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 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mit Shah 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 Q3 and 9M FY '21 Earnings Conference Call. We have with us Mr. Kedar Vaze, Whole-Time Director and group CEO; Mr. B. Ramkrishnan, 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 will open the forum for a question-and-answer session. Before we start, I'd like to point out that certain statements made in this conference may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. Now I'd like to invite Mr. Kedar Vaze to make his opening remarks. Thank you. And over to you, sir.

Yes. Can I request Mr. Shrikant to make the opening remarks, my connection is a little bit slow. Shrikant?

Yes. Just one.

Mr. Shrikant? Hello?

Yes, yes.

Sir, we are not able to hear you. Mr. Shrikant? Hello?

Yes, yes. Yes, I'm just opening up. Please bear with me. I'm just trying to get hold of the [ copy ].

Hello? Can you hear me?

Yes, sir, we're able to hear you.

Okay. So I can start. I think the connection is better now. Good afternoon, everyone, and thank you for joining us on S H Kelkar and Company Quarter 3 and 9 months earnings call. I trust that you and your families are safe and maintaining all precautions against this spread of COVID. To begin with, I'm pleased to share that we have delivered healthy performance during the quarter, driven by sustained uptick in demand across domestic and international markets. In addition, robust sales from our wholly-owned subsidiary CFF further contributed to growth during the quarter. I would like to highlight here that this is the first full quarter of consolidation of CFF in SHK's performance. On a consolidated basis, our revenues from operations stood at INR 375.4 crores, higher by 31% on a year-on-year basis. And on a like-to-like basis, excluding Keva, excluding CFF contribution, our revenue in quarter 3 were higher by 6% year-on-year. As we have indicated in our earlier communications, the global F&F industry during the third quarter witnessed significant price increases in some of the key raw materials. We believe that this global surge in raw material prices transitory in nature and situation should normalize. In order to mitigate these near-term uncertainties, we have proactively built up our inventory levels. A prudent inventory management enabled us to cater to the demand during the quarter without any notable impact on our gross margin performance. In addition, our cost optimization measures assisted profitability. Accordingly, our gross margin during the quarter stood at 43%, while EBITDA margins were at 19%. CFF also delivered a steady performance in its core Fragrance division, driven by increasing demand and volume offtake in the Italian and other European markets. Gross margins in the core Fragrance segment remained strong at 54% in quarter 3 for CFF. PAT stood at INR 35 crores, higher by 39% as compared to INR 25.2 crores in quarter 3, which is excluding onetime exceptional costs. Another encouraging point that I would like to highlight here is that even in a challenging and an unprecedented fiscal year, we have reported healthy growth in the 9-month period. Our consolidated revenues grew by 10% year-on-year, and excluding CFF contribution, our like-to-like revenues were steady at INR 810.8 crores. On the profitability front, excluding exceptional income and loss, our 9 months FY '21 PAT stood at INR 91.9 crores, higher by 54%. Cash profit for the period was strong at INR 134.5 crores. Coming to the segmental front, the Fragrance division witnessed normalization in demand, and improved business wins resulted in a healthy volume offtake in the domestic market. New wins from the existing large and midsize FMCG customers in the domestic market further assisted growth. In the Flavors division, continued traction with existing and new customers, both in the domestic and international markets, resulted in improved performance in the quarter. Overall, a key hallmark of the F&F industry globally, is its ability to sustainably churn out steady and consistent performance over long periods of time. We are confident of reporting the solid results in the coming quarters and years. From a consolidated balance sheet perspective, as of 31st December 2020, the company's net debt position stood at INR 492 crores, which includes the consolidation of CFF debt and the payment of the second and final tranche of the CFF acquisition. Higher inventory levels on account of uncertainty in the raw material environment would impact working capital requirement in the near term. We believe that this will translate into a higher than indicated debt position by March 2021. However, the company has no major CapEx plans on hand, and our focus remains on generating healthy free cash flows that will strengthen our balance sheet position going ahead. On the whole, we are seeing solid recovery in the domestic macroeconomic environment, and there are positive indications that consumption in the country will only strengthen in the months ahead. Our engagement with clients, especially in the domestic FMCG, remains strong, and we are registering steady wins across categories. This should enable us to sustain our growth momentum going forward. On that note, I would request the moderator to open the forum for any questions or suggestions that you may have.

[Operator Instructions] The first question is from the line of Alpesh Thacker from Motilal Oswal.

Congratulations for a very good set of numbers. Just wanted to know 1 thing that -- as you were talking that there is this kind of transitory, raw material volatility in the -- volatility environment. So just wanted to understand what is the reason behind that? And can you throw some light on how much kind of price increase have happened or the volatility that has happened? So just 1 thing on that.

No. I think the price volatility is not across the board. It is in a few key raw materials, particularly on the lower cost products. The volatility is more linked to China being sort of closed for the Chinese New Year, plus freight and logistics delays. So there is a shortage in local stock, and there is a kind of higher cost and time for freight in general from pretty much all locations, and especially from China at this point. This has resulted in the spot prices or immediate pay prices going up in this period. We have seen almost, in some cases, doubling of prices, but this is not like any major factory shutdown or force majeure situation, but more a transitionary supply, demand, local stock reduction or change because of mainly the freight. So we have now enough inventory built up, and we see that these problems should ease up in 2, 3 months.

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on a pretty good quarter. Sir, the first question is, last year fourth quarter results, you have indicated that we will be sizably reducing the R&D expenses for the next couple of years. So the 9-month numbers, do they reflect the savings from R&D? Because I understand we had about INR 50 crores to INR 60 crores per annum of R&D expenses. And you had indicated that, that will come down to about INR 15 crores to INR 20 crores. So do the 9-month operating margins and operating profit reflect this saving?

Yes. So I think part of it is already factored, not the entire savings, but it is in track. So this quarter, we will be on line with 4%. The last couple of quarters, we had some additional costs for the relevancy of where people have been reallocated or reassigned. So there has been a change in the overall cost structure. And yes, we will be at 4% this quarter.

Okay. That's helpful. Sir, the second question is in terms of our segment. So FMCG is our major segment. And if I were to divide it between FMCG and non-FMCG. So how has been the environment over the last couple of quarters? And what do we expect in the next foreseeable future? And in the presentation we have given those qualitative comments but in terms of both the segments, FMCG, how much does it account for our overall top line, and non-FMCG, obviously, will be the rest? And what is the expectation in terms of the demand environment, the growth in domestic and international markets?

Yes. So actually, all our demand is directly or indirectly because of FMCG demand. I would say there is a 90% direct demand from FMCG with small and large players across India and across the international markets. So to that extent, barring the industries where we are the supplier to things like paints, varnish and textiles and so on and so forth, which again, indirectly are consumption items but they are particularly not classified as FMCG. I think most 90% of our demand comes from FMCG, either directly or indirectly.

And how has been the environment right now and what is the expectation?

The environment on the FMCG consumption, both domestic as well as Middle East, North Africa region, Southeast Asia has a strong demand environment. We have seen a big uptick in the volumes and in the kind of activity level post the pandemic in these markets. Italy continues to run on a normal track. We are seeing some early signs of what are -- what is the effect of the second wave. But there is no major disturbance to our business, which is mainly in the home care and the consumption items, which are necessary and not linked to fine fragrance or very small part of our business is beauty or premium where there is a direct effect of the pandemic. So overall demand situation is strong. We see that the large customers have already been in -- if I take the top FMCG companies, we have done more than 20% growth year-to-date on these companies. And the midsize and smaller companies were lagging in their growth and now they're all coming back. We have alluded in December, things are now more or less tracking business as usual post pandemic, particularly in India and in -- across Middle East Africa.

Sir, just last one, if I can squeeze in. Can you just reiterate our guidance for FY '22 in terms of revenue growth, gross margin and EBITDA margin?

In FY '22? Next year, right?

FY '22, next year, right. Right.

Yes. Yes. So we are confident to maintain the same guidance as before. We will look at approximately INR 1,300 crores or 16%, 17%, 18% growth from this year to next year on the existing business, plus the CFF business, which we anticipate to be around the EUR 17.5 million for the year next year.

And gross margins and EBITDA margins?

So we are confident of delivering 43% gross margin and around 19%, 20% EBITDA level.

We'll move on to the next question. That is from the line of Viraj Mahadevia, an individual investor.

Congratulations for stable results. I guess my question was partly answered by the previous question. But given where your P&L is and given where you know the band within which raw materials will move, the only way to accelerate profitability, really, in your opinion, is through revenue growth. So what steps are being taken to accelerate that, either share of capture of wallet of existing customers or efforts around new customers, both in domestic and overseas markets?

So as we have talked about in many of the customer, so let me break this growth story into 3 or 4 different parts. We have, obviously, a good market share and presence in the domestic India market in fragrances, where our strategy is more value addition and product differentiation strategy. For the flavors where we have a smaller market share in our fragrance business outside India, we have good headroom to take up the additional market share. We continue to grow. And we have again built good technology platforms and new products. In terms of the R&D as I alluded already ahead of the curve and we hope to monetize these products in the upcoming years. So there is a good pipeline of innovation, and there is a good access to a large number of untapped customers, especially in the overseas market. Italy, again, we are a strong player within the Italian market, and we are looking to expand the footprint to other European countries and utilize our own offices in Netherlands and Italy in combination to expand to other European countries. So we are looking at geographic expansion in the low penetrated markets, and we are looking at innovation and kind of value-added products in the current clients within the country.

Understood. And are you seeing any benefit of this China plus One as people look for sourcing alternatives away from China in flavors and fragrances, particularly for European and U.S. customers?

Yes, we've seen some benefit from that. We are largely a formulation-based business. So our market is, I would say, much more linked to the FMCG and the ingredient business, which links to the fragrance and flavor manufacturers in a way, it's much more linked to the global demand. We have some benefit and some tailwinds on that front. That's only about 15% of our overall business. So that -- I mean that is already something which we have been factoring in our base plan. But we have strong market share of the products where we are the manufacturers already prior to this pandemic. So we don't foresee any additional market share gains in these products as we are the market leaders.

Ladies and gentlemen, we have lost the line of the current participant. We'll move on to the next question. That is from the line of Deepak Poddar from Sapphire Capital.

Sir, you mentioned about the higher than earlier indicated net debt level position we are targeting FY '21, maybe because of the higher inventory position. So can you quantify that? What sort of range we are looking at?

Yes. I think we will be around the INR 365 crores to INR 370 crores then the -- I mean, we originally indicated to bring it down to around the INR 300 crore level. I think we will be hovering around the INR 370-odd crore level. And we will bring down the debt level, maybe 1 quarter, 4, 5 months further down than we anticipated.

Okay. And by FY '22, what sort of level we are looking at by next year?

Yes. I think by mid of next year, we should be around the INR 330-odd crore in line with our long-term trend, long-term expectation.

Understood. Understood. And to one of the earlier participant, you mentioned about next year revenue growth at about 16%, 17%. So that 16%, 17% includes the CFF revenue, right?

No, 18% or 17% on the domestic. I think we are seeing roughly 10% to 12% growth with the addition of 1 additional bond this year. So we are -- we're basically looking at 6% of delivery gap in this year in month of April. And adding the full year growth of 12%, it should be somewhere like 18% growth for next year on this year's growth and then we will add the CFF for EUR 17.5 million on top of that.

Okay. So this INR 1,300 crores, the number you mentioned was on the domestic [ figures ], yes?

That's right. Like-for-like business.

The next question is from the line of Ujwal Shah from Quest Investments.

Sir, just wanted some more clarity in terms of Fragrance division. If you can talk a bit more about client acquisition, we are looking for MNC players where we have opened up or rather expanded our sales team overseas, targeting those MNC customers. So where are we positioned right now? How do you see that panning out in FY '22, if you can share some insights?

So I think we have already -- our first small win is actually global MNC business. So that's something which we have already started to see revenues. They will be small. They're not significant to the overall effect, but we are already making headway into that market. In 2022, probably we will grow to some significant number probably. It will still be small in the overall context, but at least we expect INR 4 crores, INR 5 crores of additional business with the MNC account. And then from there on, we will build on that base.

Right, sir. Sir, also wanted to understand, excluding CFF, we have seen a 6% kind of growth. And if I see the Fragrance divisions breakup that you have given, we have seen some decline in the domestic market as well on a year-on-year basis. Can you throw some light what led to this kind of a performance? And how are our sales impacted by this global freight issue that we are seeing currently?

So our sales has not been impacted by the freight. We have taken early steps to ensure that we have the inventories in our factory. And there also -- we bought out the local stock to ensure that we have the continuity of our business. As alluding to the growth, I think we have 1 month of production loss in the sales in the month of April and I think the growth has started post at, I would say July, August scenario, and it continues to be strong growth. But as of now, we have not yet caught up with the production -- lost production with the -- at the market and trade typically has some stock of our finished goods. And at some point, there will be a restocking, and we will see a big uptick in that quarter. But if you look at quarter-on-quarter underlying products, I think we are doing our business vis-à-vis last year at a good 10%, 12% growth level. The bigger brands and the bigger products have already started to, in some cases, do double-digit even 20% growth year-on-year, which is sort of a leading indicator because of the midsize and smaller companies will start to grow as the overall market expands.

So in the Flavor division, we saw a very strong growth year-on-year in the domestic business in 3Q around 40%, 41%. What led to this kind of growth, sir?

No. I think there -- it's a quarter-on-quarter. So you need to look at average sales. There is a good amount of seasonality in the Flavor business. The last year same quarter versus this year same quarter is probably not the best way to look at it. There is a continuous demand. We are continuing to grow our Flavor business. We also have put additional resources to ensure that we keep this momentum, particularly in the domestic flavors.

[Operator Instructions] The next question is from the line of Nikhil Upadhyay from SiMPL.

I have just 1 question. You mentioned on the cost inflation on the RM side. I just wanted to understand whether some part of it was visible in Q3 or most of it is coming in Q4? That's the main thing which I want to understand.

No, I think the part is that we have taken the additional stock. So we will not see a very big change in the -- neither we have seen in Q3, neither we will see a very big change in Q4. And we expect that by the quarter 1 next year, these things will be back to lower levels than where they are today because there is no basic supply demand or basic production issue. It is more logistics and distribution of stock issue, and also Chinese New Year having all the Chinese brands are also back on full production, I think these issues will get resolved by that time. So we don't see any impact on our gross margins. We basically offset that risk of inflation or volatility by keeping higher inventory levels and working capital. So accordingly, we don't see any net effect of this on our business this quarter or next quarter. And quarter 1 next year, we have ample time to look at how things pan out now. But next couple of weeks, we expect things to start getting back to normal. In the event that things remain in difficult or higher price than we will be in time to renegotiate or discuss with our clients for our pricing.

We'll move on to the next question. That is from the line of Pavas Pethia from Enam Asset Management.

Just wanted some clarification on the guidance numbers for revenues. So you said INR 1,300 crores. This doesn't include the CFF, but if I presume that if I take this year's sales number, it will be closer to INR 1,300 crores, minus whatever is the CFF. So that will be closer to INR 1,100 crores. So on INR 1,100 crores base, you are asking -- you are giving guidance for 18% to 20%. Is this right way to look?