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

Ladies and gentlemen, good day, and welcome to the CCL Products (India) Limited Results Conference call hosted by Nirmal Bang Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Navalgund from Nirmal Bang. Thank you, and over to you, sir.

Thank you, Steve. On behalf of Nirmal Bang Institutional Equities, I welcome all the participants to CCL Products 2Q FY '21 earnings Call. From the company, we have Mr. Challa Srishant, Managing Director; Mr. K. V. L. N. Sarma, Chief Operating Officer; Mr. Praveen Jaipuriar, CEO of Continental Coffee; Mr. V. Lakshmi Narayana, CFO; Mr. P.S. Rao, Consultant, Company Secretary; and Ms. Sridevi Dasari, Company Secretary on the call. Without further ado, I would like to hand over the call to Mr. Srishant for his opening comments, and then we'll open the floor for Q&A. Thank you, and over to you, sir.

Okay. Thank you, Abhishek for the introduction. The group has achieved a turnover of INR 322.22 crores for the second quarter of 2020/'21 as compared to INR 298.68 crores for the corresponding quarter of the previous year. And the net profit is INR 47.46 crores as against INR 42.07 crores. The EBITDA is INR 77.67 crores and profit before tax is INR 61.16 crores. For the first -- for the half year ended September 30, 2020, the group has achieved a turnover of INR 611.48 crores as compared to INR 572.83 crores for the corresponding half year of the previous year. And the net profit is INR 85.94 crores as against INR 76.74 crores. The EBITDA is INR 106.93 crores, and the profit before tax is INR 85.94 crores. We can open up the floor for questions.

[Operator Instructions] The first question is from the line of Richard D'souza from SBI Mutual Fund.

Yes. Congratulations on better-than-expected numbers. So if I may just ask your domestic sales were down by about 8%, and you had some -- hello?

Yes, we can hear you.

So your domestic sales are down by 8% and your Vietnam and -- sales are up quite a bit. And you had problems in our new FDC unit. But at the same time, your gross margins were up by about 330 bps. So would it be right to assume that most of it because of higher freeze-dried percentage in your total volume sales or am I going wrong somewhere?

Yes. Vietnam, I mean, on the performance, like total turnover side, Vietnam performed well as was in the last quarter. So almost reached about 100% utilization this quarter also.

Okay.

In respect of India, anyway, we are carrying some portion of freeze-dried product from the last quarters, though we have shut down the plant -- one plant. That's not the SEZ plant, the other plant. That first plant we shutdown, and the SEZ plant was running to the full capacity. And we also are having a carry-forward inventory of freeze-dried. So it's not as though substantial quantity has come down in freeze-dried. We have liquidated the existing staff, plus as you are aware, the freeze-dried product, particularly from SEZ has a better margin profile, which we build a gross margin levels of about 48% or so.

Okay. Okay. Okay. So it would be right to assume that most of the gross margin increase is attributed to the higher freeze-dried percentage in your total sales volume?

Yes. It was there last year also, no. Last year, also -- second quarter, anyway, it was not there. From third year onwards, this gross margin profile was there from last year itself.

Yes. Okay. The second question, sir, is on the performance of your Vietnam unit. I think we have seen some extraordinary growth there. I just wanted to ask whether it is sustainable? Or if not sustainable, then what do you think is the sustainable rate? And the second part to this question is where exactly is the demand coming from? Private label or...

As you are aware, in fact, we have been telling in the last 2 calls also, that a major order was acquired from U.S. and also there were a few ancillary things, because of which we are hoping that we will do closer to 100% utilization this year. So this will be continued. During this only, we are going in for that line balancing and expanding the capacity to some 13,500. So surely, if not 10,000, we will definitely be doing at least 9,000 tonnes in Vietnam this year, which is a little more than the optimum utilization.

Okay. Okay. Okay. [indiscernible]

Mr. D'souza, you have any more questions? Sir, sorry to interrupt, but your voice is breaking up.

I said that I'll come back later.

The next question is from the line of [ Rupen Shah from InCred Asset Management ].

My first question is related to utilization level. Sir, if you just -- if you can just provide the current utilization in India also, like you mentioned about Vietnam that you plan to achieve 100% utilization because of the large order from U.S. If you can just bifurcate India and Vietnam utilization level, your current position, and then the expected utilization for FY '21 and FY '22, like considering the existing order book position and the order inflow trend. If you can just bifurcate?

Yes. In India's traded capacity, we have utilized to the extent of about 75%. The optimum, as I've always been telling, would be in the range of about 80% to 85%. So Y-o-Y basis, we should be reaching about 80% on the spread-rate capacity. In freeze-dried, as you are aware, we have already declared on the site also that we had to close the -- shut down the plant for 2 months. So as of now, the utilization level -- composite utilization level between SEZ and our main plant, Duggirala plant is about 65%. From now onwards, we are hoping that we will be utilized to the full optimum utilization, in which states on a Y-o-Y basis, we should reach about 70-plus or minus.

Okay. Fair enough, sir. And the second question is, if you just give some color on realization and gross margin difference in SD and FD for our company like -- to get a fair idea like how the margin profile will change for the company with the changing product mix going forward?

That will be going into 2 specifics. We are a single-product company and on occasions, we realize that it is working against us. Broadly, you can take that, the margin profile between spray and freeze would be in the range of 1:2 or 1:2.5.

[Operator Instructions] The next question is from the line of Akhil Parekh from Elara Capital.

Congratulations on a good set of number. My first question is on the, what we say, the FDC -- new FDC unit guidance which you had provided last time of reaching around 90%, 95% of utilization level. Do you expect to reach that level end of FY '21?

New -- specific to new FDC unit, normally, optimum utilization is about 80% to 85%. On the new FDC facility, we will be reaching that utilization levels. In old facility, we already lost about 2.5 months plus another 1 month during lockdown. So to that extent, there will be a reduction in the utilization part.

Okay. The SEZ, you were saying around 80%, 85%, and the Duggirala one...

That is a new facility. SEZ facility, which we are sure that we utilize 80% to 85%. In the other one, we already lost, no, so I could not reach that level.

Sure. Got it. But last time, if I remember correctly, you had mentioned that there has been a preponement of orders, specifically from the Russian client, and we should be able to recover it. So has that changed -- hello?

Sorry. Yes.

Sir, my question is last -- in the last quarter con call, you had mentioned that there has been a preponement of orders -- sorry, postponement of orders from the Russian clients. So has -- are those orders going to get executed during the rest half of the year? Or we have -- there's no clarity as of now?

No. It will not be in 1 month or in the first -- third quarter itself, it will be spread over the 2 quarters. So by the year-end, we should be able to execute those orders.

Got it. Got it. And one more question if I can squeeze in. In terms of branded business, how we have done for first half of the year?

Oh, great. We have done very well. Praveen will tell you.

Praveen, this side. So yes, for the domestic business, we clocked a turnover of around INR 60 crores in the first half. This is almost 70% growth over the corresponding period last year.

Okay. And this includes the institutional part as well or this is pure brand? This includes institutional part, right?

Yes, this includes the institutional part bulk as well. So -- yes.

Got it. Got it. And in terms of profitability, do we expect that minor losses could be there for this FY '21?

See, right now, we are expecting a good second half as well as what we have done. So closer to quarter 3, we will be able to comment a little better on this. We are trying to see how best we can minimize even though a little losses that we had expected at the start of the year.

The next question is from the line of Kashyap Jhaveri from Emkay Investment Managers.

I have 2 questions. One, on the stand-alone margins front, I understand that we also do advertising on behalf of Continental Coffee and which is later on billed to them. So the stand-alone margins partially could also be because probably there was no A&P spends in the first half?

Yes. I mean, there was -- no. The spend was efficient, but no, it's not because the A&P spend was there, but we got the margins that were better.

The better margins...

Yes. I understand that even gross margins of about 300 basis points would have helped. But you said that anything on no A&P spends during the quarter or if we would spend on A&P...

I said that there is a way of how people are spending, yes. Yes. I was there.

So 50% of the last year's budget was already spent. So since it is only last year, we have spent the entire amount in the second quarter only. This year, it was only to the extent of 50%, we have spent.

So that was, I think, about INR 11 crores last year, right? And which is about...

Correct, correct. This year, it was about INR 5 crores so far.

Okay. Okay. Second question is on the new client in U.S. as well as on the European -- the retail chain side. Any developments [indiscernible] if there is anything to apprise of at this point of time? And in terms of supermarket segment in Europe, anything that is -- any new development over there if it is there?

There's no new development as such. We've already added this new customer as far as the U.S. is concerned. And we've actually started supplying our first private label small pack business to the U.S. to one of the large retailers. So that was a significant milestone for us, and we've created a very unique product for them. So that is one significant milestone in the U.S. market. As far as Europe is concerned, the existing supermarket business, we got it renewed for next year as well. So that is a positive news again. So next year also, we will have supplies to the EU supermarkets.

Okay. Right. Right. And just one last question on the retail side. You mentioned that the first half total on the branded side is about INR 60 crores. Did I hear that correctly?

Right. Right. So domestic was INR 60 crores, which includes retail plus institutions.

Right. And if I look at FY '20, I mean, the full year sales was about INR 60 crores, with EBITDA loss of about INR 3.5 crores, and we've spent about INR 11 crores last year in terms of expense. So if I were to look at INR 120 crores full year sales this year, I mean are we still then expecting EBITDA -- are we not expecting still EBITDA breakeven over there?

So we are. But as I told you in reply to the last question that let this quarter pass, and then we will be able to give a better this thing because a lot -- this year because of COVID and some segments being closed, it's a little worse for us, that how things move. So we'll be in a better position. But as you rightly pointed out, and as I was mentioning that we are trying to kind of get as close to breakeven as possible.

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

Congratulations on a good set of numbers. Just quickly, I want to understand, 70% Y-o-Y growth in the domestic business. Could you give a breakup -- I don't want the absolute number. I know it will be sensitive. But if you could just give a breakup, let's say, what would be the growth for branded vis-à-vis for domestic institutional business?

So the branded business would have grown close to -- we would have doubled the business is branded, so almost 100% growth is there. Because in [ 2 ] business because of our lockdown and all that, it was pretty muted. So whatever growth has come, the absolute value has come from the branded segment as well.

And it would be fair to assume that we would be very close to, say, INR 100 crore landmark in branded business by the end of this year? Hello?

Sir, requesting to please stay connected. Ladies and gentlemen, the line for the management is disconnecting. Please stay connected while we reconnect them back. [Technical Difficulty] Ladies and gentlemen, the line for the management is reconnected. Over to you, sir.

Yes. So I wanted to check whether -- it would be fair to assume that branded business would be close to the INR 100 crore landmark by end of this year?

It should be. We are keeping our fingers cross, but should be.

Okay. If you can also just overall -- while it's been discussed in part in the earlier calls as well, if you can just holistically share 3 or 4 key products that will drive the value -- upward value movement for you, the new products that you're working on across markets, especially in U.S. and maybe in Europe?

Yes. So value-added products, we are doing several new products, starting from flavored coffees, micro-zone coffees to cold brews, instant cold brews. So these are all extremely high-end products. It's a completely different segment from this -- from the standard vanilla-type products that we used to offer in the market. So a lot of companies who are getting into specialty coffees are in that. Even existing customers who want to increased their portfolio of products, they've started buying these new niche products from us. So you feel that -- yes, go ahead.

Yes, yes, please go ahead. I'll continue later.

Yes. No, so you feel that there is a good growth potential in the future as well because it's a new product consumption pattern that we're trying to create. So it will take some time. So volumes will start slow, but they should pick up going forward.

And how do economics work for these products vis-à-vis your -- the traditional bulk packaging and traditional instant coffee business in terms of either the gross margins or the overall way the [ commerce should ]. How is it different?

See, the margins are definitely better, but because the R&D that has gone into this is also quite a bit. What we do normally is we create new products based on our customers' requirements. And once we create the product, we can offer that product to other customers in different territories as well. So that's what we have been doing over the years. A lot of these innovations that we've come up at our end, we've started these things because of our customers. They've put in request saying that this is the inconvenience or the problem factor that they're facing and they wanted a solution. So cold brew is one such example. Cold brew is a product where a customer is costing them about $150 per kilo, which we brought down the cost to something like $30 a kilo for that. So this is a convenient product, which is there for us. And the customer also, there is a cost saving, which is why they come to us with $50.

And it would be fair to assume that these products would be significantly higher realization. So in the sense that, this would -- would this also be a volume game? Or would this be a much faster scale up for us in value terms? It's like...

See talking about volumes for these products right now, we are a bit premature. This will take some time to build up those volumes.

Okay. No, no, what I meant was, Srishant, that whether this will be a volume story or whether this -- the value scaleup will be much faster, and we should look at the value terms in this business?

So this business will be value terms only because there is nobody else who can make some of these products that we are making. We should be able to maintain our value proposition for at least a couple of years.

Great. Just one last very quickly on the small pack business and on our own labeling and packaging plant. What exactly is the status on that?

Well, the plant was actually supposed to be ready by now, but unfortunately, because of COVID, all the suppliers, the construction, everything has gotten delayed. We are expecting the plant to be fully operational by next financial year beginning, in Q1 of next financial year.

And will -- that would feed into your existing business itself, right? I mean that would be...

Yes. Actually, we are already operating at peak capacity for small packs. So we are also exploring third-party packing for some of our products because we are exceeding our existing capacity right now.

The next question is from the line of Richard D’souza from SBI Mutual Fund.

Sir, on this product innovations, which are there, I just wanted to drill further on it. Today, of the turnover, what percentage would it be? Or, let's say, 3 years or 5 years down the line, what percentage do you expect this value-added products to be as a percentage of your total turnover?

See, right now, this will definitely be less than 5%. And -- yes, going forward, frankly, it's too early for us to project how much it will grow, but we are hoping that it will increase. Our volumes are also growing. So our volumes are growing for the other generic products much more. So this has to out beat that.

Okay. Okay. Okay. And I believe I had asked this question last time also, but I just wanted to understand your strategy for the single-serve segment. Are we planning to enter that or cater to some of the branded players there or we won't be there? Or it's too early to comment anything on single-serve business?

Yes. So single-serve actually is divided into 2 categories: one is we are -- single-serve sachets with instant coffee, which we are already present in, and we're already exporting this also to various countries; the other single-serve is the pods. The pods is a segment where you need the machines in order to use the pods. That segment, yes, it is growing, but it's a very regional business today because everyone who has a small roaster can do the packing and pack themselves locally. So it doesn't make sense for us to actually do the production packing in India, then export it to whichever part of the world, we lose a lot of time and shelf life also in this process. That's why it's more regional point in time. And we have the opportunity of exploring the market in India. But in India, pods market is virtually nonexistent. And we can get into the segment very easily if we have to.

Okay. Okay. But there is no business opportunity in supplying to some of the big guys, who are there -- biggie guys in the single-serve or the pods?

Most of them -- so keeping the shelf life in mind, most of them would want to do it in-house at their end and also buy it locally. If you have to supply from here, especially as the transfers and everything, they lose 2 months or the 6 months' shelf life. So -- yes.

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

Sir, my question is pertaining to, again, Duggirala facility. So what kind of capacity utilization, at least, for freeze-dried, which is there in Duggirala you expect for H2?

For the current year?

For the current year, yes.

H2. H2, we should be doing it -- I mean, clearly, we should be doing approximately about 70% or so.

Okay. Sir, I'm talking about freeze-dried. So we expect 70% in that?

Duggirala plant?

Yes. Yes.

Yes.

Okay. Okay. And sir, when you talked about your Continental brand business, so the total revenue was around INR 60 crore, okay? And we see 70% growth in there. So how much was the Continental in terms of percentage?

Narayana?

So Continental brand will be almost 70% of that.

Okay. And sir, with this unlocking of economy, have you seen any growth in institutional business?

So institutional business has now started to pick up. The first 6 months was a complete washout. And now with things opening up, offices opening up and out-of-home consumption increasing a little, we are seeing an uptick, but still it has not come to pre-COVID level.

Okay. Okay. Okay. And sir, in our balance sheet, we have seen a sharp rise in our short-term borrowing. So what is that for?

Yes. To enable them and to operate independently, we have taken working capital limits, both at our Swiss facility and the Vietnam facility also. So on the consolidated figures, the working capital borrowings have increased to the extent that we borrowed for working capital at these 2 places.

So this is in what cost of fund then?

1.5%.

Okay. Okay. Okay. And sir, in your annual report, sir, we have seen also rise in contingent liabilities.

Contingent liabilities relating to the income tax assessments. So other than that, there are no other contingencies.

Okay. Okay. Okay. And sir, lastly, can you share the...

Sir, sorry to interrupt, but for any follow-up request you to rejoin the queue please. [Operator Instructions] The next question is from the line of Bharat Gupta from Edelweiss.

Congratulations, sir, for a great set of numbers. Just wanted to get a sense what has been a revenue split between the sales which we got deferred from Q1 FY '21? And sir, can you tell us about the volume growth which has happened during the quarter?

Narayana?

Volume growth, there is -- 7% is the volume growth. Hello?

Hello? Yes, sir.

Yes. There is a volume growth of 7%. And yes, that's all. Your question is that, right?

Yes. That partially answers my question. So I just wanted to get a sense about what has been a spillover sales from Q1?

So the spillover has been -- I mean, the spillover sales have been to the extent of about INR 15 crores to INR 16 crores.

INR 50 crores to INR 60 crores.

INR 15 crores, INR 15 crores, 1-5.

INR 15 crores, 16 crores. Okay, sir. Right.

You will see that in the stock adjustment that we have made on the cost side. So I think about INR 12 crores also is the stock adjustment. So overall, about INR 16 crores to INR 17 crores, the existing stocks are [ duplicate ].

Sure, sir. Sir, my second question pertains to the current level of pandemic. So we are seeing that there has been some second wave across -- of coronavirus across Europe. So are we seeing some kind of a delay in terms of order purchase by the clients?

Yes. It's not totally to the normal levels. We are occasionally seeing these disturbances. But definitely, there has been an improvement in offtakes at least people started taking it as a routine. But not only on the market side, even within the manufacturing also, we are seeing that a few -- 1 or 2 of our colleagues also getting infected, and then they had to take quarantine and all that. So the effect is there. It's not on there -- not on just marketing side, it is there on every side. We are trying to overcome. That's the challenge as and when it is coming. On the market front, particularly, yes, that slowdown, which was there in the Russian market for the past 2, 3 months, is slightly improving. We are expecting that whatever backlog orders were there, which will, along with the current orders will be executed in the next 2 quarters.

Sure, sir. That's really helpful. Just one more question, if I can squeeze in.

Yes, go on.

Currently, if you look -- hello?

Yes, go on.

Yes. So if you look at the production volumes, so you have estimated that 9,000 tonnes would be a production from the Vietnam unit. If I look at the freeze-dried unit out here in India, so what can be a suitable amount of production which we can send because 2 months we have lost in terms of maintenance for our old freeze-dried units. So total, if you look at the cumulative volumes, so in India, what can be the sizable contribution which we can produce for FY '21 as a whole for freeze-dried?

See currently, we are -- on the freeze-dried front, I may not be able to say that there will be a huge growth over last year. We should definitely cross by a minor margin in the current year over the last year. Because last year, first 2 quarters, the SEZ plant was not fully operationally. So that is how -- there we might be able to maintain the last year's volumes in the freeze-dried. Spray-dried, we are seeing a better traction this year also in the domestic market. So the volume growth could be slightly better in the freeze-dried segment. So both in India and in Vietnam, this year, the volume growth wherever is there, it is mainly on the spray-dried.

The next question is from the line of Lokesh Manik from Vallum Capital.

Sir, my question is a little macro -- on the macro side. We've observed that the Indonesian government has given a big stimulus. And many -- and some of our companies -- export companies in India have been beneficial. As I understand, we also export to Indonesia, and we've been performing very well between 2015 to 2019, and there was some dip in 2020. So just to understand from you, are you seeing any positive impact there from that country for exports?

So not going very specific into the details, I would say, the exports to Indonesia over the last year has been encouraging.

Okay. And do you see an uptrend from here? And do you see a change in profile mix in terms of -- between spray-dried and freeze-dried what they used to order before and what they are ordering now?

Broadly this year, it is only on spray-dried.

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

Congratulations on a good set of numbers. My question was more on the MEIS benefit. Sir, could you quantify what was the benefits in Q2? And also going forward, since the government has capped the benefits to INR 2 crores, what can we expect in Q3 and Q4 and next financial year, sir?

So Q2, anyway, it is capped at INR 2 crores for that -- Q3. Q3, it is capped at INR 2 crores for that quarter. But as you have already -- you have seen from the financials that we have about close to INR 300 crores in debtors. So we should be getting at least INR 10 crores to INR 12 crores eligibility on that, which we should be getting subsequently if it is capped at INR 2 crores next quarter. This quarter, we have realized about INR 8.5 crore, INR 8.5 crores this quarter.

So for the rest of H2, we can expect INR 10 crores to INR 12 crores. Is that right, sir?

If the government further -- do not impose further cap on the fourth quarter also.

Okay. Okay. And also, my second question is relating to the margin. Can we expect FY '21 to close on FY '20 level EBITDA margins, sir?

Yes. Thankfully, you've asked for the same level, so I would say yes.

Okay. Okay. That's good to hear, sir. And sir, also, going forward, once the situation normalizes, can we expect our earlier volume guidance of 15% to 20% to frutify in, say, FY '22, '23?

Definitely, definitely. With caveat being, as you said, things getting normalized.

The next question is from the line of Prithvi Raj from Unifi Capital.

Yes. My question is on the tax rates in India, we noticed [indiscernible] percent. Sir, one-off that you missed in the tax computation?

Come again, the question?

Yes. So the question is, the effective tax rate in your India books seems to report 40%, 41%. I just wanted to understand, was there a one-off in the tax computation? Or how should we read this number?

No. Actually, we are on the regular tax, which is at 34.94%. That's what is provided for as against -- if you look at the PBT at 54.78%, which assessed at 34.94%, which is equivalent to INR 17 crores. Against that, the INR 7 crores plus we have provided in the Q1 and INR 9 crores plus is provided in Q2.

Okay. So what is the revised time lines now for commissioning the new capacities in Vietnam? I'm sorry if I missed this in the opening remarks.

It's likely to come into operation by March.

By March. So which means benefits will only be there for Q1 of next year?

That's right.

Okay. And once the benefit comes in from Q1 of next year, do we have a lag time before we commercialize this? Or can this be commercialized from day one?

No, it can be commercialized.

Okay. In terms of the demand that you're seeing for -- from -- okay, I mean, just to understand, what was your utilization in Vietnam for H2 of last year?

H2 of last year, we are at 60%.

Okay. Is it fair to assume that for H2 of this year also Vietnam can see this kind of 85%, 90% kind of utilization?

Yes.

Okay. And in terms of the consolidation of our wholly owned sub, I'm just curious how will transfer pricing work now? Will we still price it at cost plus margins? Or will that equation change now?

No. We invoiced to subsidiaries on arm's length basis. We follow the way that we invoice to others in terms of the pricing, in terms of the credit period, both we maintain.

Sure. I understand, sir. And an extension from the question of the previous participant. I understand MEIS for H2 could be about [indiscernible]. So then with the MEIS benefit being recalled, what's the outlook on this for the next year, sir? And what will be the negative impact, if any?

No, come again? Can you repeat the question again?

See, my question is with the MEIS benefit being recalled by the government in favor of RoDTEP, what would be the impact on our financials for the next year?

So far, if you look at it last 2, 3 years, on an average around INR 40 crores is our MEIS contribution. Okay?

Yes.

And we do not know the kind of scheme that is going to come in place next year. And also, if at all if the effect is there, to the extent, if you look at it, there is no new benefit is coming to us. You stay this and look at it at INR 40 crores is MEIS. But yes, there is a new scheme in place, which the current levels we are expecting would be covering to the extent of about 30%, 35% of the existing benefit. Hello?

Yes.

Yes, you are there no? Yes. Secondly, this MEIS benefit over a period has gone into the pricing with a few of our customers because they knew that we are getting this benefit out of their business and all that. So it is considered and shared among the few of our customers. So with these customers, we are confident that we will be able to retrieve on the pricing to a certain extent. So overall, if you see, it's -- I mean, the MEIS scrap and RoDTEP as it is apparent today, we might be able to cover to the extent of about 60% to 65% in total.

In pricing?

Both in pricing and the scheme in place. The balance to the extent of about INR 10 crores to INR 12 crores maybe risk that we have to derisk ourselves.

Sure. That's helpful. And I have a question for Praveen, if I can. Praveen, there's been an explosion of domestic direct-to-retail kind of coffee plants in India. And obviously, this is at a slightly premium range. How do you see this affecting our brands?

So at an overall category level, what we are seeing is that all these brands, which are -- they are very niche in nature. They're still not making a substantial volume impact in the category. So it's good that they're developing the category because after all of them help to increase the category size. But as of now, as we are talking to each other, the big section is still coming from the traditional coffee segment, which is instant coffee. So that's not impacting us too much. On the contrary, we are also getting help because we ourselves are doing a lot of innovations. For example, the premix coffees and the flavored coffee. So these are all started to pick up and, in fact, is helping our business.

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

Just want to know about compared to Brazil, say, if you think about Brazilian real, it has depreciated a lot in the last 6 months. While INR is...

[indiscernible] Jignesh, can you repeat once?

So yes, I just want to understand our competitive dynamics versus Brazil because the real has depreciated a lot in 6 months, while INR has appreciated. So do you think there will be pressure on the margin when you are bidding -- competing against the Brazilian suppliers?

Sir, actually, we are not able to understand your question clearly.

Yes, I'm audible?

Yes, sir. You are.

Some small disturbance is coming.

Just a minute. So what I'm saying is if you take about Brazilian real, it has depreciated a lot in the last 6 months, while INR has appreciated against USD. So Brazil has been a little more competitive in the last 5, 6 months. So is it impacting our future order margin outlook?

Well, I think you are already aware, no, that as far as coffee is concerned, throughout the world, the coffee is bought and sold in dollar terms only. So the green coffee is bought in dollars and the finished product is also sold in dollars. So only to the extent of conversion rate, there will be an impact.

Are you saying that Brazil has been more aggressive because of the favorable currency?

No. See, one thing you should understand is the qualities that come from Brazil are completely different from the qualities that we supply. Brazil grows Arabica coffee. 90% of what they grow is Arabica coffee. And what we use about 95% of our consumption is Robusta coffee. So the kind of output product, the target audience, everything is completely different.

And if you take that based on current order visibility, what kind of volume growth we are expecting in the second half of this year from India plants?

So that's actually a difficult question to answer because at the beginning of the year itself, we had actually booked orders for the whole year almost. Unfortunately, with this COVID and all that, with the postponements that we saw, we were in a position where we couldn't take new orders because we didn't -- we had already committed to some customers and we had to execute those orders. So going forward also, at this point in time, we have a completely full order book. But if a customer comes and asks for a postponement, again, it will turn out to be an obligation for us to accept that postponement. So it's very difficult for me to 100% confirm and say that there'll be so much volume growth. Our target for this year was around 10% or so. And even now, we are hoping that we should be able to achieve that.

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

Sir, what sort of tax rate can we expect in the stand-alone entity this year?

It is the regular tax rate, which is at 34.9%.

Okay. So why was the tax rate so high in Q2 at around 40%?

No, it is 34.94% is the tax that we have provided, if you look at it Q1 and Q2.

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

Just want to understand how the distribution structure has progressed for the domestic-branded business? We've -- I believe we were making a lot of efforts to increase the distribution presence. If you can just share more on that.

So we started distributing our products from south of India to [indiscernible] coffee markets. And last year, year-end, we -- as the distribution reach of around 55,000 outlets. It currently stands at around 75,000 outlets, and we are looking to -- by the end of this year to reach directly to around 1 lakh outlets. Now this 1 lakh also includes what we have done is basically now that we have got a foothold in the southern market, we are expanding our distribution to some of the key towns in rest of India. So by this year-end, we would have done a basic distribution or, let's say, product placement in at least 10 lakh plus down across India. So that is the plan for us. And the structure is very similar to any FMCG structure. We have our sales officer in the field who are supervised by area managers and then zonal managers.

So I missed the last part of that. You said you will intend to reach all 10 lakh plus towns -- plus population towns in the rest of India by the end of this year?

Yes.

Okay. Right. Second, it is -- I think it was mentioned in one of the earlier calls or maybe I read it somewhere that the uptick for instant coffee would relatively be much more given the work-from-home culture, and maybe we are seeing some of it. If you can comment on that, you would obviously have an understanding of multiple markets, depending on your client requests, et cetera. If you can give a global flavor of how the coffee consumption patterns are changing because of COVID.

So at a basic level, in the first half because of the lockdown, what we saw is that the in-home consumption went up. That was a clear trend that emerging on the markets. And out-of-home consumption, which is like cafes and other touch points, they got drastically reduced. So that's a trend which we have seen in the first half. Now it remains to be seen whether a similar trend will continue because slowly and steadily, what we are seeing is that there is now offices are opening and other out-of-home options are opening. And so how much of it gets back to pre-COVID level, how much of in-home consumption continues to be on a higher side, I think we'll have to wait for some more time for some clearer trends to emerge. But the first half, clearly, we saw in-house consumption going up.

Did you also see any uptick in, let's say, the higher variants of coffee in terms of quality relative to the...

Some -- at a very broad level in-home consumption is -- will be better [ this thing of ] coffee now. So in that sense, yes, it was. But the clear trend as I'm telling you, it is a very short-term spikes that could have come. We'll probably need to wait for a longer period of time to see clearer trends.

Okay.

Mr. Bohra...

One last quickly, if I may squeeze in one question?

Yes.

On the distribution side, for the -- let's say, the top 10% of our 55,000 outlets or 75,000 outlets, what would be our market share in, let's say, the top 10% outlets as a percentage of the sales of coffee for our brand?

4% to 5% maybe, 4% to 5% is what I would put my finger on.

4%. And our target would be upwards of 10%. Is it fair to assume?

See, that's our wish, I would say. And of course, we are heading towards that. But yes, if -- because it's the branded segment, you need to create a lot of brand pool before we reach to 10%. 10% in an FMCG category is a pretty high percentage for a new brand to achieve. So we are all working towards this. And yes, hopefully, we should achieve that.

But are we doing it in any of our stores?

Any of our?

Any of the outlets, are we doing 10%?

Yes, yes, there are many outlets where we doing 10%. In fact, there are a lot of e-commerce platforms where we are doing 10%. So that's eminently possible. But as you know, FMCG is not about certain only handful of outlets, it is about how quickly you can scale up distribution and achieve 10% in all of these outlets. So that's a little distance to go. But what I can say right now that we are headed in the right direction.

The next question is from the line of Sameer Deshpande from Fair Deal Investments.

Hello?

Yes.

Am I audible?

Yes. Please go ahead.

This MEIS cap, which you mentioned of INR 2 crores is the annual cap on the export turnover?

No. For the third quarter, the quarter from October to December, government capped it at INR 2 crores per company.

Per quarter [Foreign Language]. So annually...

For quarter, not per quarter. It is only for this quarter.

[Foreign Language] only for this quarter. [Foreign Language]. And -- so actually, in this quarter, you mentioned that you -- we received INR 8.5 crores in Q2. So assuming that run rate of about INR 7 crores to INR 8 crores a quarter, we -- for the next quarter, we will have the effect of about INR 5 crores, INR 7 crores negative?

For the next quarter, it might be capped at INR 2 crores. So that will be a negative of INR 5 crores for that. But if they allow -- subsequently, if it is revived, the fourth quarter will see a quantum jump because already during the quarter, we would have accumulated some more eligibility. So it would rather compensate in the fourth quarter, if there is no further restriction.

[Foreign Language] and government is actually likely to replace it via a certain remission of duties, et cetera. So are there benefiters, if at all, that is implemented?

No, it will not fully compensate it for us. That's what I answered for the last question. It might compensate to the extent of about 30%, 40%. Some part of it, we are trying to recover through our pricing. We are trying to minimize the damage. If the MEIS goes and the other scheme doesn't compensate to the [indiscernible].

The next question is from the line of Manoj Gori from Equirus Securities.

Just missed like -- I was late to join the call. If you can throw some highlight like what was the potential impact we witnessed during the month of July for the stand-alone business that resulted in degrowth during the quarter.

Can you just repeat it, sir? There was some disturbance.

So potential impact on the stand-alone business, like we degrew during the quarter, so?

Yes, we've had to shut down our -- due to these postponements, et cetera, we have stopped our freeze-drying plant in our Duggirala facility. So if I have stopped it for 2 months, it is about 800 to 900 tonnes reduction in the freezing production capacity.

So that would have been roughly around INR 50 crores to INR 70 crores of impact, sir?

Not INR 50 crores -- plus or minus INR 50 crores. But we were already carrying an inventory, no, so March end, we were carrying substantial inventory, which we have liquidated during the first quarter to a larger extent. And then during the first quarter, we have produced some and towards the end of the first quarter, we were carrying some inventory, which we could liquidate during the second quarter. So there will not be a substantial reduction on account of freeze drying capacity The capacity was lost, but the sales were almost to the extent of about 60% to 70% in the Duggirala unit also. You would see that on the inventory adjustment that...

Definitely come down, yes, yes. So what we can safely assume, like there wasn't material loss of sales because of the maintenance that we did for our freeze-dried capacity in Guntur plant?

Correct.

The next question is from the line of Nikhil Upadhyay from Securities Investment Management.

Congratulations on good set of numbers. Am I audible?

Yes. Yes. You are. Go ahead.

I had 2 questions. One is to Praveen. I think on the branded side, we've seen a very strong growth. And if I understand, at the end of March, April, because of a lot of unavailability, we were targeting the smaller retail and stockists. And there, we were getting good traction. If you can just help me understand in terms of some kind of a same-store sales growth kind of because the distribution also has grown by 50%. So on the existing stores where we were already present, what kind of a growth are we getting? Or what is the kind of retention of customer we are getting? Any qualitative aspects if you can share?

So first half, because we were not able to expand too much because of COVID, in fact, all the growth that we have got is largely because we only grow from 55,000 outlets to maybe 70,000, so which is only 15,000 outlets we grew. But the large part of growth came from existing outlets itself. And the good part is that our product has been quite liked by consumers. So we are seeing a lot of stickiness by a lot of new set of consumers. And that is getting reflected by the repeat orders that we are getting from the initial outlets that we have placed the products in. So that's the positive feedback that we are getting from our -- for our product.

Okay. And in this, this modern trade would not have contributed anything for us?

Yes. Modern trade also -- I would say, actually, because for a small business and a growing business like us, a lot of green shoots that we had seen last year had started to bear results this year. So also, the good thing is that we have seen growth across channel. So the growth has come from kirana channel. The growth has come from modern trade as well. The growth has come from e-commerce as well. So all the channels have seen a good amount of growth. So I can't say that one has overdone the other.

Got it. Secondly, Srishant, like 2, 3 years back when we were putting the freeze-dried facility, and there was a lot of noise about new capacities coming in. And now as those capacities are commissioning or getting operational, how do you see like -- is that demand supply good enough? Or do you think that the pressure on pricing, which we were talking of a year or 1.5 years back, does this still exist? Or what -- any qualitative aspects if you can share?

Well, the pressure is still there. All the capacities have already come online. And everyone is supplying in the market already. And I think last year and this year also, we are seeing a slight increase in demand also for freeze-dried coffee. So yes, there's not much of a drastic change in the market dynamics as such.

But contrary, it wouldn't be like -- because of the situation, which has been impacted because of COVID, once many of these facilities be facing stress or are they still making good enough money?

See, most of the places as far as instant coffee consumption is concerned, even after COVID, there is no real reduction in consumption that is there across the world. A couple of places and as per our postponement, in Europe, for instance, we've seen an advancement of orders. They anticipated a sharp off-take. So they asked to advance orders. And slowly, that gets tapered down for the rest of the year. So like this, we haven't seen any reduction in consumption of instant coffee as such. It's only a temporary postponement what we have seen. So keeping that in mind, as far as FD is concerned also, there is no reduction in demand, but there is a slight -- I mean, every year, there is a slight increase in demand for freeze-dried, which is there like even this year as well.

The next question is from the line of Kashyap Jhaveri from Emkay Investment Managers.

Hello?

Yes, please go ahead.

Yes, sir. Just one question on the gross margin. We have this inventory adjustment, which is about INR 11 crores sort of adjustment of inventory from the previous quarter carryforward. If one were to adjust for the costs which are included also in this INR 11 crores, would our gross margins be higher by another about 100 basis points? Is that [indiscernible]?

Very minimal, no, because in any -- in our cost structure, the raw material component itself will be more than plus or minus 70%, if you take the cost itself. So the impact of other costs would be minimal.

Okay. Okay. And second question was on the inventory side. You mentioned that we have still carryforward inventory of freeze-dried coffee...

Last quarter.

Sorry?

Last quarter. Last quarter end, we were having inventory, which during this quarter, we could sell. That is how even though the plant was shut down for 2 months, 2.5 months, the sales per se have not come down substantially.

So that I understand, from the first quarter, we had highlighted this, but -- I mean, if I heard you clearly, you mentioned that we have still decent carryforward inventories for the next quarter also? Or was that -- or have I heard incorrectly that...?

No. For the first quarter, we had inventories available because what we were carrying from March, we were able to liquidate during the May, June. But during May, June for some part -- after that initial 30, 40 days lockdown because we are essential commodity, we were able to operate. So that quantity, we were having an inventory during the end of the first quarter which during the second quarter we could liquidate. That is how during the second quarter, though we have shut down the FD plant for more than 2 months, the sales figure has not come down since we have liquidated all that inventory. Now we are maintaining minimum inventory on finished goods.

The next question is from the line of Manish Mahawar from Antique Stockbroking.

Just 2 specific question. One, in terms of freeze-dried coffee, when you said maybe 2Q, we will be liquidated inventory of 1H. So is it fair to assume because we have taken a shutdown in our -- production shutdown in our -- loss in our 2Q. So is it fair to assume that second half, our contribution of freeze-dried will be lower as a total company?

See, if we are able to run the plant to the full extent and we are able to deliver, then obviously, we will be able to achieve. We will not carry the -- we will not have any inventory or we will minimize the inventory by the end of the second half. Then, we should be able to achieve almost equivalent to last year's sales figures on freeze-dried.

Okay. And second, just again, in continuation of this just -- do you just wanted to understand. Second half the margin should be -- if we compare with the last year second half should be lower maybe because contribution of freeze-dried will be lower because Vietnam is doing really fine. And also, your export incentives should be lower again in the second half. Is this fair to assume in the second half?

The Vietnam improvement in quantity is an additional thing, no. To a certain extent, MEIS will dampen that additional realizations that we get. But there will not be a total strength on the margins as such. So normally, MEIS is one part. We consider margins without MEIS facility. So operational margins should be better. The MEIS being what it is, it is changing from quarter-to-quarter for the past 3, 4 quarters. So we take it as a separate. The operational margins definitely should improve.

Okay. Understood. And sir, can you give me export incentive number for the last year same quarter? This quarter, you said...

Last year same quarter, it was about INR 10 crores.

INR 10 crores. And what was the number for 1H this year and last year, if possible?

Pardon me?

This year's first half and second last year first half numbers, sir.

It's INR 18 crores versus INR 15 crores.

As there are no further questions, I now hand the conference over to Mr. Abhishek Navalgund for closing comments.

Hello?

Abhishek, over to you.

Yes. Thank you. Thanks to the management and all the participants, basically. So I'll just hand over the call to Srishant sir for his closing comments. Thank you.

Yes. Thank you for organizing the call. And thank you all the participants also for taking part in this. Hope to talk to all of you again next quarter. Thank you.

Thank you. Ladies and gentlemen, on behalf of Nirmal Bang Institutional Equities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.