CCL Products (India) Limited (519600) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CCL Products (India) Limited Q3 FY '20 Results Conference Call hosted by Nirmal Bang Equities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Punmiya from Nirmal Bang Equities. Thank you, and over to you, sir.

Yes. Thanks, Aisha. On behalf of Nirmal Bang Equities, I would like to welcome you all to the 3Q FY '20 Results Conference Call of CCL Products (India) Limited. The management is represented by Mr. Challa Srishant, Managing Director; Mr. K. V. L. N. Sarma, COO; Mr. V. Lakshmi Narayana, CFO; Ms. Sridevi Dasari, Company Secretary; and Mr. P.S. Rao, Consultant Company Secretary. I would now hand over the floor to Mr. Challa Srishant for his opening remarks, which will be followed by a Q&A session. Thank you, and over to you, sir.

Thank you, Vishal, for the introduction. The group has achieved a turnover of INR 302.72 crores for the third quarter of 2019/'20, as compared to INR 234.07 crores for the corresponding quarter of the previous year. And the net profit is INR 47 crores as against INR 32.60 crores. The EBITDA is INR 84.83 crores and the profit before tax is INR 68.71 crores. For the 9 months ended, the group has achieved a turnover of INR 874.57 crores as compared to INR 819.28 crores for the corresponding period of the previous year, and the net profit is INR 123.74 crores as against INR 119.25 crores. The EBITDA is INR 216.67 crores and the profit before tax is INR 167.64 crores. The guidance that we had given for the beginning of the year, we are still maintaining the same guidance. And the MEIS clarification is something that we have received at least until this financial year-end. So there's a 5% incentive that's going to continue until 31st March as opposed to the earlier 7%. We can go for the questions now.

[Operator Instructions] The first question is from the line of Jignesh Kamani from GMO.

I just want to check on the Indian operation. We have reported very healthy margins. Is it purely because of the ramping up of the new freeze-dried unit or in the Duggirala, the existing unit also we've seen better product mix, which may not be sustainable throughout the year.

No, no, it's mainly because of the new freeze-dried unit coming around.

So as the ramp-up in the freeze-dried, the current margin will be sustainable or can be increased?

No, it will be sustainable.

Understood. Second thing on the Vietnam, there's been not much ramp up on the profitability of the Vietnam. Are you continuing to face any challenge in terms of a customer ramp up there?

No, we are more or less operating at kind of an optimal capacity over there as of now. And that's also one of the reasons why we're going in for an expansion next year. Currently, the product mix that we have has resulted in a slight reduction in our production output, which is why the -- I mean there is a growth, and there will be a growth this year compared to the previous year. But from next year onwards, if we have to meet the demand that is constantly increasing, we have to go in for expansion which is what we are hoping should be completed by quarter 1 of next financial year.

Sure. And second thing, on the freeze-dried capacity, 2 or 3 new supply has come in freeze-dried in the last 1 year and you already mentioned that it might put some pressure on the pricing. How is the current scenario on the pricing and the profitability of freeze-dried versus 1 year ago?

Compared to 3 years ago, there has been a reduction, but compared to 1 year ago, it's maybe a very slight reduction is there. In fact, there are other plants that have come online as well. And in the market, there are enough suppliers of freeze-dried, which is why that pressure is likely to continue in the future as well.

The next question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Sir, my question is on the revenue growth of 29%, I mean if you can talk a bit more on how much of this has been contributed by volumes and is there a pricing angle to it? And given that we have added capacity recently in the India operations and planning to add capacities in Vietnam, how do we see the demand environment to absorb these capacities? So if you can throw some color on that.

Hello. Yes, so this year as well, whatever volumes that we are seeing now is part of our normal standardized operations. What we had projected at the beginning of the year is based on the order book. And we've done our contracts and everything also well in advance. Typically, most of our bigger customers, we do contracts about 6 months to 12 months in advance. And we are doing the same thing, which is why we were able to project this earlier as well.

Yes. So this volume growth will also continue going forward. So the capacity absorption wouldn't be a problem.

Yes, it will.

And on the capacity expansion that we're going to see in Vietnam. I mean one, I think, is that the growth has been more moderate compared to the Indian operations, as you had told earlier. Can you give some color on how do we see the operations over there, probably having new capacity come in next year? How much of capacity is going to be put? And what is the kind of CapEx requirement would be there?

We're investing around about $8 million to enhance the capacity for an additional 3,500 tonnes. And this should be completed towards the end of first quarter. So the balance 3 quarters, we will start using this additional capacity as well for executing the orders. And we are expecting to reach at least -- with the enhanced capacity, next financial year also we are targeting maybe around 75% utilization or so.

Sir, finally, from my side, the brand that is Continental Coffee, I mean currently, what is the size of the brand? I mean where do we see the footprints across? And going forward, what is the kind of scale that we see here? And how much of the investments you would continue to pursue on the brand expansion?

Yes. I'll just hand over to Praveen. He can answer this.

Hi, it's Praveen this side. On the branded business, like we had detailed out last time, we started our operation in the southern part of India which is the large coffee market. And it's been like now -- last year, we started building the distribution, we started building the business. And this was the year when we started to work on the brand awareness creation and offtake creation. So on the domestic business, we will be -- I'm just giving you a broad guidelines so that you'll get an idea how this is faring and where is this going to head towards. So in totality, we will be ending the year close to INR 100 crores that we had -- we had given the guidance for in the earlier conversations. And out of which, more than half now will be contributed by the brand, brand business alone. So we will cross a figure of around INR 50 crores this year for just the branded business. So that's been quite a significant stride when we look at creating a brand and the business out of it. So just to give you a perspective, this number last year was around INR 30 crores and a year before, was just INR 8 crores or INR 9 crores.

[Technical Difficulty]

[Technical Difficulty] was the branded branded business will grow -- we'll have this number this year. And going forward, we are pretty excited about the whole business because this was a year when we were -- last year was the year when we had built a lot of pipeline in the market in terms of creating infrastructure. Now this year, when we got this business, we are now seeing a lot of offtakes, which is happening in the market. There's a lot of confidence that going forward, this business will do good.

They want you to subscribe to the NPDs of their business.

Yes, sorry. Hello? Sorry, I missed your last part.

No, I just wanted -- apart from that, if you can throw some color on how much the amount that we are spending on an annual basis, whether that should increase? What could be the cost on this side?

So as far as spends, so obviously, with the business, the spends will also will increase. So this year, we almost -- in terms of our ATL budget, we spent close to around INR 14 crores, INR 15 crores. And in the same proportion as the business is growing, we will keep investing that kind of money.

The next question is from the line of Mr. Vakharia from Lucky Investment Managers.

Sir, what is the -- can you please explain the economics of the investment of $8 million that we are making?

The economics of the investment as in -- we're just -- we already have the infrastructure in place to expand capacities. We are just installing the necessary equipment in order to increase the output.

Okay. No, what I am trying to understand is that if we -- so typically, we make some extra investment in infrastructure in the start. So at full blast, at full blast 75%, 85% utilization, if we invest INR 100 crores into a plant, gross block, what is the peak turnover that we can achieve on that INR 100 crore?

$15 million. Almost around INR 135 crores.

Around INR 135 crores is what we can achieve, about $15 million.

Okay. INR 135 crores, and we make about 22% to 25% EBITDA margins, and we need about 100 days of working capital. Is that right?

Yes.

The next question is from the line of Nihil Parekh from Dhanki Securities.

Sir, we've posted super results for Q3. If you can give some more granularity on the numbers. So what has been the impact of the volume growth? We had also seen some price rise in coffee in the last quarter. So what has been the impact of price realization, if any? That was my first question. The second is, for the 9 months, what has been our MEIS benefit that we have accounted for? And the third question was on the Vietnam operation. So one of our peer has stabilized their plant in Vietnam and they're running at good capacity utilization now. So going forward, what is our outlook? Are we anticipating any possible higher competition as that plant also ramps up? So your thoughts on that.

Yes. Sarma here. First, on the quarter results, honestly if you see, I must admit that the denominator was slightly favorable to us. Last year, during quarter 3, there was a slight dip in the performance. So obviously, this is looking much bigger. If you compare it with the second quarter which has been uniform, still we have achieved better. But the substantial growth that is being seen is on 2 accounts. One is we are recouping our volumes to the normal levels in the first place. And secondly, because of the freeze -- the additional freeze drying capacity coming into full-scale operations. First 2 quarters, we were stuck in the process of getting the certifications done and the clients' audits getting done. So the utilization levels were slightly lower. And the third quarter, as we mentioned to you last time also third and fourth quarters, we will be using freeze drying capacity at optimum utilizations. So these 2 factors contributed to the additional growth as -- vis-?-vis last year, similar quarter. And you will also see a better result than the last quarter itself. And in Vietnam, particularly, Vietnam, if you have seen last year, first 2 quarters were substantially better and subsequently there was a dip in the performance. But this year, we have recouped on the volumes, and almost were on a breakeven level corresponding to the last year on the EBITDA margins, and we are seeing a larger potential for better business, better margin business in Vietnam in the fourth quarter and also expecting a substantially better order for which we are gearing up by enhancing our capacity. It's not that we are utilizing the entire -- earlier, as you are aware, we were saying that we have a 10,000 tonne capacity, and we have infrastructure available for 20,000 tonne capacity. The additional capacity will remain. Out of the first 10,000 tonne capacity itself, we are doing some line balancing part and enhancing it to 13,000 tonnes. Out of this 13,000 tonnes, we are anticipating that we should start with an order size of about 1,000 tonnes or 1,500 tonnes in the first year, that is later part of the next year. So we will be geared up for the increased volumes for the next 2, 3 years in Vietnam. Third question [Foreign Language].

MEIS.

MEIS, this year, we have booked about INR 30 crores as of now. Not booked, actually, realized INR 30 crores. As you are aware, we are accounting MEIS on a cash basis, not on an accrual basis. So thus far, we have realized about total...

INR 30 crores.

Total this year, we have realized INR 30 crores of MEIS.

So that is 3-0, right? 30?

3-0, yes. For the year.

For 9 months.

Yes, for 9 months.

Right.

Sure. And sir, in the initial remarks, I think Srishant, sir, mentioned that we are targeting for a 75% capacity utilization in Vietnam. So that will be on the enhanced operations, and that was for the next financial year?

No. Enhanced operation will come into commercial availability only towards the third quarter of the next year.

Correct. So what level of capacity utilization, sir, would we...

On 10,000 tonne capacity, we'll do a 75% capacity utilization this year. And as you are aware that in Vietnam, we have certain products which have lower productivity. So effectively, machine utilization will be a little more than that 75% that the figures are indicating. But we will see in -- particularly in freeze dried capacity being -- taking into account the seasonality aspect also we need to have an additional capacity available for us. So 75% to 80% capacity in an exclusive freeze drying plant should be the optimum utilization at those levels. That is the reason why we have gone in for line balancing and improving our ability to produce more.

And sir, just 1 last question. On the India operations, now that this FDC plant has stabilized and is doing well, what will be the likely utilization level that we should build in for the next year, financial year 2021?

Next year, we should be utilizing this facility up to about 80% capacity utilization. But a small planning that we are doing also is that we are intending to do a small refurbishment in the base plant which will enable better productivity and perhaps be able to give another 500 tonnes additional productivity also for which we may -- I mean we are just planning and in the first quarter or second quarter, we might take up a small maintenance activity there. So overall put together, FDC will -- both units put together, it will be an optimum utilization next year to the extent of 80%, 85%.

The next question is from the line of Chirag Lodaya from Valuequest.

Sir, my first question is on margins in stand-alone business. When I look at your quarterly numbers, large part of margin expansion has come through gross margins. So how sustainable are these gross margins?

I cannot explain in detail on this aspect. We do various cost optimization efforts continuously. While you spoke about gross margin, that is the input costs, factory costs and input costs being lower this time. We have taken specific efforts for material substitution and better productivity efforts, whereby the gross margin levels are better. And this is a permanent feature now. Since we have already done the required R&D and then enabled the transition to a better gross margin levels, this is sustainable. And gross margin, as you are aware, there is -- I mean what advertisement expenses that were there last year, last quarter, was not there this year to the extent and these things, and also MEIS was on a lower realization last quarter. This year, we were able to get the average. If you average out, we have got the required amount for the current quarter. So all these things enabled better EBITDA levels as well. And among the product mix also you'll see the FD component of the product mix has increased. All these are the...

Okay. Can you just help me with the MEIS number for the quarter vis-?-vis last year same quarter? That would be helpful.

Both quarters, it is about INR 12 crores. It is INR 12 crores each.

Yes. And in the beginning of the year, you have mentioned, in Q3, Q4, we'll see substantial ramp up in our freeze dried capacity in India. But when I look at your quarterly numbers, your absolute sales is in the same range Q3 -- I mean Q2 and Q3. So just trying to understand what kind of ramp-up we have seen in new freeze dried capacity.

See, the top line is one thing that will not directly reflect the operations, as you know. There are impact last quarter, there was a reduction in green coffee prices to a certain extent. So obviously, the top line would have got affected by that. So a better basis for evaluation of the company's performance is on the EBITDA levels.

Okay. And just lastly, what is the CapEx for this year and next year?

As you are aware, we are implementing that packing-cum-granulation plant in India. Now it is being implemented through a subsidiary. And the CapEx plan of about INR 12 million?

It's INR 15 million.

INR 15 million. That figure remains the same, but will be spread over this year and the next year.

Okay. So INR 15 million plus INR 8 million, INR 23 million spread over between this year and next year.

Correct.

And how much it would be already spent in first 9 months?

Miniscule amount, perhaps INR 3 million, INR 4 million. Only advances were given, so to that extent, only have spent some of that.

[Operator Instructions] The next question is from the line of Himanshu Nayyar from Systematix Shares & Stocks.

Congratulations on a good quarter. So firstly, on the revenue side, it seems that we have not got any benefit of a recovery in coffee prices because we've seen both Arabica and Robusta prices rise over the last quarter. I believe we have certain longer-term contracts. So when do we see the benefit on our realizations of this rise in prices if this were to sustain?

So normally with coffee prices, immediate impact is not going to be there. When the coffee prices go up or down, we are doing contracts with our customers at that point in time for a period of some times 6 months or a year also. So that if we are buying green coffee now, we've already done the contract which has to be executed say 6 months later. So that impact will come in at a later point in time. So immediately, that impact will never be there in the company.

Right. So for the next couple of quarters, we believe whatever growth we get would predominantly be volume driven, right?

Yes.

Understood. And secondly, Srishant, on the working capital side, I mean last year, and we had seen some increase in receivables because we -- in a bid to drive our business in a few markets, we were going a bit liberal with our credit terms. So just wanted to understand whether that situation still sustains or whether we've been able to tighten the working capital cycle a bit?

This is Lakshmi Narayana here. The working capital cycle has been increased due to the additional market that we have taken up at the year's end, and also the enhanced operations of our subsidiary from Switzerland operations. So at this level of trade cycle also we could be to sustain without any additional costs.

Okay. So what should be the receivables and inventory period we should be looking at right now?

Inventory, it is at 60 days and receivables are running at 75 days.

Understood, understood. And with no change in the payables period, I believe.

No.

Understood. And final question is on our packing CapEx. When do we expect that packing unit to get complete? And in terms of numbers, how much do you think we can reach in terms of small pack sales once that unit is up and running?

The new facility which we are -- already, we have taken up the implementation and required advances are -- started paying it. We are expected to complete this facility and all the steps by end of the 2021 financial year. And next financial year, we could see the revenue part of its contribution.

No, but any specific number you would want to give out by which it could increase your proportion of small pack sales once you start packing at that facility?

I think it is too early. We have to look at it in the current financial year because the domestic business also is going to take a shape in all the steps. In 2021 is going to be a deciding factor, how the proportion between the small packs and -- that's how packing is going to happen.

See, normally, the guidance we'll give only at the end of the fourth quarter. Just one thing which we can clarify is that the volume of small parts is definitely growing at our end, both in the domestic sector as well as for exports. So we're expecting that benefit as in that growth to continue in the subsequent -- coming years as well. It's not just limited to 1 year. We're adding a lot of final brand owners as our customers, so that is helping us grow this volume.

The next question is from the line of Vaibhav Gogate from Ashmore India LLP.

This is Ashwini here. I had a question on the India retail business or the branded business more appropriately. So from what I understand, your budget for this year is about INR 100 crores of revenue, with about INR 50 crores or thereabouts as branded business. So where does the rest of the INR 50 crores go?

So the rest of the INR 50 crores is, we do private label for most of the retail chains. So that's the 1 part of the business. And we also do some bulk selling, bulk coffee to some of our clients, big clients. For example, clients like Amul, who uses our coffee for making their milkshakes and coffee shakes and Lotte, a confectionery company. So these are companies who buy bulk for us -- from us. So that's also a part of the business, domestic business.

And would it be fair for me to assume that the India subsidiary is loss-making at this point in time?

This year, we should be breakeven. And -- next year, sorry. Next year, we will break even. This year, there is a...

Slight loss.

Slight loss because of the spend that we are doing to build the brand. So that is how it is.

But the ad spend happens in the stand-alone entity, right? The parent?

No. So that is the larger part of the ad spends, but we also do a lot of brand building activities which is below the line and some of the smaller ad spends that we have to do. So that is a little negative that we will fall into this year. But next year, we will break even on most of the accounts.

And -- so what's happening in market shares? I mean Nescaf? and Bru are the sort of dominant market share, but I also see iD Coffee packs now on shop shelves, et cetera. So where do you stand in terms of market share? Where do you think this business can grow over the next 5 years? How do you think about it internally?

So internally, our thought process are like this. Today, we are, in terms of market share, the #3 brand in the country after Nescaf?, Bru. Yes. While you can see some of the iD shelves, but mostly, you are seeing it in the modern retail outlets. But a bulk of the coffee is sold and the biggest business of coffee is in the instant coffee business. These are very new segments that have emerged and yet to prove their...

Sustainability.

Sustainability in the market. So that's how the market stands right now. So in 1.5 years or 2 years of operation, we're already #3. And there are some cities where we have done extremely well, we have already reached close to 5% market share like a Hyderabad and a Vizag. So we are going pretty good on that front. We have seen now because we are now getting picked up by Nielsen, that very fact tells us that the offtake has started happening in a positive direction. So that's how we are looking at. But going forward, we are very confident that we will be closing into it because in couple of cities, we already have achieved a 5% market share. Our target is to achieve that kind of a market share in the balance of the geographies. So that we are confident of. We are expanding our -- the outlet network. We are creating more awareness of the brand, and we're also launching a lot of new products into the market. So all of that put together, that's the outlook we are looking for the next couple of years that we should reach a 5% market share.

And bulk of this would be instant granulated coffee?

Yes. Bulk of it is instant because that's the largest segment, consumer segment in India, the granulated instant coffee.

And these premixes or filter coffee decoction, et cetera, that's going to be a very small sort of niche presence.

Yes. Right now, they are niche -- they have niche presence. But a couple of segments, we think, are going to do well in the coming times because of the convenience that it offers. Premix is one of them. So that's the reason we are pretty excited about this segment, and we have launched an array of products in this segment. So right now, we are focusing a lot more on the large stores and the e-commerce space. But we are very confident that this space -- this whole convenience thing will grow much larger in the years to come. And that's the reason we are betting big on it.

And there are no manufacturing assets in the Indian subsidiary that looks at the retail business.

No, there is no manufacturing assets.

The next question is from the line of Kanwalpreet Singh from AMBIT Capital.

Sir, if you can give me some guidance on what the utilization level was for the freeze-dried unit in this quarter?

This quarter, it has reached about 75% utilization. Overall year-on-year basis, we are expecting that we should do between 50% to -- between 50% and 60%.

Sir, 75% utilization in the freeze-dried capacity? The new one which has come up?

Exclusive freeze-dried capacity in SEZ.

Sorry, sir. I didn't catch that last part.

In SEZ facility, in this quarter, we utilized the 75% -- reached 75% capacity utilization.

Okay. And you expect that to...

And overall on a yearly basis, we'll be utilizing a capacity utilization between 50% and 60%.

For the full year, you're saying.

For the full year.

Okay. Right, sir. Sir, so the margins which we have seen in this quarter, do you think would increase utilization. You said the utilization in freeze-dried SEZ can go up to 80% next year. So should we expect...

Within the product mix, the freeze drying product has increased. So there is a better margin available.

Okay. So is it reasonable to expect similar margins? Or do you think there is still further scope as greater utilization of freeze-dried occur next year?

Next year, we might be able to do another -- on an overall basis, we may be able to improve our capacity utilization from 60% to 80%. So there will be that much improvement in the operations in total.

Okay. So margins should improve a little bit from here also. Would that be fair to say?

Yes, yes, that is true.

Okay. Sir, the second question I had, we referred to this in the last con call about some trade negotiations between Brazil and Europe in terms of reduction in import duty. If you can give us some sense on where that stands presently?

[Foreign Language] Europe [Foreign Language] between Brazil and Vietnam. Is that what you are referring to?

Sir, Brazil and Europe, there were some talk about a reduction in import duty.

Yes. Brazil and Europe, they entered into this agreement a couple of -- actually, about a year ago. But the same was not ratified by the EU countries. So that did not get passed. So [indiscernible] going to continue as of now.

Sir, and am I right in my understanding that this does not apply only to coffee? It is more broad-based to many other agricultural commodities?

Yes, exactly. In fact, Europe was -- several of the European countries they were very apprehensive if Brazil starts dumping their products into the market, it could create more chaos, which is also 1 of the reasons why they did not obstruct. It's not specific for me to comment.

Okay, right. Sir, the third question I had was -- so you referred to this in the past that we already have a sizable market share in the B2B business. But it's very heartening to see that we are growing and we are expanding in Vietnam also. So I just want to understand, has the picture changed in some sense because certain geographies are doing better now maybe. Like you said, the U.S. is opening up. Is there a shift? Is there a scope for greater market share gain over the next 5 years?

Yes, so there is a significant change that has undertaken within the company, that is, earlier, we used to be focused only on the B2B bulk business, so which means that our customers were always re-packers and resellers. And these re-packers and resellers, they had multiple options to choose from. And they were just constantly -- if we offer a lower price, they'll buy from us, otherwise, they'll shift to someone else. So almost 40% of our business was with people like this. And what we are consciously doing is we are now expanding our capabilities to do more of small parts and specialized products. And we're not offering these specialized products to the re-packers and resellers. We're offering directly to the brand owners and that is incentivizing the brand owners to come to us directly now and they come to us with larger volumes. That is one the things why we are quite confident that we can grow the market even further. If you actually look at that, though we are the largest player in the market for instant coffee and private label, our overall percentage of market share is less than 5% today. So we still have a large scope of growth, which is possible in multiple territories. There are lot of big brands that we can also start focusing on which we will be doing from now onwards. We've actually started doing from last year. It's going to start [ hitting the ground ] this year onwards.

Right, right. Sir, my question like what you said, I understand that is more of our internal efforts to increase, moving away from bulk. But in terms of the external environment, in the macro environment, do you see certain geographies opening up or is it the same it was 2, 3 years back.

Actually, there are several geographies, which are opening up because of a lot of political disturbance that is currently there. For example, U.S. is talking about imposing duties on products from Germany. And Germany is currently selling almost 7,000 or 8,000 tonnes in the U.S. alone. Now suddenly, this entire volume is up for grabs from other countries. And we are able to pitch for this business now, thanks to our partners who are there in the U.S. Similarly, there are several other countries where we have an additional advantage that is there. For example, Asian countries -- from Vietnam, we can approach the Asian countries with 0 duty. Brazil is currently paying 9% duty. So we have several advantages which are there, which we are capitalizing on at this point in time.

The next question is from the line of Jignesh Kamani from GMO.

In earlier comment -- earlier call, you mentioned that Brazil has become very competitive because of the bumper production, while Vietnam coffee prices increased because many fund is investing and they are buying coffee beans. So has the situation now reversed to normality now?

Yes. In fact some of the analysts were making comments, right, saying that the green coffee prices have gone up. That price going up is mainly in Brazil. And as far as Vietnam is concerned, the pricing and everything is more or less the same. The differentials are changing a little bit, but the pricing is more or less the same. And this basically means Vietnam and Indonesia will be able to compete a little better than they were doing earlier.

Understood. And 1 year ago, we lost 1 customer because they set up their in-house facility. Has the customer come back to us? And if he is on mainly on the value-added product or on the basic also he is picking up from us?

He is buying some premium products from us but very, very small quantities. Now that he has his own facility, he's utilizing that at his end. Whatever -- in fact, that's also one of the reasons why you can see that if you do a quarter-to-quarter comparison from last year to this year, there is an increase. We've made up for that volume, and we are sticking to our projections keeping all these changes in mind as well.

Understood. Any customer addition in this year or probably in next 6 months, which is expected to give healthy volume for the next 1, 1.5 year?

Yes. Actually, there is 1 major customer. Unfortunately, I cannot name that customer due to an NDA. But with this customer, we're expecting some large volumes coming in from this year onwards.

From India operation?

Yes. From -- actually from Vietnam.

The next question is from the line of Tushar Bohra from MK Ventures.

Congratulations, Srishant, sir, on excellent set of numbers. So a few points. Firstly, we mentioned that we're seeing incremental competition coming in freeze dried. And so overall, pricing or the profitability as such for the entire industry is sort of coming down year-on-year. But we are -- in that scenario actually expanded our freeze dried capacity ourselves. Do you think that the overall competition is not a concern for us? Do you expect to continue to see traction on this going forward?

Yes. First thing we have to remember is freeze dried definitely has better margins than spray dried fundamentally. And more importantly, when we took a decision to go in for expansion also it was almost 3.5 or 4 years ago. And at that point in time, there was a capacity constraint that was coming in. Just the way we were able to understand what's happening in the market, 2, 3 other companies decided to make a similar investment at the same time. The last couple of years which the shortfall that was caused was, again, due to some exceptional reasons. And we wanted to capitalize on that. Now the market demand is also still growing. In addition to us increasing our capacity, the market demand is also growing. So that's also one of the reasons why we were confident that though there are new capacities coming in, it still made sense for us to set up a freeze drying unit. And as you can see, originally, we thought maybe we'll be touching close to 40% to 50% utilization in the new unit in this year, but were able to exceed that. We are coming closer to a 50% to 60% range for this financial year.

Okay. So sticking to the new unit, it seems that we have mentioned we can now look at maybe closer to 60% utilization for the year, which means that Q4 we will still -- if you still see some improvement from Q3 in terms of utilization levels at this unit?

Opening -- yes.

And correspondingly, should we take the margins going forward, this 28% EBITDA margin that we reported, led by a gross margin improvement? Do we see that as being sustainable? You said it earlier in the call as well. Just to reconfirm.

Yes.

In fact, do we see any further operating leverage coming in from the new unit? So therefore, the margins could possibly be slightly better than this also?

No, no. I think we're already doing a good job with respect to improving the margins and all. In the long run, when you're running at 100% utilization, maybe it will improve further, but that will still take some time.

Okay. Next is from a retail perspective, we mentioned the brand sales should be more than INR 50 crores this year. Just -- so effectively, the B2B business in domestic -- it would be about between INR 40 crores to INR 50 crores. Just to understand what it was last year. And is there a conscious effort on our side to improve on the branded part rather than the B2B?

Yes. We are consciously putting a lot of effort and focus on improving the branded business. And so the branded business, which will cross INR 50 crores this year was INR 30 crores -- approximately INR 30 to INR 32 crores last year. So from INR 30 crores to INR 32 crores, we have moved to INR 50 crores. And the rest of the business, which was bulk and private label, which is around INR 40 crores, it was around INR 30 crores last -- not INR 30 crores, INR 25 crores last year, yes. So that is how -- so you can clearly see the growths are much, much more significant on the branded business side.

And this is before ATL, right? As in we're just going to start reaping the effects of ATL in this quarter?

No. So this year, we did ATL. So we have been doing, as last quarter Srishant had mentioned that we had, in fact, started doing ATL, and we preponed some of our ATL spends in last quarter itself. So this year, we have been doing ATL. Obviously, if you see the brand building side, the ATL is -- it's largely long-term investment. So you don't see immediate effects on ATL that you do ATL and you will immediately start seeing the effects. But directionally, we have started seeing the optic started happening. We are now getting market share gains. So all these are very positive signs of the ATL that we have done. So we will continue doing that because it's a long-term brand bidding process that we have started on the retail side.

So this 5% that we're targeting as an overall market share, this would be on instant coffee the INR 2,000-odd crore market or it includes filter coffee, which possibly then would be a much larger market?

No. So filter coffee is incidentally not a very large market. So if you see the market sizes, instant coffee is almost close to INR 2,000 crores. And filter coffee is INR 400 crores to INR 500 crores. So when we're talking market share, we are only talking about the instant coffee market right now.

Okay. So effectively, INR 100 crores in sales maybe by next year, is that it?

No, it will take a couple of years to reach there because we closed in to around INR 50 crores, INR 55 crores just as we brand brand business. So we should cross -- or look to at least cross that figure of INR 100 crores only on the branded side in a couple of years. It will take a couple of years. But let's see how things goes up because the movements are in the right direction. And you can -- you would acknowledge that, on the brand side, you start feeding and seeding things and investing. And there is a certain point of inflection when the curve will move up substantially. So we are just waiting for that to happen. Let's see when that uptick happens on the brand side. But the movement has been very encouraging on the branded business side.

And at what point do we breakeven on purely the branded part of the business on all costs?

Next year we'll breakeven on all costs.

On the branded business?

Yes.

Okay. Great. Just 1 last on the overall strategy for the company, say, from a next 3 years perspective. I'll just break it into 2 parts very quickly. There are some products that we mentioned in last quarter that have been introduced. I think cold brew coffee something in U.S. and Europe. And overall, I just wanted to understand on the product side what are the -- some of the initiatives that we're doing, coffee and maybe even beyond coffee. Is there any initiatives? And second, do we look at CCL as an instant coffee manufacturer only 3 years down the line? Or do you -- are you really looking at the branded business and maybe other segments from even a global perspective?

As of now, as far as the core business is concerned, we are still going to keep our primary focus on the core business because there is still a lot of potential for growth. And we are now focusing more on small packs and directly servicing brands, which earlier we were not doing. Apart from that, our own branded business -- the reason for this initiative also we started focusing only on India because there are only 2 major brands, which are there in India. And almost every other country that you go to, you have sometimes 10, 15 brands, which are there in the same space. So we knew that we have the ability to further help expand the market within India. If you look at the hot beverage market within the country, coffee is still a very small segment. So there is still a huge potential for growth within the country. And there was no innovation that was taking place within India for several years. Despite 2 brands having the capability of doing much more, they were just selling plain vanilla-type products over here, which is why we wanted to expand into further unique products, including things like freeze-dried coffee. We have a manufacturing facility within India, which we can use to our advantage, to sell locally. If they want to sell the same freeze-dried coffee, they will have to import it and pay substantial duties and then sell in the market. So we wanted to take advantage of all these other things as well. Globally also all the new products that we are introducing, the premium products and all, we're starting with the developed market because they have better acceptance in these markets. And we are introducing these to certain big supermarkets and big players and, in some cases, to coffee shop chains itself directly. And the reason why we are doing this is because the products that we have, we are the only ones in the entire world who can manufacture this today. But after maybe 3 years, 4 years down the line, there will be other companies who will be interested in making that necessary investment, trying to replicate what we are doing. So we're creating a market from scratch at this point in time. And our focus for especially domestic market branded business and all, the reason why we have a separate entity and we've given Praveen a free hand to focus on this segment is because we know that over the years we know that the branded business is likely to grow much more substantially. And we'll have the ability of them subsequently introducing brands in other territories as well, where we are not competing with our customers.

Fair enough, sir. Just very quickly. The global initiatives -- are we using Continental as a brand anywhere or are we preferring to stick on the B2B side of it?

As of now, we are focused mainly in India, but we might test market in some other markets in the near future.

The next question is from the line of Vaibhav Gogate from Ashmore India LLP.

This is Ashwini here once again. Referring to one of your previous comments where you said that you are now looking at small packs and brand owners as opposed to wholesalers or bulk buyers, how is this working? Because basically you're bypassing your existing customers, right? So isn't that kind of creating a lot of unrest with your large mainline customers today?

We -- if you are bypassing, it will be only to certain like -- okay, the kind of customers that we have, you have some customers who will consistently buy from you no matter what. You have another set of customers who will buy from you as long as you're giving the lowest possible price in the market. Right now, what we're doing is we've taken a conscious call to -- we're willing to let go of certain business in order to cater to some new business as well. I can give a simple example. There was a -- if there is, say, a 1,000 tonne customer and we are earning, say, INR 5 crores as margin from this guy, within -- I mean if we directly go to a branded owner, for 100 tonnes itself, we can easily earn that INR 5 crores. So there won't be any negative impact on the company for the bottom line, at least. And this business that we are able to secure will be more sustainable in the long run. The brand owner is unlikely to shift to somebody else just because they're giving us slightly lower price. They are more focused on the quality. So we started focusing on this type of business. And that's why we are seeing that additional growth coming in as well. Eventually, yes, we might be stepping on certain toes, but that's a conscious call that we are taking, because end of the day, we're looking at the long-term growth of the company. That is sustainable, mainly.

And did I hear you right that 40% of your total revenues today comprise bulk buys? Is that the number? Or I would have thought it to be much larger.

40% are the people who are -- okay. 60% of our customer base are loyal customers who have a certain unique product that we are supplying to them. 40% is the vanilla type products, which they can buy from everybody else, not only us. So we view this 40% business as a higher risk business and very low-margin business. So we want to focus on growing the 60% business even more.

So would it be fair for me to think that over the next 2 to 3 years, you will essentially have 3 very big margin drivers? One would be rising freeze-dried coffee revenues, both in India and overseas. Second is retail. And third would be shift from whatever opportunistic wholesale customers towards brand owners and retail packs. What could be the risks -- what could be the potential risks to margins? One -- probably the margins on freeze-dried coffee might come off as more people get into that game. Anything else that you worry about from a medium-term perspective?

See, brand is something now that we are breaking even next year, it's a question about how fast are you able to capture market share. And our objective also is to grow in a sustainable manner. So any other contribution that comes is a plus-plus benefit that we are expecting into the company. As far as the small pack business is concerned, there is -- because there is a big potential for growth, that's the reason why we are focusing on this segment. Today, it's only the -- there are several people in Europe and other locations. They don't have manufacturing facilities. They have just packing facilities in place. These people are the ones who are catering to this market with high margins. So we've seen that this is where the potential is. And converting a customer -- a branded customer into the company is a very long run process. Normally, it takes sometimes 2 to 3 years also for us to convince the customer to transition. They want -- they will first try you out and test with maybe your container. They'll expect consistency and a lot of other things. So a lot of initiatives that we have taken 2, 3 years ago are panning out now, which is why we are going in for that expansion of the packing line, as in coming up with a new packing project itself.

The next question is from the line of Anuj Jain from ValueQuest Capital.

I have 1 question with regards to branded business. Like how much of the expenses for branded business have been booked in the parent company for this year?

In the parent company what is the extent of...

So approximately INR 10 crores have been booked in the parent company.

Last year. Last part...

Nine month, right?

9 months, yes.

The next question is from the line of Tanvi Shetty from Axis Securities Limited.

Most of my questions have been answered. I just wanted to understand the INR 12 crores MEIS benefit in quarter 3 this year. So it is reflected in the revenue part, that is it is included in the INR 302 crores revenue this quarter, right?

Yes, it was included in INR 302 crores.

And sir, now that it is being reduced to 5% from the next quarter onwards, what would be the impact in crore terms, in rupee terms if you could?

Not much of an impact, but it may have around INR 75 lakhs to INR 1 crore.

Okay. Okay. Hello?

Around INR 3 crores to INR 4 crores [ maximum. ]

Okay. Okay. And my next question would be, sir, Sarma sir mentioned that there's an additional productivity of about 500 tonnes in the freeze-dried unit. So this additional productivity is from the Duggirala unit or the SEZ plant, sir?

It is after implementation of that small refurbishment and line balancing that we intend to take up during first quarter of the next year in Duggirala plant anyway.

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

Rohan here from Edelweiss. Sir, first question is on our margins. Basically generally we enjoy almost per kg margins fixed in both the businesses of freeze dried and spray dried. It seems that our margins per kg has improved. Earlier it used to be close to 110, 215 in freeze dried and 70, 80 in spray dried. In the current quarter, can you give some sense on per kg margins because it seems like our freeze dried margins are much beyond INR 200 to INR 250 per kg? Is that the case right now? If you can just give some clarification on that.

I would suggest we do not go into specific numbers on this. Anyway you only answered it. Because of the increasing volume of freeze dried, the per kg relation would have gone up. We subscribe to the topic.

No, sir. I was still looking at the difference between the freeze dried and spray dried margin because the subsidiary, Vietnam, margin from the current quarter was lower at gross margins of 5%. So just want to understand is the -- I don't want to get into the numbers...

These can be understood in a better manner only over a year. In a quarter-to-quarter, see, we have -- we will have a profile of various customers having various kinds of margin profiles. So if in 1 quarter, despite doing volumes if we are not able to reach the EBITDA margin level, then we must have -- during this quarter the composition was a lower-margin business. Next quarter, it could be higher margin. So these figures perhaps we can discuss better over the annual figures rather than in quarterly figures.

And sir, your comfort on current level of margins that except a little bit pressure on freeze dried, but do you see that this current level of percentage margins or on a kg basis are going to sustain for next -- I mean over next 2 to 3 years or there is some risks on the margin front?

It has been our endeavor to continuously improve our margins through various methods, be it on the market side, be it internally our -- improving our productivity norms, our input substitution norms, R&D efforts and all that. So the effort on improving the margins per kg will be a continuous effort. We will try to do. And current level of margins are definitely sustainable.

Okay. Sir, just second question on this. So with the current margin profile and profitability, we are generating strong cash flows both domestic as well as in the subsidiary. Initially you have guided that the CapEx is not going to be so aggressive for next couple of years. So have we taken any thought? I mean have we -- do we have any thought process on the additional cash flows, which we are having? Initially, you have indicated that the subsidiary will pay higher dividend to the parent that ultimately will be given back to the investors. So just some clarity on that.

The CapEx, whatever we have projected last year, around $20 million at Indian operations and $8 million at Vietnam operations, that shows we are going to spend in this current financial year. And as far as the remaining going forward in future, we want to take a break and see that the cash flows are being utilized for the repayment of term loans which are moving to call in.

Okay. So for next year, you are saying that it will be debt repayment, which will be completely in focus.

Yes.

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

Sir, what is the status of Switzerland operation?

Switzerland operations are actually doing quite well. A lot of new businesses coming in. In fact, this quarter also we'll see a significant improvement compared to what we've seen in the past. And a lot of new supermarket business we've gotten over there. And we're quite confident that we'll do even better next year.

Sir, what would be the revenue done until 9 month FY '20?

What will be the revenue...

What is revenue?

From the Switzerland operations?

Yes.

For 9 months, we did around INR 83 crores, and we expect to reach around INR 110 crores.

The next question is from the line of Akhil Parekh from Elara Capital.

Just 2 questions from my side. One is, what is the current debt on books, long term as well as short term? And what is the average cost of borrowing for them?

Pardon? Can you just repeat that?

Current debt on books, long term as well as short term and the average cost of borrowing.

It's a term loan we had, debt of almost INR 320 crores. By average, cost of funds are at 6%. And working capital, we have INR 115 crores. The average cost of working capital -- it is around 2.5%.

2.5, is it?

Yes.

Okay. And one last question to Praveen, sir, on the branded business. How much is the retail reach and how many distributors have we appointed for our Continental Coffee?

So currently, as we speak, we are reaching around close to 60,000 retail outlets -- direct distribution. And this 60,000 we -- almost have all-inclusive institutional and retail put together around 600 distributors.

The next question is from the line of Kanwal Singh from AMBIT Capital.

Just wanted to understand. Sir, it's very heartening to see that the margin has been very good this quarter. But if I look at the sales growth on a Y-o-Y basis and -- because freeze dried do stand there at 75% utilization level. So there must have been a significant drop in spray dried. Is that reasonable to think so?

It's 75% utilization for the quarter, not on overall basis.

Yes, it's quarter. Right, sir.

So that means about 750 or 800 tonnes only. Yes. There's a small reduction in spray dried utilization currently, which -- again, these orders are being done on a retail pack basis. So the execution was getting delayed. Perhaps on the fourth quarter, you'll be able to see the retrieval of the volumes of spray dried as well.

Okay. Right. Sir, but there is no case of clients substituting previously bought or previous order for spray dried with new freeze dried, right?

No. I mean in the brand itself, these spray and freeze are different. So there is no substitution from spray to freeze. In fact, if it happens, it is for the good only. We will be selling a premium product in place of a base product.

No, sir. That of course is much better. Just wanted to understand like if previous customers are substituting, buying spray dried from somewhere else or maybe just continuing with the spray dried version, only taking the...

I do not think so. Because for every -- if they are into a brand, obviously the brand sourcing -- shifting the brand sourcing is very difficult. And we have not seen any major shift or any major reduction in our major clients' procurement profile.

Okay, right. Sir, last question from my end. This is a follow-up to what the previous speaker asked you about the revenue from Switzerland. If I heard correctly, you said you did around INR 83 crores in 9 months. So that's quite good compared to the last couple of years, I think, and it's been quite volatile also in the past. So I wanted to understand what is the strategy there. Because I think you had said earlier that there are lot of retail outlets, which want to do private label with you in those markets. So how do you see this market growing from present levels over the next 2, 3 years?

So there is -- one, we've seen a lot of potential in the EU market. The reason why we haven't been tapping into this market in the past also as I had mentioned earlier, we were supplying earlier mainly to the repackers and resellers. Now with our Swiss director being present over there, he started approaching a lot of people locally. And we started getting a couple of opportunities over there to start supplying to them directly. And that's what we are seeing during the whole of last calendar year and this year as well. That was the benefit that we are seeing that is coming into the balance sheet now. And using these people as a base, we are quite confident that we can go after some larger retail business as well. Because most of the big retailers, they want to buy from minimum 5 suppliers. The kind of volume that they buy is so high, they cannot be dependent on any 1 supplier. So we are trying to get ourselves approved as 1 of the 5 suppliers.

Okay. Right. Sir, how do you see the growth opportunity over here over the next 2, 3 years? Can you -- would it be possible to increase this substantially, maybe double this volume? Would that be possible?

Over the next couple of years, yes, it could be possible. But then again, if we focus on that type of a volume growth, again, we'll have to spend more money for CapEx and going for further expansion also. Instead, we are also looking at how we can balance things and reduce our dependence on the low-margin business and focus more on the premium business. That is 1 area that we are looking at. We're not going to let go of the volume business, but at the same time we're going to be focusing more on the premium business.

The last question is from the line of Yogansh Jeswani from Systematic Group (sic) [ Mittal Analytics. ]

Yogansh here from Mittal Analytics. Sorry. I missed out on the domestic sales figure that you gave for the quarter.

Okay. So the domestic sales figures -- I'm just giving an overall guidance for the full year. For the full year, we are likely to close in the figure of around INR 100 crores. So that's the guidance we had given in the -- that's the guidance we are maintaining. So that's where we are likely to end the year with.

Right. So I think until H1 we had done about INR 35 crores, right?

Yes, yes. So we've added another approximately INR 30 crores in this quarter. Yes, and -- yes, we are looking to maintain that momentum in the last quarter as well.

Right. And secondly, sir, on the export incentive side. So now that 2% MEIS is gone, do we have any clarity on the RoDTEP, if there'll be any incentive from that to our industry? And do we hope to get this 7% benefits back in next year?

Okay. First things first, that 7% has been reduced to 5%. And now we just saw an article 2 days ago saying that because U.S. is blocking this Appellate Authority from being constituted in the WTO, we don't know how long that this MEIS can continue. There are talks that the government might extend the MEIS even beyond 31st March. So whenever they are planning on discontinuing MEIS, that's when the government is going to come up with an alternate system and give clarity on how much they are going to give. Most of the people in the industry are saying that 1 way or the other the government will -- in light of the decline in exports, one way or the other government is likely to continue to incentivize the industries within the country to promote exports. That's what we are hearing. But from our side, we're prepared for whatever scenario that comes in.

Fair enough, sir. Lastly, on the stand-alone side of the business, so in previous con call we had discussed about how Q1 and Q2 are slightly lower and Q3 and Q4 are usually a better half for us. And specifically on the freeze dried, we had mentioned that Q1 and Q2, there were some checks by the clients done, and those orders will be picked up in Q3 and Q4. However, when we look at the quarter-on-quarter numbers, there don't seem to be any specific growth. So was there any degrowth on the other side of the stand-alone business? Because then this number should have been a bit higher. Or is there a realization role in this?

To an extent, there is a realization role also because the green coffee prices have come down compared to what it was in the previous year. So part of it is because of that. As far as absolute volumes are concerned, there has definitely been an additional volume growth. And next -- I mean quarter 4 also there will be a further volume growth compared to quarter 3. On normal operations, 3 and 4 are usually the best quarters for the company.

Okay. How much was the volume growth? If you could quantify that for us that would be of great help.

We're not...

For the overall stand-alone business. If you don't want to break it, then overall stand-alone would also do.

Overall, on a consolidated basis, we have given a 10% to 15% volume growth as a guidance for the year. So we are still sticking to that.

Fair enough, sir. And sir, lastly, on the CapEx that we have mentioned for Vietnam and accumulation to start in Q1 FY '21. And I think on the call, there was a mention about INR 4 crore, INR 5 crore of spend so far, right? Did I hear that number right?

INR 4 crore, INR 5 crore -- around $3 million or $4 million.

$3 million or $4 million, okay.

Yes.

Thank you. As this was the last question, on behalf of Nirmal Bang Equities Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.