonrecurring costs. These costs pertain to internal reorganization of teams and incentive structures to make them more variable in nature. These costs once expensed are expected to sustainably alter the fixed and operating expenses to a more variable structure. This would help the company maintain its normalized margins through varied business cycles and incentivize the teams and prepare the organization to navigate through change in the operating environment, which we have been seeing.

The operating environment has regularly seen large changes with accelerated velocities over the last couple of years. With these initiatives, we will strengthen our growth outlook related to market growth and prepare for the future.

The PAT in H1 stood at INR 34 crores and was INR 15 crore in quarter 2 FY '20. Interest costs increased to INR 14.1 crore and depreciation stood higher at INR 25.3 crores in H1, primarily owing to the commissioning of the new facility at Mahad and the adoption of new accounting standards.

On the raw materials front, the environment in the global market saw early signs of stabilization during the first quarter. By mid-September 2019, the raw material pressure had largely eased out and is currently in a fair state of normalcy. This has led to stable raw material prices and better availability of key raw materials.

Moving to our segmental performance. The Fragrance division delivered a stable growth in H1. While the Domestic Fragrance grew by 2%, company's international segment registered a growth of 20% year-on-year. In quarter 2 FY '20, the Domestic Fragrance degrew by 6% on account of subdued sentiments and base effect vis-à-vis last year and international segment marked a healthy growth of 15%.

Operating profit during H1 stood at INR 63 crores against INR 66 crores in H1 FY '19. In quarter 2 FY '20, operating profit stood at INR 27 crores as against INR 37 crores in quarter 2 FY '19. As the raw material situation normalizes, the division should deliver stabilized operating margins over the long term.

In our Flavours division, we reported a subdued performance during the period. The revenue during H1 FY '20 stood at INR 49 crores as against INR 53 crores in H1 FY '19. The domestic business, in particular, degrew by 28% while overseas marked a growth of 20% during the period. Particularly in the quarter 2 FY '20, the increased momentum in the overseas business delivered a healthy 20% year-on-year growth. The domestic segment, however, degrew by 54% in the quarter 2 based on a base effect, particularly seasonality linked to Diwali versus the increased uptake for Diwali last year.

In H1 FY '20, the segment recorded an operating profit of INR 6 crores with margins at 13%. In quarter 2 FY '20, operating profit stood at INR 3 crores. Going forward, we expect to report better results for this segment in H2 FY '20 as well.

I'm also happy to share that the promoter group during the quarter has increased their stake in the company, purchasing 2 lakh shares. With this, the total promoter holding now stands at a healthy 57.5%. In another development, promoters have also released 55.5 lakh pledged shares with a balance of 33,000 shares yet to be revoked, which will be released in due course.

In conclusion, looking ahead, various pro-growth measures undertaken by the government to boost demand and investments in the country should lead to better consumption and enhanced consumer sentiments. Along with the raw material situation easing out, the availability of key raw materials will help out the company long term to improve profits and margins. In addition with the company's initiative to improve working capital and operating cost efficiencies, we should see strong robust cash flows in the business. We continue to see great potential in our present business across all categories in the medium- to long-term perspective.

Overall, we look forward to scale up and grow, deliver improved performance in the upcoming quarters.

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 Ajay Bodke from Prabhudas.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [2]

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My first question is, in the last conference call held in August, you had stated and I quote you, "as I've mentioned in the last call, we are hopeful of a strong double-digit growth, both in volume and bottom line for the year, domestic as well as export. We don't see any change from that." With a 6% Y-o-Y increase in total operating income in the first half FY '20, even if we assume not such a strong double-digit growth, a growth of just 11% or 12% for the full year, it implies a second half growth of between 15.8% to 17.8% on a Y-o-Y basis in second half FY '20 over FY '19. Looking at the current environment, do you feel that it is achievable? If not, is there a case for you to tone down the guidance that you had given as late as August 2019? That's the first question.

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

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So I think the question is very appropriate. And I think I want to put this in a broader context of where the company is and what we are doing. Because -- let me start with what is the raw material situation. As we spoke in August, vis-à-vis mid-September, many of the key raw materials have decreased prices and availability has changed completely dramatically, in some cases as much as 100%, 200%. So things have changed very dramatically over the last 1.5 months on the raw material side. And on the demand side, normally September. So when we were talking last in July, August, we are looking at the normal uptick pre-Diwali, particularly in the Flavours. This year, there has been 0 uptick in the sales of Flavours I think largely due to prolonged rains in parts of the country where the typical beverage market is not picking up and has a very flat uptick in Diwali. So last year versus this year, 6% growth on the first half of last year is also -- it's trending faster than 6% year-on-year for last year. And we believe that our underlying growth continues to be there vis-à-vis the market. And we are still hopeful of more than 12% year-on-year growth. I also want to track here that while the volume growth of 12%, I'm reiterating that we are on track because comparing the first half versus this year first half, if you look at the second quarter last year, we had an exceptionally high growth in pre-Diwali and then third quarter was on a lower level. I'm still hopeful that the volume indication -- and I would say, if I was 95% level of confidence in August, we are maybe at 90% level of confidence now. But volume growth is still there. We are witnessing that. We have good new wins in the pipeline. The main issue, which I think we are correcting for is a possible selling price correction in some of the products because of the changing raw material scenario. And we will track that in correcting our operating cost trend accordingly. So the view is still the same. I think we are still trying to get the same bottom line. We may have the 12% volume growth, but 12% volume growth may not translate exactly into 12% revenue growth if we have pricing both on cost and sales decline to the extent that we are seeing at this point. I also think that the decrease in prices, as with most things, also overshoots and is overexaggerated. And this is not something we will expect to remain like this. So we are very cautious. And our target for the end of the year still remains 12%, both volume and revenue.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [4]

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So essentially, as you said, the target will remain 12% value growth, strong volume you are confident, you'll try to maintain 12% value also as you said in the concluding remarks right now, which will imply a very strong, as I said, 15.8% to 17.8% second half growth on a Y-o-Y basis. And my second question, sir, in the call in August, you had also mentioned, and I quote, "debt levels more or less at the same level in the end of March as it was at the beginning of the year. This implies almost INR 150 crores of free cash flow generation and reduction in debt through the year. We are confident to achieve that number and run that through the system." If I look at the first half FY '20, the free cash flow generated by the company is a meager INR 12.6 crores, cash flow from operations of INR 27.6 crores and a CapEx of INR 15 crores, giving a free capital of INR 12.6 crores. Are you confident that in the second half FY '20, the company will be able to achieve INR 137.4 crores of free cash flow?

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

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I think if you look carefully at the numbers, we've already taken steps on the inventory and the inventory reduction vis-à-vis last quarter and we are seeing the downward trend. As the cycle of payables and inventory normalizes, we have already reduced roughly INR 30 crores of -- we have freed up INR 30 crores of cash flow from operations, which will come in, over and above the operating profit that we generate for the balance 6 months. In addition, we have large number of taxation-related dues, which are due to be refunded. And that is something which we are progressing and talking with our respective taxation officers. So with the operating cash flow and the tax revenue refunds plus the working capital, I think we are still confident to meet our working capital targets.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [6]

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INR 150 crores of free cash flow you're still maintaining for the full financial year FY '20?

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

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That's right.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [8]

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Okay. And sir, on the debt side, the net debt has moved up from INR 348 crores as of end first quarter FY '20 to INR 400 crores as of end second quarter FY '20. And your cash levels also have moved down from INR 75 crores to INR 44 crores. So do you still maintain that by the end of the financial year, the debt levels will be lower than what they were at the beginning of March?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [9]

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As we mentioned, we are on track for INR 140 crores, INR 150 crores cash flow generation in the balance of the year. And we will remain largely close to the March level, give and take INR 5 crores or INR 10 crores.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [10]

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Okay. Sir, lastly, in the opening remarks, you said that in the second half, there'll be further nonrecurring costs to come. Would you be able to quantify what number you have in mind on recurring...

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

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I think what we are relooking in terms of our long-term strategy and way of operating the business and the business model to factoring faster changes, both of upsides and downsides and differential growth rates in different parts of the world and different business segments. So our objective in this restructuring is to make more agile business units that can quickly respond to any changes that are happening. So these are things that we have been looking at the last 2 years. And I think the environment globally and as well as in the domestic market is very fast-changing. And what we are looking at is to redo the underlying business practices and cost structures and people teams in a manner that we are better able to respond to changes on a localized level. So if something changes in China, we don't need to change everything in our business model and people and the entire structure, but we can change just one part of the organizational working and the same across different business units. So our objective in this is to -- I mean we don't have a specific -- quantified specific point. We will change in the next 2 quarters to better reflect what is the business reality of the future that we have to factor in faster changes and higher rate of change, and accordingly make our business robust through bigger cycles of change.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [12]

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So this INR 97 crores of intangibles and goodwill that you have in the balance sheet, will there be any charge related to that in the second half?

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

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On the Mahad facility, which we have alluded, most of the production is now moved to India. We will have a look at the facilities in Netherlands with what are the alternative business opportunities there and then work out the basis. So there is no specific goodwill or specific hit, which will be charged out, but we will retool the facilities as we do. Most of the goodwill is in terms of the acquisition, which is being amortized on a regular basis.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [14]

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And the acquisition that you intend to line up for the second half, complete the acquisition in the second half. Any assumption of debt for that?

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

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As we are looking at that carefully at this moment, I don't have a fixed number on that. We are evaluating the time lines and the finalization of that. Just to add, we have already added and kept -- taken some of the key management resources, we have our team for the acquisition ready, both in term of integration and in term of managing the business. And we will then outline with the current partners and selling shareholders a time line and details of when we acquire and conclude the transaction.

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Ajay Bodke, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [16]

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My submission is that, as I'd said in last quarter also, if you could crunch the time line between the announcement of results and the conference call, I think it will be very well appreciated by the minority investors. Thank you very much, sir.

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

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Thank you.

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Operator [18]

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The next question is from the line of Ambareesh Baliga, an individual investor.

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Ambareesh Baliga, Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research [19]

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Just a couple of questions. First one is, I mean, what is the nonrecurring cost of INR 4 crores which you've written off? Although you explained to a certain extent, I mean, I can understand reorganization of the structure, incentive based on performance, but does it mean that there is some onetime payoff to certain employees? Or is this some sort of a separation cost because, I mean, for reorganization, I'm just wondering as to...

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

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Exactly. That is the nature of the cost. So there is early retirement, separations and changes in the leadership that we have undertaken. So accordingly, early payout or separation cost has been taken.

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Ambareesh Baliga, Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research [21]

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Okay. Okay. And you have stated a similar cost again in the second half or second -- of the next quarter.

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

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I think we have no quantified number, but in the process, we will have some nonrecurring costs in the next 2 quarters. And then after that, we will be on normal basis basically completing our -- to the new organization structure.

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Ambareesh Baliga, Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research [23]

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Okay. Okay. And just want to check out and see what is your progress on your private label because if I'm not wrong, you've been having your private label since the last couple of years. But have you really seen some sort of -- decent sort of volumes in that? Because, I mean, I only see those private labels in exhibition.

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

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So I think the private labels that you're alluding is our retail business. 5%, 7% of our total revenue is historical business. We also use exhibitions and the demonstrations to further illustrate new concept products, new products, get some consumer tests of those. If you have visited one of those exhibitions, this is largely a new business development venture -- marketing venture than retail business foray for us. So we are not in retail. We continue to participate in some of these retail with product demonstrations. And most of these lead into concept generation for potential clients or entrepreneurs, are still looking for new things or new businesses. So it's a kind of a new business development venture for us.

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Ambareesh Baliga, Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research [25]

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Yes, but do I understand that there is not much of focus on retail as such?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [26]

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So we are actually suppliers to most of the retail customers, so we don't compete with them. Our objective is to understand, go to the consumers, do some limited consumer test to some products. So we do have sales online of limited editions or things like this or we do have our small branded fragrance oils that we sell, right? These are not our main products.

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Ambareesh Baliga, Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research [27]

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Yes, this will never be a focus area even going ahead, I suppose?

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

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That's right.

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Ambareesh Baliga, Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research [29]

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Okay, fine. And as far as your Mahad plant is concerned, somehow, I mean, despite starting operations, I'm not really seeing, I mean, additions either in the top line or improving of your margins. So, I mean, what sort of a capacity utilization arrangement is there in Mahad?

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

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The Mahad facility together with the China facility is at 75% plus capacity utilization. It will be probably appropriate at some point in the future when we have maybe a full year of Mahad running that we can put out the comparables vis-à-vis the business comparable time frame in the past. So I think what we had stated to have a EUR 2 million cost saving, we have by and large been able to achieve that. It has been spread over a period of different financial years and quarters. So it's not feasible at one go. But as we speak, the Mahad facility is up and running to the desired level. Like any other production facility, when you have a new facility, there will be teething troubles. There are learnings on the new facility, and we will continue to improve the costs and improve the facility going forward. But it is at the desired level of operation cost and operation output. So we are very happy and pleased with the Mahad facility being come on.

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Ambareesh Baliga, Way2Wealth Securities Pvt. Ltd. - COO of Institutional, Wealth Management & Research [31]

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Okay. So, I mean, can I assume that possibly the operation efficiency of Mahad has been negated by the sort of raw material price increases in the recent past?

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

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In a way, yes. In a way, also because we have been running the PFW facility and the China facility in parallel with the Mahad facility. And when we completely move and don't make the product in multiple locations, then we will have a better OpEx efficiency.

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Operator [33]

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The next question is from the line of Chetan Gindodia from AlfAccurate Advisors.

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Chetan Gindodia;AlfAccurate Advisors;Analyst, [34]

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Sir, can you quantify the amount of nonrecurring costs that you said, the onetime costs that is included in our Q1 results -- sorry, the first half results?

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

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So I don't have a specific quantified number because the costs are -- overall costs of the organizational changes. So it's not specific number. In totality, we have a couple of one-off costs. There has been additional freight of material movement as the Mahad facility has come onstream fully. We have had to move material back and forth between the Mahad facility and the various stock points across the world and the people and changes in terms of the organizational changes. So in total, I would say, between the people and the one-off freight and relocation costs, we have about INR 6 crores of nonrecurring costs in the third quarter -- in the second quarter, sorry.

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Chetan Gindodia;AlfAccurate Advisors;Analyst, [36]

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Okay. The INR 6 crore is including freight and both employee costs?

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

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Yes, this is everything. So there are various smaller heads and larger heads, but the same activity of changing the business into the new business.

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Chetan Gindodia;AlfAccurate Advisors;Analyst, [38]

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Okay. Okay. And sir, towards our EBITDA margin, so how should we look at our EBITDA margin from -- after this reorganization exercise?

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

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I think we have already indicated an 18% level of EBITDA is where we wish to be. And we are progressively sort of -- if you look at the non-one-off costs and we will be there within the next 1 quarter or 2 quarters. And after the restructuring costs, which we -- or nonrecurring costs, which we expect to hit these 2 quarters, we should be in that 18% to 20% EBITDA level.

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Chetan Gindodia;AlfAccurate Advisors;Analyst, [40]

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Okay. And sir, about your cash flow that we are generating this year, our targeted free cash flow rate of INR 150 crores, so that would be going towards debt repayment?

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

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Largely.

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Operator [42]

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(Operator Instructions) The next question is from the line of Ashok Shah from LFC Securities.

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Ashok Shah;LFC Securities Pvt. Ltd.;Analyst, [43]

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Sir, we have started with incentivizing schemes for our employees. So what type of benefits we expect to derive from this?

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

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We've already -- so every organization and every employee participation has some level of incentive or variables. We are just ensuring that we have a more focused approach that the variable is more linked to the performance of the company or business units.

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Ashok Shah;LFC Securities Pvt. Ltd.;Analyst, [45]

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So is it applicable to [what's say] if they do not perform then?

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

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It's not the 0 or 1. It is more variable. It's not like 0 and then suddenly if you perform, you get 100%. There is a variation. So we are making it more variable than previously.

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Ashok Shah;LFC Securities Pvt. Ltd.;Analyst, [47]

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And also, sir, when I seeing this performance-wise, this variation, the promoter remuneration is on the higher side. So is there any thought on reducing the promoter remuneration, which is impacted?

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

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I will refrain from commenting on this. I will take your comment to the non-rem committee who can relook this and evaluate that.

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Ashok Shah;LFC Securities Pvt. Ltd.;Analyst, [49]

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Similarly, what was the aim to buy back the share at such a high premium when we have -- already have a debt, which is to be serviced and we fork out the cash by increasing the debt or similar way?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [50]

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I think there are various ways to look at it as we have a very strong confidence on the cash flow of the business and we don't see that this is unreasonable price and/or wrong timing of doing the buyback.

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Ashok Shah;LFC Securities Pvt. Ltd.;Analyst, [51]

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So again, the prices have gone down. So would you think the company would be again contemplating again a buyback because it's not near the INR 180 price, which is also buyback price.

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [52]

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I don't have any immediate view on that. The Board will consider at an appropriate time what is the best method of distributing profits to the shareholders.

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Operator [53]

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(Operator Instructions) The next question is from the line of Dhavan Shah from ICICI Securities.

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Dhavan Shah, ICICIdirect.com, Research Division - Research Analyst [54]

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Yes, I have a few questions. So some basic questions. So I got the overall capacity of our plants from the annual report of '18. So would it be possible to share some revenue contribution based on the different plants, like Vapi?

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

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It's a little bit difficult to quantify revenue because there is a host of intercompany production and parts made in one factory and the final thing maybe in another factory. So it's difficult to quantify revenue to each factory. We can try to ascertain, I will see if we can give you a better data in the upcoming reports. But it is very difficult to ascertain because products are made in various factories and supplied to each other and they are converted to a final product. So it's not one product made in one factory.

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Dhavan Shah, ICICIdirect.com, Research Division - Research Analyst [56]

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Right, right. But suppose if I talk about the current quarter number, so can you share the volume growth or maybe the price growth? Any differentiation between those 2? I mean that could be a degrowth, but if you can share the numbers?

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

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I think vis-à-vis last quarter to this quarter, there has been almost no price increase. There has been 1% or approximately 1.5% price decrease. So you have a 6.5% volume growth and a 5% or 7% volume growth and a 5.5% value growth.

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Dhavan Shah, ICICIdirect.com, Research Division - Research Analyst [58]

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Okay. And in terms of EBITDA per ton, would it be possible for you, I mean, for this Flavours and Fragrance or maybe the aroma chemicals, how is the EBITDA per ton...?

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

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As the products are vastly different, so there is no specific product. Each product is tailor-made, so there is no per ton, per kilo kind of a calculation. It is on a per sale basis. So we do total revenue and a percentage of that revenue.

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Dhavan Shah, ICICIdirect.com, Research Division - Research Analyst [60]

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Okay. And can you share some key raw materials?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [61]

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So we have already shared earlier. Our main 4 feedstocks in the industry are coming from the turpentine wood processing, CSP or turpentine, petrochemical inputs like Sitral. Then we have the natural citrus oils like orange and lemon. And then we have a host of natural products, which are -- very large number of products coming from all over the world, which are the nature of herbs, spices, fruits, bark, natural products, which are grown or found in different parts of the world and are expected for perfumery and flavour use.

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Dhavan Shah, ICICIdirect.com, Research Division - Research Analyst [62]

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Okay. Okay. And how is the price scenario of these few raw materials?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [63]

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So the price scenario has been -- so 2 years ago, the prices had skyrocketed. I think today, we are seeing somewhat normalization of the prices. It's individual, there are 1,200 ingredients. So it's line by line, individual by individual. But I would say that we are more in line with the normal long-term trend than to have a force majeure or elevated pricing.

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Dhavan Shah, ICICIdirect.com, Research Division - Research Analyst [64]

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So our sales contract is long-term contracts, right? So, I mean, the prices are fixed at the beginning of the year or how does it work? If you can share because -- I mean, and have you built up any inventory or the low-cost inventory will come in the coming quarters?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [65]

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So we have normally a 3-month to 4-month lag between the raw material -- so inventory between -- so if I look at inventory days, we have 120 inventory days, which is on a higher side. But effectively, we have roughly 4 months to 5 months of inventory in the system, so between raw material, WIP and finished goods. And it will take anywhere between 2 months to 3 months before the price, corrections, both upwards or downwards, start to play in cost corrections for us.

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Operator [66]

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(Operator Instructions) The next question is from the line of Naitik Mody from Ohm Portfolio Managers.

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Naitik Mody, Ohm Stock Broker Pvt. Ltd., Research Division - Research Analyst [67]

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Sir, in quarter 2, under our Flavours division, our revenues have degrown by 25%, but our margins have doubled. Can you please explain that?

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

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Yes. So I think last year, we had very depressed gross margins, if you look at it from a raw material scenario. And this year, we are seeing more normal gross margin levels.

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Naitik Mody, Ohm Stock Broker Pvt. Ltd., Research Division - Research Analyst [69]

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Okay. So this is a sustainable level?

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

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I believe so. I think we are on both Fragrances and Flavours around the 40 to 45 gross margin level and I think this a long-term sustainable level of our business.

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Naitik Mody, Ohm Stock Broker Pvt. Ltd., Research Division - Research Analyst [71]

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Okay. But the same thing does not seem to have played out in your Fragrance business, even if I exclude INR 6 crores of onetime costs.

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

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On the gross margin level, I think we are on the 42 ballpark number. And the expenses and the onetime expenses are the one where the expense line is much higher.

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Operator [73]

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(Operator Instructions) The next question is from the line of [Ramesh], an individual investor.

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Unidentified Participant, [74]

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My first question is regarding Fine Fragrance, which was around 2% of our total business as of Q2 FY '18. And we have a target to reach around 10% within 3 years. So we are down -- already we've crossed 2 years. So where do we stand as on date?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [75]

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I think the Fine Fragrance's business in the export market is continuing to grow. We will not reach the 10% level in 3 years, but we will hit much higher number than the 2%. As of now, after 2 years, we are at roughly 4% and we should end up between 6% and 7% for the next year.

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Unidentified Participant, [76]

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Okay. Sir, the second is about launching the company's Fine Fragrance products here in India and India's products there in the European countries. So at what stage we are as on date?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [77]

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So there are already product wins and products which we have been put out both in Europe from Indian origin ingredients and others and for India fragrances from our Italian partners have been put out to the customers. Revenue streams are small at this point, but the wins and the kind of response for the products are good.

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Unidentified Participant, [78]

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Sir, during last quarter, we had launched our products for the new segments like Industrial Fragrance and automotive sector and all. How is the response for those products?

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

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So there is -- I mean, the industrial demand is slow, in general, and we are no exception to that.

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Unidentified Participant, [80]

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Okay. Sir, in spite of all these changes right from last year of the raw material and this year regarding the demand, are you still hopeful of reaching the 1 billion target in the next 6 years or 7 years?

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

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I think we are focused on making sure that we are in good shape in the next 4 quarters. After that, I'm still very positive about the underlying long-term initiatives, product development, long-term things that we have continued even in these last 2, 3 difficult years. So we are on track to have all our readiness for the 1 billion. At this point, it is also in all our strategic discussions with large global MNCs, all our product development, new molecule, patented technologies, patenting is continuing in desired manner. So strategically, long term, we are doing everything that we need to do to reach our goals. In the short term, last couple of years, we have had a lot of macro headwinds. And we are now gearing up to be leaner and ready to have these changes factored in a faster manner. But on the long-term direction, there is no change.

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Unidentified Participant, [82]

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Okay. Sir lastly, which I should have asked you in the beginning itself, the raw material prices, which you have mentioned, there was sudden and downward reduction. Do you foresee further reduction in the prices due to drop in demand also?

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

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No, I don't think that there is any further reduction in prices. I think the raw material and most things, there is a knee-jerk reaction both upwards and downwards, which is often exaggerated. And in 1 month, 2 months, things streamline or come down to more normal levels. So in my earlier comment, I was only alluding that the pace of change, which has been witnessed by the industry and global business and economies, has been very fast. And in a matter of 25, 30 days, majority or major changes in raw material or demand scenario can occur.

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Unidentified Participant, [84]

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Okay. So -- but whatever the growth you have projected for the second half, to that, you have already accounted whatever the variation in these raw material prices?

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

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At this moment, no. We have indicated annualized year-on-year growth of 12%, both volume and value. So if there is a consistent erosion on raw material, then we need to correct our selling prices in some cases. We will see some value drop. We will try and compensate with increased volume sales. But as of now, we are looking at a steady 12% year-on-year vis-à-vis the last year.

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Unidentified Participant, [86]

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Sir, is it fair to assume that if the prices move up slowly gradually, then either price dropping down or increasing and transferring it to the customer happens without any problems. Is that is the correct assessment?

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

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That is correct. I think when the changes are like plus/minus 30% in 1 month, we are to absorb the hit and we cannot do any changes to the clients. So we are basically working on a fixed monthly or annualized average costing in our discussions with the clients.

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Operator [88]

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The next question is from the line of Dhiral Shah from PhillipCapital.

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Dhiral Shah;PhillipCapital;Analyst, [89]

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Sir, I have a few questions. So what is your current capacity utilization?

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

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I think we have already put that out. The capacity utilization is roughly 50% for the Mulund and Vashivali facilities. We are at 75% for the other facilities. And the Netherlands facility is at a low production level at this point.

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Dhiral Shah;PhillipCapital;Analyst, [91]

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Okay. Okay. And sir, so with this current gross block, which we have, what kind of revenue we can generate at optimum utilization?

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

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So the revenue to capacity mix in the industry for most of the formulation business is a 15% increase in the volume business double the revenue.

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Dhiral Shah;PhillipCapital;Analyst, [93]

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So what will be the exact turnover, sir?

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

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Roughly 1.5 to 1.7. We don't have asset turnover measurement as a very big important criteria because investments are made on a 2-decade kind of horizon. So Domestic Fragrance, our last investment prior to this factory, was in 2000 -- 1984 and we did our new investment in 2004, 2007 period. So 2009, it was fully commissioned. 10 years, we are basically with the same facility. And I think another 20-plus years, we will be able to sustain and continue the Fragrance operations in the same facility.

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Dhiral Shah;PhillipCapital;Analyst, [95]

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Okay. Okay. And sir, just lastly, sir, why we need to keep an inventory of almost 4 months?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [96]

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This is the nature of the business. There are areas, products, which are available only once a year. So we keep that whole -- the inventory for the full year. Plus, we are keeping normal 2 months to 3 months of inventory of finished good raw material to offset the changes in terms of demand forecast, variability. We're relooking this as we speak and try and optimize and make it lean. But anywhere between 90 days to 110 days is a very normal working capital cycle for our business.

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Dhiral Shah;PhillipCapital;Analyst, [97]

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Okay, sir. So is there any chance to bring down the working capital days?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [98]

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We've already alluded. If you go back in history, we've been trying to look at 10 days per year reduction in working capital. And we have been hit by the force majeure and unavailability of material in the last 2 years. We will come back to bring down the working capital to 120 days, 130 days level over the next few quarters.

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Dhiral Shah;PhillipCapital;Analyst, [99]

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And currently, it is how much sir? 160 days, 150 days?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [100]

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That's right.

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Operator [101]

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The next question is from the line of Swarna Mukherjee from Edelweiss.

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Swarnabha Mukherjee, Edelweiss Securities Ltd., Research Division - Research Analyst [102]

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So most of my questions have been answered. But just one question on your growth guidance. Just wanted to understand whether this 12% growth guidance is coming from the demand resurgence that may happen in the FMCG industry going forward? Sir, also does it account for any additional volumes that you will get from the new wins that you have mentioned?

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

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So I think the 12% is a combination of underlying volume growth of the existing business and a number of new wins, which we have already clocked in the last year. So everything which has started business in the second half of the year, we will have a full year effect of that. Plus, what are the businesses have initiated and began in the first half of this year, we'll have the second 2 quarters. So I would think it's a combination of all these 3 factors. In addition, we have a specific targeted or specific new wins of large volume, which we have ready to be commercialized and any of them coming on stream will add a percentage point of growth for us.

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Swarnabha Mukherjee, Edelweiss Securities Ltd., Research Division - Research Analyst [104]

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Okay. Okay. So just a follow-up on that sir. On the new segments that you have been entering in the recent times, would you be able to guide on the kind of opportunity size that they may have, which you might be able to capture on going forward over a medium-term horizon, sir?

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

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So I think the question is how the consumers perceive these changes or new products. So potentially, it could be a very large business, maybe even potentially INR 250 crores to INR 300 crores of revenue, all the industrial products that we alluded to. This is in a very nascent stage. And it will take -- it really depends on the customer and the consumer's feedback and how these products are appreciated and they get picked up by the consumers, and the business on a full potential basis is easily INR 250 crores to INR 300 crores. We are quite conservative and look at next 3-year to 5-year horizon where we look to do maybe 20% of that business.

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Operator [106]

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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 [107]

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Sir, you mentioned that during the first half, our international sales have grown by about 20%. So what is the factor which is driving this particular growth? And is it possible to maintain similar momentum in second half as well?

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [108]

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So I think between the domestic and international, if you look at last year's number, the domestic business was very strong momentum in the first half, especially second quarter. And the international business had momentum recovery in the second half of the year. So we are continuing with the international trend line and the growth. Vis-à-vis year-on-year comparison, I think in the second half, the international business will look at a much bigger base. So we will see some returning to sort of a lower number than the 20% in the first half. At the same time, the domestic base effect will mean that our growth rates on the domestic are higher for the second half and the international will look lower. But on the product by product, country by country, when you look at the product level, we are seeing strong double-digit growth on both the segments, international as well as domestic, excepting we have seen no uptick on the Diwali or festival season, which normally we expect in months of August and in September.

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Operator [109]

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

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Kedar Ramesh Vaze, S H Kelkar and Company Limited - CEO & Whole-Time Director [110]

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Thank you. I hope we have been able to answer all your questions satisfactorily. 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 [111]

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