S H Kelkar and Company Limited (SHK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to S H Kelkar and Company Limited's Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on S H Kelkar and Company Limited's Q1 FY '21 Earnings Conference Call. We have with us Mr. Kedar Vaze, Whole-Time Director and Group CEO; Mr. B. Ramakrishnan, Head Strategy; and Mr. Shrikant Mate, VP and Group CFO of the company. We will begin the call with opening remarks from the management, following which we'll have the forum open for a question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Kedar to make his opening remarks.

Good afternoon, everyone, and thank you for joining us on our earnings conference call to discuss the operating and financial results for the quarter ended June 30, 2020. I hope and wish that all of you and your families are keeping safe and healthy amidst the current crisis. The quarter gone by started amidst an unpredictable operating environment. The spread of the COVID pandemic and the resulted lockdowns in the country caused overall disruption in our manufacturing and business activities, particularly in the months of April and May. In addition, similar lockdowns and restrictions across key international markets also impacted demand and sales for major part of the quarter. However, as lockdown restrictions across domestic and international markets eased, we witnessed an encouraging demand pickup, roughly around the last week of May and continuing into the month of June. On a consolidated basis, our revenue from operations then stood at INR 191.4 crores in quarter 1 FY '21. In these extraordinary times, we undertook concerted efforts to maintain a strong financial and operating discipline that enabled us to seamlessly support business commitments despite the operating constraints. This, along with the stabilized raw material environment, enabled us to report normalized gross margins approximately 44% EBITDA -- gross margin of 44%. EBITDA margins also improved to 18% during the quarter. Reported PAT stood at INR 14.8 crores with PAT margin at 8%. On segmental basis, the Fragrance and Flavor segment reported degrowth primarily owing to disruptions in the first month, both in domestic as well as the international markets. Fragrance segment however witnessed strong traction in demands from the last week of May, continuing into the month of June. This resulted in a better-than-anticipated performance during the quarter. On the operational front, I'm pleased to share with you that we have concluded the acquisition of the remaining 49% equity stake in Creative Flavours & Fragrances July. The acquisition is value-accretive and synergistic business opportunity for us to expand presence into newer markets in Europe and also expand our portfolio within the high-growth categories of Fine Fragrances, Air Care and Fabric Care segments. Furthermore, through this acquisition, we will continue to broaden our product offerings by cross-selling solutions and sharing R&D and knowledge base to create and launch innovative products in the global markets. CFF continues to report healthly results despite the challenging operating environment. During the January to June period, revenues from the core Fragrance segment stood at INR 71 crores, with gross margins of 55%. PAT margins remained stable, and we expect it to improve going forward. From a balance sheet perspective, as of June 30, cash from operations stood strong at the INR 61.5 crores. This enabled us to further reduce our net debt from 30th June of INR 246 crores as compared to INR 299 crores as of March 31, 2020. Following the payment of the second and final trends for the completing of CFF acquisition of roughly INR 126 crores, the consolidated debt levels will increase. However, these would be peak debt levels for company. And given the cash generation anticipated in FY '11 -- FY '21, we are confident that the net debt by the end of the fiscal would be at similar levels to the last year. Furthermore, as we have no major CapEx plan for the next few years, this should generate strong free cash flows going forward. As we look ahead, we are hopeful that the demand scenario across the country will stabilize. In the month of June and July, we have seen strong uptick in inquiries and leads across domestic and international markets. In the domestic FMCG industry as well, there are positive signs that a recovery should strengthen from here on. Our engagements with our customer base continue to be solid, and our wallet share across accounts has remained stable. In addition, [ win back new [indiscernible]] during this period under review, which is consistent with our [ new win ] tracks in the last few quarters. We are constantly monitoring the macro situation and accordingly undertaking all measures to plan operations, safeguard customer interest to the best extent possible. On the whole, we are confident of our growth potential and opportunities across the domestic FMCG space as well as in the international markets over the medium to longer term. We believe that once the macro situation normalizes, we should be able to deliver healthy growth going forward. With this, I now request the moderator to open the forum for any question or suggestions that you may have.

[Operator Instructions] We have a first question from the line of Sajal Kapoor from Unseen Risk Advisors.

Kedar, on the page 3 of the investor presentation, it says that the focus is towards making a sustainable improvement in the return ratios going forward. Now around the IPO time in FY '16, our ROCE was around about 20%. Is that more like an aspirational number we could aim to look at over the medium term?

Yes. I think if you look at the business, we have been in an investment and growth investment. And now we are in the phase where we have the investments in, particularly, the R&D investments in place. I think our aspiration is to restore the business to the plus 20% ROCE levels and around the 20% EBITDA levels.

Excellent. That's good to hear. And secondly, given the fact that our business is relatively inelastic with a stable and predictable cash flows and balance sheet is getting back to good health now, what could be our capital allocation strategy going forward? And what is the debt repayment schedule like? So if you could just shed some light on capital allocation and our debt repayment schedule going forward.

Yes. Given the uncertain macro environment, we are very conservative in terms of capital allocation, we are basically operating our current business. And what we have undertaken, we have basically completed with the acquisition of CFF. There are no immediate plans for any major CapEx or expansion around these current macro situation. On the cash flow, debt levels, as we have indicated before, we are now at the maximum level of debt that we would be in the annual cycle. And we should be back to the same levels of debt at the end of March 2021 as where we were at the beginning of the year. We plan to, roughly, bring in INR 140 crores of cash flow for this year.

Right. So I mean do we aim to keep the cash on the balance sheet or go for some sort of enhanced dividends or buyback? I mean, what's the sort of larger strategy around the cash flow utilization?

So we will use the cash flow to bring down debt, and we will also keep in line with our distribution policy of roughly between 30% and 40% of the profits of the year to be paid out to the shareholders.

Okay. Okay. That's good to hear. And lastly, if I could just squeeze one last. So keeping the COVID thing aside, what are the key risks that we need to watch out for in a more normalized operating environment for a business like ours?

I think given the couple of years of uncertainty and low growth environment, we have -- as you've seen in this quarter, we have taken quite aggressive steps to manage our cost, particularly fixed cost, converting some of the cost to much more variable form. This allows us to be very nimble, allows us to focus on business opportunities with a focused team and dedicated approach. So from that angle, we have a bit derisk from such events in the future in pockets. So if it is a macro event like the COVID, obviously, it will affect all business segments. But if there were particular challenges in one region, one category or segment, we are able to better realign our resources to opportunities that grow. This is the parts that we have done. I think the question in terms of your risk. So we have derisked our model to large extent. And our large risk is basically at what momentum and growth rate does the FMCG and the markets we are in actually grow in the next 2, 3 years. So we have now a more flexible approach. I think the risk is still basically in reverse, that if the market were to rebound and the growth were to come back in very strong measure in these markets, then we may be a little bit caught out with our R&D preparation because we have substantially downsized our R&D in the last year and continue it now to focus on the slower growth trajectory that we expect. So the risk is if things start looking up and things go back much faster, then we may have some challenges to ramp up our development pipeline. But other than that, I don't see any major risk.

We have next question from the line of Alpesh Thacker from Motilal Oswal Financial Services.

Congratulations for the set of numbers amidst this crisis. A couple of questions from my end. The first one would be the EBITDA margins improved in this quarter on account of better raw material pricing as you had suggested that it has already stabilized in the past 2 quarter. The second was the cost optimization measures that we have been taking for the last couple of quarters. Just want to understand how sustainable are these 2 measures going ahead into the future quarters as they stand today?

So if you compare like-for-like this quarter versus last quarter, there is substantial reduction in the fixed cost, both the employee and other costs. This is, I would say, about roughly half which is long-term measures and half which is measures which are specific to the situation of this quarter. We have converted, as I mentioned earlier, some of our fixed costs into a variable format with our vendors and employees to have that more nimble and more focused to what is happening on the ground. So that has allowed us to bring down the costs of -- for this quarter. So typically, if you say, employee cost, we have a reduction of INR 6.3 crores versus last year. I would think almost half of that is sustainable, real advantage, real cost reduction, and the remaining is specific to this quarter. Similarly, other expenses, we have brought down almost by INR 12 crores vis-à-vis similar quarter last year. But these are sort of semi-variable with fuel, power, these kind of things were not -- the taxes were almost closed for 1 month, I think, almost INR 8 crores to INR 9 crores of what we otherwise call fixed costs are completely down to 0. Thanks to the nature of the like power and fuel and things like this, normally have a minimum charge. And thanks to our levels, we are able to keep that to very small level. So when the factories were completely closed, I would estimate, I don't have a exact number because it's a little bit small parts of the factory are running, some things are additional costs because of the COVID. But roughly INR 8 to INR 9 of fixed costs were one-off costs saving in this quarter. I would say, put that together, roughly INR 10 crores of cost saving for this quarter are one-off, and the balance are sustainable going forward.

Okay. Okay. Understood. And sir, second question is on the consolidation that we have done. And I was looking at the gross margin for CFF. So on a blended basis, that the gross margins are lower than what our core business right now has. So how do you -- do you see margin pressure going ahead on a blended basis for the company post-consolidation which has happened?

So I'm not exactly sure which number you are referring to. Yes, there is 2 business -- nature of business, there are 2 businesses. One is the manufacturing contract business, which is a low-margin business, maybe 5% ballpark, although it is not separately shown. And the other is the core Fragrance business for which the gross margins are excess of 50%. So we are actually integrating the core Fragrance business with our business. The manufacturing contracts with some of the large FMCG players is a approach towards being able to service that market. But that's not our main growth area or that kind of covers our operating overheads in context of CFF.

Okay. Okay. Got it. So I was looking at both the margins from So -- got it. Fine. And sir, last question is on the Flavours business. So as far as I understand, that Flavours is more of an essential item. But at this time, the de-growth in the Flavours business was like more than the Fragrances business? And also, like this segment has been facing a quite volatile growth level for last many quarters. So any color on that for the future outlook on this segment going ahead, sir?

So I think while the Flavour business is much smaller and clearly an incremental business, gain or loss becomes a big percentage of the business. If you take INR 2 crores business gain or loss INR 100 crores base, the kind of percentage volatility is much higher. But when you drill down to product-by-product, customer-by-customer level, I think, there has been consistent growth in the Flavours in double-digit plus. We've had one large business, which we had to exit from the citrus oil based, roughly around INR 25 crores of revenue. So that has caused a big volatility in both quarter-on-quarter and year-on-year. So if you take that out, I think, our business has been fairly stable in the historical context. In the first quarter, we have a much higher degrowth on the Flavours. We have also a seasonality in Flavours in terms of products like beverage and ice cream and so on and so forth, which are more summer products and in the kind of mid- year's or consumption in the -- typically, July, August, it's range is lower. And then it picks up again towards the winter season. So there is a sort of -- we have lost INR 5 crores, INR 6 crores estimated ballpark on the fact that we had a lockdown just in the middle of the summer period. So that is a seasonality part which will -- which is more pronounced in the Flavours. In Fragrances, there is no real large season in our product portfolio. So we are -- we have a bit of seasonality, but it's like plus or minus 2%. In Flavours, it is plus or minus 15% from a seasonality point of view.

We've next question from the line of Manish Jain from [ Gormal ] One LLP.

Kedar, I just needed insights on 2 questions. First is on working capital. For every INR 100 incremental sales, how much is the increase in your working capital broken up into inventory, debtors and creditors?

Yes. So on the working capital, our working capital is largely inventory. While you may see quarter-on-quarter end of the year position of debtor, creditor has substantially gone up and down in the last 2 years because of the GST and force majeure situation. On the longer term, our payable and receivable cycles are fairly well balanced. And the working capital is basically the net working capital is largely equal to the inventory that we hold. I would think 100 days of sales is our incremental inventory, then we need to still hold some minimum inventory of various ingredients, which is roughly INR 100 crores of inventory. So if I look at current basis, we are at roughly 160 days because also the revenue for this quarter has been lower. But on a normalized basis, we are at a 135 days of sale as a net working capital. And I think incremental sale, our net working capital inventory requirement is around 100 days. So this 138 will start to come down about 10 days on every INR 100 crores of growth.

And the second question is, can you share insights on the level of digitization across the company, across different function?

I'm not sure what I can answer in this. So I think the -- obviously, we are in a brick-and-mortar manufacturing side of the business, where the labs and the production requires to connect with the products, so that is fully brick-and-motor in our factories and labs. From the rest of the processes, we are digitally enabled. I don't think we are anticipating, or we were anticipating any kind of major disruption like we have seen in the last few months. But we are enabled to operate in the new work from home and various kind of initiatives around that. I think we are not probably cutting-edge as far as the digitalization as a theme. We are still -- the major issue in terms of Fragrance and Flavour is that the product has to be experienced. So any product development in, for example, in music or art, you can digitalize the format versions, designs and send it across the world. In our case, that's not required. And -- yes?

And my last question was on customer and product concentration. So what would be that contribution of top 10 customers and top 10 products per year?

So the customer and product concentration has not changed substantially from where we were before. I think the top 10 customers account for around 25% of our revenue. And I can send out the exact details subsequently.

We have next question from the line of Madhav Marda from Fidelity Investments.

My question basically was, do you think you have scaled down the R&D spending. Just wanted to understand like, is that something which is sustainable? Or do you think that's the right approach, considering some of our global competition invests a lot in R&D, or is it moved from a more fixed to a variable model, so that's how it should work now going ahead?

No. So I think the question has many aspects to it. Typically, we have a 2 to 2.5-year product development cycle. So what we are developing now will hit the market in 2, 2.5 years when we have to catch the trend of the market 2, 3 years down the line. So for that, we are always needing to do R&D a bit earlier than the market revenue or growth to let the, unfortunately, have the GST demonetization. So in the last 2, 3 years, the growth has been behind the curve in terms of new product launches in the market. So we have now enough for prototypes and pipeline for the immediate 2, 3 years of growth. We are not intending that we will have the R&D permanently at a standstill or reduction phase. Once the revenues start kicking up, we will proportionately start with redeploying in R&D and future development. So at the moment, in the overall picture, we are R&D invested. So we have the prototype, we have the products, we have the library, everything pretty much ready for the next 2, 3 years of anticipated trends and business. To give you an idea, we have within the last quarter, substantial wins in sanitizer and other categories that came up as a result of COVID. And we were able to address them through the library of prototypes, we had already created. So we know that our library is very robust. And what we have been developing in the last many years and particularly last 3, 4 years, it's coming to us, and we will be able to manage the market demand from that library and then add to it for improvements. The second question was in terms of global R&D and they are spent. So global company spends are much higher than our average spends. The spends are higher. And if you look at the nature of business, they are also in much more premium products income per capita spend markets like Europe and America. So their margins on some of these categories is also higher. So it's a different market dynamics, where you need to have a bit higher spending on R&D and product margins which are higher as a consequence, therefore, that's why, evolution, as we look back in history, we were sort of spending 1% to 1.5% of our revenue in R&D. We have upped that to 3.5%, 4%, even 5% last year's. And this is the phase where we are confident that we have enough R&D pipeline. We have the right resources [indiscernible]. We delivered the same results with a 3.5%, 4% revenue to R&D than what the larger global companies are doing with 8% to 10% of their revenue as R&D.

So if I go to last year in FY '20, we spent about 5% of our sales on R&D. What does that number look like for the next 2 to 3 years, considering that we have enough liability available?

So we are targeting around the 4% of sales as R&D expense as our life path for the next 2 to 3 years. So as we grow, we will put out more resources. It depends on the growth rates.

Got it. So basically, 1% of our sales, we are [indiscernible] on the R&D cost for the next 2 to 3 years. Yes? That's a way to think about it?

That's right.

Okay. And sir, the other question was in terms of the CFF acquisition, the gross margins looked quite healthy. But how was the EBITDA margins in that acquisition? And how do you see the revenues and the margins shaping there for the next say, 2 or 3 years?

So the CFF business has been well managed and run. So we have been participating in the management last 2 years. And we have been tracking the business and opportunities and building the also some complementary products in India and in CFF. The overall scenario there is a very similar business to our business in India as a large market presence in Italian market across the board segment products in Fragrances. We see that it will continue to grow at a 6% plus CAGR in euro terms, and has demonstrated this over the last 10-plus years. So we don't have any concern that it will continue to grow. Last year, we have also initiated and invested about EUR 1.5 million of CapEx in CFF, which is already executed. So we have additional capacity built there in line with our overall philosophy to have the capacity ahead of the anticipated growth. We have working systems in terms of product development and technical people to exchange the product concepts or product designs from CFF to rest of the group. So we see that the -- both the businesses will benefit from this synergy. These products will be available in the emerging markets, where we can sell them. Likewise, some of our technologies and new molecules and high-end technologies, the market in India and emerging markets in Asia is not ready for them. And we can use this to market -- to European market, where the market is already set up for capita spending on fragrances to absorb these technologies.

Understood. And sir, my last question would be, basically, this year, like you mentioned in your press release as well that your spends on Fine Fragrances -- sorry, the market for fine fragrances might be a bit muted this year, but the sanitizers in turn should do better. I know it's a bit tricky to sort of answer this. But on the whole, do you think the weaker demand on fine fragrances, which, sir, can be compensated by the higher sanitizer demand? Or how would that play out?

So I don't think sanitizers alone, when I talk about sanitizers or new demand, it is everything related to COVID, which includes soaps, some wash personal wash fabric immunity products. All of the sets of health and wellness products that demand has gone up. If you look at our overall basket of kind of categories, the Personal Wash and Fabric Wash categories are roughly 40% of the sales. And Fine Fragrance is roughly 20% of the sales mix. So the Beauty and Fine Fragrances products will decline. The Personal Wash and Fabric Wash, they will -- in which we include also things like sanitizer and any kind of floor cleaning, dishwashing, surface cleaning, lots of the different things that have come up in a big way in terms of COVID. Those categories are growing. So I think overall, the product mix will be slightly different, but the revenue line, we anticipate that there will be continued growth. On the margin front, as I mentioned earlier, we will see a roughly 1% or 2% gross margin erosion on the account of the product mix, but we are also seeing a decline in some of the key raw materials, which should allow us to improve our gross margin. So I'm still looking at the same gross margin level at roughly 43% for the full year.

43%. And overall, the EBITDA margin is basically, you sort of guided towards reaching 20%. So how many years do you think we can get to that level? Is it like a 3, 5-year journey to get there?

I think we are already at 18% in this quarter because it is exceptional cost. But if we did a full quarter with a regular sort of, say, regular sales, we would be at 18%, effectively quarter-on-quarter going forward. I mean, not taking into -- this year into account because there's a lot of variability, I think, '21, '22 onwards, we should be in a sustainable EBITDA 18% plus.

Your next question from the line of Ankit Pande from Quant Mutual Funds.

Many congratulations for the management for a rough quarter, but with a very good execution. My question is around some of our discussions that we've been having with our clients with [ MNCs], and we have been hopeful of some conversions here. What has been the -- any progress in these discussions? And also, if you could highlight what has been the impact of the lockdown on our mid-sized and domestic clients, which form roughly about half of our revenue here.

Yes. I think the first quarter results, where testimony that in months of April, a large many of our smaller customers, our own operations were not fully functional. By June end, almost all customers have restarted. I would say, as we speak, the traction on the ground is that more and more customers are coming online and demand is starting to come back. It's uncertain time. So I don't want to commit on anything that happens going forward. But the current traction is there. Every week, things are slightly better than the previous week. I wouldn't say we are completely normal, but things are improving. On the customer mix, I think, the larger customer, the first question was on terms of the new products in the larger clients, MNCs, and global accounts. So some of those activities are also being affected by the lockdown because they are unable to conduct consumer tests, so they haven't taken up new products as part of their response to lockdown. They have reduced SKUs. They are focused on managing current supply chain. So many of the large projects, which are multi, let's say, multi-quarter, multi-year, kind of, projects have all been -- work on that has been stalled in the first quarter. By and large, these projects have restarted, and we are hopeful that in third quarter, people will be back in the normal new product launches and so on and so forth. The additional thing is that whilst the normal products new launches have stalled, there has been a few of new products catering to the new COVID-related trend, and we have a large number of new wins across these categories. So however the pipeline of new wins is quite healthy, it continues in this quarter as well.

Okay. Great. So if I'm to interpret it right. During the next quarter or 2, maybe it will be a couple of quarters still to get back to the top line that we used record before. But should we expect a good growth going forward? And I mean, I put this in context with the last 4 years or so, we have shown a deceleration, and I should say in our top line. So what can we expect as investors over a 3- year time horizon as far as that top line growth is concerned?

Yes. So I think this year, we will probably end the year, I mentioned earlier, around the -- so we are looking at a 11-month year in a way, and we're trying to see if we can do at least the turnover and levels of last year and exceed that. I think bottom line, because we had exceptional cost last year, will be quite different. But on the revenue and margin side, if we can reach last year and we are on track for that. In terms of the growth thereafter, this roughly translates to 8% growth, if you convert the 11 months to 12 months of execution. And we anticipate that the year after that onwards, we can factor roughly 12% growth on the current business. We will get additional growth from the CFF after the integration next at least quarter to this year. So we will present the CFF outlook after the integration and the first quarter of consolidation. But the non-CFF business, we can factor in 12% CAGR growth the year after this year, in '21, '22 onwards.

[Operator Instructions] We have next question from the line of Rohit Nagraj from Sunidhi Securities.

Sir, you mentioned that in terms of CapEx, we had done largely CapEx across the Board, and we may not be spending for the next couple of years. So given that the current capacities we have, Care as well as CFF, what is the maximum revenue potential that we can have on based on maybe last year reprices?

So if I look at the, basically, the potential revenue, we have roughly 20% of our business, which is in terms of ingredient capacity, where we have about 80% utilization. So there is limited scope for revenue increase there, roughly 20%. And the 80% of our business, which is a INR 1,000 crores business, we really have, basically, capacity to double up even triple that business without any large CapEx in the markets that we are currently operating. So the CapEx wouldn't be necessary if our revenue growth were in new markets or in additional geographies where we don't have a plan for the [indiscernible] some kind of a [ BCP]. Not in the current business [ contractual year ] operating in the current markets, we have capacity enough for doubling our revenue over the next 3, 4 years without any real products and CapEx. So we will have CapEx largely in the nature of setting up R&D centers and [indiscernible] the production CapEx is somewhat in place.

Okay. And the second question pertains to CFF. So if you've given the details about first half performance. So if we just calculate the consolidated gross margins, sir, it comes at around 37% with a [indiscernible] 44%. So is there any scope for further improvement? And is there any risk on the contract manufacturing side of the CFF business? And lastly, the cost of debt for the CFF acquisition?

Just give me 1 second. So on the CFF, we have basically 2 parts of the business. We have the core business, which is the fragrance manufacturing and development business like ours. And we have a manufacturing contract business, which is roughly half of the revenue. So the gross margin in total business is roughly 32%. But when you track to the core business, we have a gross margin in excess of 50%. And that's really the business that is growing. The manufacturing contract business is basically steady state that covers part of our overheads and operating costs. So that is helpful to manage the fixed cost to a very low level and/or cover the fixed cost to almost 100%. So that's the business model at CFF. We have 1 or 2 large manufacturing contracts, which cover for the manufacturing overheads. And then our business of 16.5 million last year was the core business, which had excess of 55 -- 50% of gross margin.

All right. Sir, and another question on that. In terms of the contract manufacturing business, is there any risk? And what would be the cost of debt for this INR 140 crores that we have from the investor?

Rohit, so the INR 140-odd crores, a bit little less than INR 140 crores [ for debt ] that is raised for this acquisition is in euro terms. It's the borrowing rate close to around 2% at this point. So I don't have exact number with me. It is linked to the Euribor floating rate, but it should be around the 2% interest rate.

You have a question from the line of Anuj Sharma from M3 Investments.

My question was on the Flavour segment. Now internationally, when we see global large players, the discussion between Fragrances and Flavours is marginal. In our case it is significant. My question is, is there any INR 120 crores on business of, given our age and experiences a very marginal number. So are there any structural challenges in our businesses that -- and being a small player, I think, we had multiple opportunity to scale up. So some thoughts into this end?

Yes. So while INR 100 crores is quite a small number in relation to the INR 1,000 crores, I believe, at the INR 100 crores Flavour business, we will be in that top 5 or 6 flavor companies in the country. So it's not insignificant. It's a market share. It's not a dominant market share, but we have started pretty late. We have come into the Flavour business only in the last 20 years as against almost 100 years in the fragrances. There is obviously catching-up time. I also see that the business of flavors and fragrances is of one nature, where it's almost 60%, 70% of raw material is the same, the same kind of product development, aroma and then you say flavor in food. Much of the flavor is smell. When you eat a, or taste an apple, the apple texture and taste is only 3 or 4 types of taste, like salty, bitter and so on and so forth. Maybe 5 types, or 6 types. There is various numbers, but it's a very small number of which is senses. And the majority difference between one type of fruit and another type of fruit, or in other food is in the aroma and in the smell. So both flavor and fragrances are quite an alive business. It's a complete business. So in that sense, we don't make -- we think it's very much strategic it continues to grow. And when we started Flavours in '90s, there was -- or prior to the '90s and the globalization of flavor market was even very low, kind of, I would say, margin or cost per kilo basis. So it was far more attractive for us to continue to grow in the fragrance business. But post-1995, '96, I think, the global flavors have started coming to the Indian market. And the flavor market has, what I would say, is quality driven rather than just price driven. So post '99, we started our sale of flavors, actually in 1999. So we are basically 20-year-old as against 100-year-old for many of our competitors in our own Fragrance business.

Okay. So if I were to ask you challenges, and the second and last question, what is the key challenge? Is it that we don't have the products, or we don't have the -- a customer access, or we -- or could we just hire a prominent flavorist [indiscernible]...

[indiscernible] The Fragrance and Flavour business is very similar. We are a very sticky business. So Coca-Cola flavor is the same flavor 120 years. There is no change whatsoever. So if you were the one who introduced the flavor, we would continue to grow with them as next 100 years. So the fact that we are in this business only for 15, 20 years, we are building a set of brands and the kind of loyal annuity, kind of, every year repeat business. And it is -- it's not that this business or this industry is really about taking existing business market share, it's about building market share with new businesses. So it will be a time -- it is a matter of time to build the market share. And to give you a perspective, our Flavour business was INR 1 crore in 1999. So in 20 years, we have multiplied it by 100x.

We have next question through the line of Bharat Sheth from Quest Investment Advisors? We have next question from the line of Dhavan Shah from ICICI Securities.

Yes. Sir, I have one question and that is related to the...

I'm sorry to interrupt, we're not able to hear you. Please use the handset.

Am I audible?

You are, sir.

Yes. So I have a question on the [indiscernible]...

Sir, I'm extremely sorry, we are not able to hear you very properly. Please use the handset or speak a little close to your device.

Is it audible now?

Yes, please go ahead.

Yes. So my question pertains to the working capital side. And if I look at the working capital cycle, which is somewhere around 45-odd percent of sales. So is there any scope of improvement over there? And if yes, then -- I mean, where can we see a reduction going forward? And what kind of the [indiscernible] in terms of the overall cash conversion cycle for the next 2 to 3 years?

Yes. So we are -- if I don't count this quarter, given the sales numbers are quite different and not normal, so if you look at March ending as a full year basis, we ended with a working capital of around INR 500 crores and 138 days to sale. This 138 days effectively for incremental growth, we will need somewhere around 90 to 100 days of working capital in terms of inventory. And this 138 will progressively keep coming down approximately 8 to 10 days per year as the sales of -- so every incremental sales, we don't need 138 days of working capital. We will be depending on the business, anywhere between 60 and 100 days of additional working capital. So 100 days on a new incremental business is what we need as a working capital.

So going forward, this 138-odd days can reach to around 300 days in next 2 to 3 years?

It will take longer than next 2 to 3 years. It will be roughly 7, 8 days of reduction per year, or probably take 5, 6 years to reach 300 days level.

Right. And what's our debt repayment program?

So we are now at approximately INR 380 crores of debt, and we will repay INR 100-odd crores of debt in this year.

Okay. Okay. And the CapEx will not be, I mean, significant, right? It will be a marginal CapEx per year, going forward, right?

Yes. [indiscernible]

Around INR 20 crores, INR 30-odd crores.

INR 15 crores to INR 20 crores is the expected CapEx.

We have next question from the line of Payal Lad from Progressive Shares.

I hope everything is good and safe at your end. Well, I need few clarifications or explanations in terms of 2 questions. #1 being, there is a mention in the AI that the company has earned a pretty good response in the domestic and the international front in terms of Ayurvedic products. So if you could help us quantify in terms of what possibly could be the opportunity that the company foresees? Who are the big league or a large MNC? And the expected launch for the immunity booster.

Yes. So I think we had an investment in Ayurvedic extract as part of our next stage evolution. I think the industry is also moving in direction of Fragrance and Flavour plus products. So value-added fragrances and value-added flavors. We had the extraction business as part of our flavors acquisition, and we invested that into a plant in Vapi last year from a longer-term perspective. Given the current COVID situation, we have brought that Ayurvedic extract and immunity products into the fast forward and into kind of a highlight. To that extent, we have very good response from our clients. Our business is starting to grow and ramp up. But I would just caution that we are starting on a very small base of INR 3 crores to INR 5 crores, which is a completely new side of the business, but it's growing very fast. On your question on immunity booster level. So we have immunity-boosting fragrances and flavors, both when we have specific actives which have been tested against -- I mean, which are known to improve immunity. Plus, we are specifically launching the immunity boosters for the online retail market-based on our Ayurvedic extracts. This will follow the Ayush guidelines formulation. Such formulation guideline, which we have taken from the Department of Ayush, Government of India. And we will be launching that shortly.

Okay. And secondly, in the last con call, sir, there was a mention that due to the lockdown imposition, the company had reported a revenue impact, roughly about INR 300 million-odd, out of which INR 20 million to INR 30 million you lost and the balance were deferred. So are there any deferents from the last quarter that have been accounted for the current one?

Yes. So in terms of deferral, it's a continuum. So let's say, so perfume was being purchased every month. So their orders of March went in April, April will go in May, May will go in June. So there is kind of a deferral, but they will pick up the material in the next quarter or next month.

If you could quantify on those figures, is that possible?

Yes. So I think the entire INR 30-odd crores, which was pending, I think, we have already sold roughly INR 20 crores out of that INR 30 crores. And by end of the year, we would have sold all of that. So only the clients or customers where they have not resumed their operations, that business is that quantity is still lying with us. For the rest, the orders have been processed.

We have next question from the line of Nikhil Upadhyay from Securities Investment Management.

And congrats on a good execution during this difficult period. Sir, I have 2 questions. One, you said that we have scaled down the R&D, and we have a good pipeline for next 2, 3 years. And as we scale up the revenue, we see the revenue growth will increase our investment behind R&D. But as I understand, in this space, the employee base or the people, the creators of the fragrance or the flavors are too limited. So would it be easy for us to get those people back or get those projects online as we see the revenue scale-up happening, or would it be difficult for us? So can it cause a longer-term damage for us in terms of our future pipeline, just wanted to understand here.

Yes, it's a very good question. This is the reason for -- I mean, the ramp-up and ramp-down of the R&D is basically people training and deployment. So it's not something that is start and stop or close and start like a machinery. But there is -- it's not that we are closing and then restarting. We just scale down our numbers. So if we were training 10 people, we will train 8 people and likewise. So over a period of time, the cost and the numbers come down. And it will take a period of time for us to scale it up. So it's a very valid question that can we ramp it up? It will take 6 months to 1 year to start to ramp it up as well. So it's not a process that is overnight. But we are anticipating that we will be in a slower growth environment for next 2, 3 years. And accordingly, we have taken these steps.

Okay. And secondly, sir, this is a question like over the last 3 to 4 years, one of the reasons why we mentioned that our growth had been lower was because our dependence on the retail or the smaller bakeries, or the -- those was very high, which got impacted due to GST and demonetization? And my assumption is that with COVID, the impact would be much more. Do you think that the growth numbers which you just discussed of 8% and 12% for next year and year onward, do you try -- build in that those segments can continue to see degrowth? Or -- and are they as substantial now as compared to 3 to 5 years back?

No. So I think the smaller clients in the domestic market, which was contributing roughly 20% of our revenue has already come down to around 10% of our revenue in '19/'20. So I think the impact of any growth or degrowth on this segment is far outweighed by the growth on the larger plans. So in the last 2 years, or 3 years preceding, we had a -- 2 years preceding last year, we had a situation where 21% to 10%, but the balance large clients continued to grow. And I think this year, '19, '20, also, we've seen that we would be in double-digit growth. And I think this year, being a challenging year and normal less year, we will wait and see exactly what happens. But our percentage dependence on the smaller clients is reduced from 20% to 10%.

We have the last question from the line of Rohit Nagraj from Sunidhi Securities.

Sir, I just wanted one clarification, where you said that we have exited the citrus oil-based business, which impacted by INR 25 crores. So just wanted a little explanation on the same.

[indiscernible]. Repeat the question.

In one of the comments you mentioned that we have [indiscernible], and there was some revenue impact of about INR 25 crores in [indiscernible] citrus oil-based.

Yes. citrus oil-based. This one is basically in Flavours. So there was business built around orange and citrus flavors, roughly to the extent of INR 25 crores revenue, which we exited because that was very low-margin business.

Okay. Okay. And sir, in terms of the wins. So what is our general win ratio for [indiscernible]? And what are the -- how many competitors do we compete with? And we are not competing in the FMCG groups particularly?

So I think between 3 and 4 competitors. So 2 to 4 competitors are present on every [ brief]. That's the nature of the business. And we win more than 1 in 3, or 1 in 4 of our [indiscernible].

Thank you, sir. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

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

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