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 that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on S H Kelkar and Company Limited Q4 and FY 2021 Earnings Conference Call. We have with us Mr. Kedar Vaze, who's our Director and Group CEO; and Mr. Shrikant Mate, VP and Group CFO of the company. We would like to 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 Mr. Kedar Vaze to make his opening remarks.

Good afternoon, everyone, and thank you for joining us on our quarter 4 and full year '21 earnings call, to discuss the operating and financial performance of this quarter. I trust that you and your families are safe and maintaining all precautions against the spread of COVID-19. To begin with, I'm pleased to share that we have delivered a healthy performance driven by the normalization in demand inquiries, both domestic as well as international markets during the quarter. We saw improved client engagements and new wins across the domestic FMCG space. We supported the full year performance in FY 2021, which was otherwise affected on account of pandemic-related disruptions in the first quarter of the year. Our CFF business also delivered strong results on the back of increasing demand and volume offtake in the Italian and other European markets. Overall, on a consolidated basis, the total revenues from operations during FY '21 grew by 19% on a year-on-year basis. And on a like-for-like basis, revenues grew by 3% in the year-on-year without adjusting for the period of discussion. On the profitability front, a prudent inventory management in addition to better product mix enabled us to maintain margins at a healthy level despite the global supply chain and raw material inflation issues, particularly in the second half of the fiscal. Our gross margin during the year stood at 43%, and EBITDA margins were at 19%. During the quarter, gross margin stood stable at 42%. It is encouraging to note that in the last 8 quarters, we have consistently delivered steady gross margins within the range of 42% to 44%. This indicates our business models, financial efficiency and stability. The reported tax during the year stood at INR 143.7 crores, excluding exceptional gain and loss in FY '21 and FY '20, respectively, so PAT in FY '21 stood at 131.2 crores as against INR 71.2 crores year previous, higher by 84% year-on-year. From a consolidated balance sheet perspective, we were able to significantly lower our net debt by INR 112 crores during the quarter, owing to robust collections, strong cash flows and normalizing inventory. This translated to a healthy debt-to-equity ratio of 0.4x. Going forward, there are no major CapEx plans on hand, the focus remains on healthy free cash flow generation, we should be able to further strengthen our balance sheet position in the upcoming fiscal. Coming to our business developments, I'm happy to share that in the month of April 2021, our wholly owned subsidiaries, Keva Italy and CFF, acquired 70% equity stake of Nova Fragranze S.r.l.. Nova is an Italy-based company, specializing in fragrance development and marketing, with specific focus on premium customers and high-end products, particularly in health care and beauty care, which is a value-accretive and synergistic inorganic growth opportunity for us and is in sync with our growth strategy to expand addressable markets in Italy and Europe. In another development, S H Kelkar has now become the exclusive distributor for Isobionic product Santalol in India. This new fragrance ingredient is the first joint product from BASF and Isobionic and is now available for the Indian market through SHK. The new fragrance ingredient is an alternative to sandalwood oil and is produced by a biotechnological wastage from renewable raw materials. We look forward to improved momentum through this product. On the demand side, while we are witnessing healthy wins across new and existing customers, the environment in the ongoing quarter has softened on account of the second wave of COVID-19. We are monitoring the situation closely and are undertaking all precautionary measures to mitigate business risk. Our key focus area remains on steadily growing our business and maintaining margins within the healthy levels. We continue to look at the new fiscal from a growth perspective, and we'll reassess the situation by end of this quarter. Our engagement with clients, especially in the domestic FMCG segment, remains strong, and we are registering steady wins across all categories. This should enable us to sustain our growth momentum going forward. Before we close, I would like to share that the Board of Directors at the meeting held yesterday recommended a dividend of INR 0.75 per share in addition to the interim dividend of INR 1 per share announced in November 2020. For the full year, FY 2021, overall dividend would be INR 1.75 per share. This keeps in view the Board's philosophy of conservative cash management and its focus on preserving liquidity in the company, given the unprecedented operating environment that we all face. On that note, I would now 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 Rohit Nagraj from Sunidhi Securities.

Congratulations on a great set of numbers for the entire year. Sir, my first question is in terms of our business. So during the pandemic year, we have seen that probably some of the lower end of the businesses have been -- have not performed well or partially gone out of the business. So has it affected our market share in the domestic market and have you seen some kind of a change from the unorganized to organized, which has helped us in the domestic market?

So domestic market across all categories, we have maintained our market share, vis-à-vis the overall FMCG Fragrance and Flavours, there is no particular particular category or client type, which has done better or worse. In the initial part of the year, the smaller clients in certain sectors such as deodorants and premium products did not do very well. But they caught up in the second half of the year with the pent-up demand and destocking that had taken place in the first quarter of the year. So in the full year basis, we have managed to maintain our market share across all categories in the domestic market.

Sir, the second question is in terms of debt reduction because we have reduced the debt sizably. Despite that, we are maintaining a significant cash on our book. So is it probably to, again, engage in some inorganic initiatives? Or this is just a safeguard from any COVID-related disruptions that may happen?

So as a part of business continuity risk management last year, the Board had mandated us to increase the cash holdings at the various bank accounts, which are the operating regions. We will review that post pandemic and bring down our free cash held in the balance to reduce the overall cash in the balance sheet.

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

Sir, just wanted your view on the growth ahead. So for FY '22, considering once we are already seeing some pandemic issues. And so if you can throw some light on the guidance for FY '22 in terms of revenue as well as margins?

I think we have a very peculiar situation where we're in the midst of pandemic where there is a kind of large uncertainty, I would not venture to give a year guidance. Obviously, current quarter is softer than the previous quarter. It is already almost 2 months of the quarter. So we are looking at softness in this quarter. For the rest of year, if I extrapolate from last year, I would imagine that the second quarter, our growth rates should resume to the average 12% year-on-year growth that we have in the underlying business that we do. I don't see anything from the pandemic last year or this year, which has affected our market share or future growth prospects. We continue to grow in all our categories. Our plants and brands have done exceedingly well in this year despite the pandemic, although it was sporadic, some brands, some products did not do well in the first half of the year. They picked up in the second half of the year. So likewise, we anticipate that this year will be a year of mix, but I would not venture to give a guidance. In the longer term, we maintain our 12% plus CAGR growth guidance on a kind of 2, 3 year horizon. But where this year will end up in that journey, it's difficult to fathom that at this point. Through the year as business environment changes for both the positive post pandemic, we will give a proper guidance and update to the community.

Sure, sir. But in terms of margins, do you think the level of margins that we are doing right now can be maintained ahead?

So we have been quite prudent in our inventory. And as the prices and costs have been going up, we have accumulated additional inventory. So we will pass on the additional cost increases to our customers as far as possible. I think there will be some transient margin pressure, may not be very large. But for maybe 1-odd month or 1-odd quarter, we may see some decline. But in the long term, with the full year basis -- longer term, we will continue to maintain the trajectory of the gross margin around the 42%, 43% level.

Sure, sir. And sir, in terms of -- apart from India, Europe as well has been opening up quite well. So your views about CFF for the year ahead? And secondly, what are our plans for Nova, considering it's a high gross margin business, so what is the management looking forward to in terms of Nova acquisition?

Yes. So the general environment in Europe is, as you mentioned, improving, it is ahead of the curve in terms of COVID and vaccination, we anticipate by July, August that most of Europe will be fully open and back to normal business. As such, our business in CFF has not been negatively affected by the pandemic even last year or this year. And we'll continue to see good growth across all the categories where we are operating. With the addition of Nova, we are also able to go to additional clients, which were not accessible to CFF in the past. The acquisition of Nova [indiscernible] marketing and development company, which fits in the manufacturing setup that CFF already has in Italy. It is also an Italian company based out of Milan. So it is very easy to operate seamlessly and match the management teams of these 2 companies. We anticipate that the incremental growth of Nova, so we already have some sales, intercompany sales prior sales to Nova from CFF. Netting off for that, we should end up with about 1.7 billion to 1.8 billion of incremental sales due to the acquisition of Nova.

And sir, in terms of margins because Nova operates at very high gross margins only.

Yes. So in terms of margins, I think Nova product ranges, it is in the premium hair care beauty products. It is at the higher end of the margin profile. Within Europe, it is -- I mean, the consolidated care business margin of CFF is around 54%, 53% gross margin level. And with the addition of Nova, which is slightly higher at the ballpark 58%, 59% gross margin. Last year, numbers for Nova were even better because of the reduction in the raw material prices at -- in the interim midyear. I think on a healthy basis, it will be on the higher end of our product range, around the 58%, 59% gross margin level.

The next question is from the line of Viraj Kacharia from Securities Investment.

Just a couple of questions. First on CFF, so if you just want to understand, how would have the business grown in '21 and vis-à-vis the market growth say in Italy? And just to add to that, what would be share of, say, Fine Fragrance now for the business? How has that move for us in the last couple of years? So any perspective you can give on that?

So I think the CFF growth rate has been in excess of 8% organic in the core business on last, I would say, 15-odd months. The underlying business growth in Italy has been around 1.5% -- 1% to 1.5% in industry growth. So Nova and CFF together have grown, I say, 8% to 9%, 3 to 4x faster than the average market in Italy. Going forward, we anticipate we will continue to grow at a healthy base of roughly 10% per annum in CFF, Nova combined entities.

Okay. So what is driving this higher growth for us? I mean because the market itself is growing and whatever sort of thing. So is it we are kind of also getting traction in ex of other than Italy, other markets? That's why we are gaining more business. I mean any perspective...

In terms of perspective, the Italian market is as large as the Indian market. So it's quite a sizable market, and it is one of the companies in the top 2 or 3 companies in the market share in Italy. So we'll look at it as a good platform for us to build further growth in Italy and then from there on to other countries in Europe. The market size of Italy is quite large compared to the per capita consumption of residents and players is quite high.

Okay. And in terms of the additional market share, which we have gained, how's the mix in terms of the customer base. So is it largely big FMCG players or regional players where we are gaining share from, any perspective you can give on what is needed there.

Yes. So again, it's very similar positioning of foreign customer type from what we have in India, and we are largely dealing with the accepting a few -- except a few businesses, largely with the regional Italian brands. And they are the brands which are working and growing in the market. We have good relations and good customer and engagement with them for multiple years.

Okay. And second question was, if we look at our overall financials, we have this line item of intangible asset kind of development written-off. So -- and if you look at last 3 years, we have been writing of around, say, INR 15 crores to INR 20 crores of expenses every year. So what are these towards? What is the write-off towards? And how should we understand this particular trends going forward?

So actually, if you see there is what is called CWIP, so a write-off in terms of capitalization. There is additional capitalization in terms of the R&D projects in pipeline. So I think at this moment, we are more or less in a steady state. We are writing-off some of the projects that did not complete or did not materialize into sales. And at the same time, we have new projects that there is a work in progress. If you look at the overview, the kind of balancing number in the balance sheet is ballpark INR 20 crores, which is fairly steady state. It's not that we are capitalizing R&D or writing-off R&D. In -- broadly in the year, the amount of projects that don't see the light of the day and, let's see the light of the day and new projects coming in is balancing out each other.

So asking because earlier, this was -- this expense write-off was not really there 3 years back. So just in last 3 years, we've seen good amount of expense are written-off. So...

The policy of this has changed from the accounting year, I think, 2016 when the Ind AS came in. So that's when the policy change was made. So this is now 3 years down the line, there will be write-offs and there will be additions and there should be no net, very small net difference in a typical normal year. Our normal R&D projects are running for a year or anywhere between 12 to 18 months. So we keep them capitalized in the balance sheet. And when they are actually materialized, either they are successful in which they get into capitalized assets, intangible assets, if they are not successful for this they will get written-off. Ballpark, this is quite steady state. So in terms of what is written-off and what is capitalized on new projects, it will not result in any additional cost or deferment of costs.

So this will basically keep on...

Yes. Basically, it will -- it's like a rotation because the projects are longer than 1 year. Because some of the expenses of last year get written-off this year, some of the expenses of this year get capitalized and will get written-off next year. Now that it has been in place for 3 years, it's kind of a steady state. It clearly doesn't -- there will obviously be some quarters up and down, but it's a pretty steady-state scenario that projects that were initiated last year will -- some of them will get written off, some of the projects will get initiated this year. And so there is sort of cost carry forward in the picture and then cost brought back -- or brought forward and -- so net to net, there is no impact on the P&L.

The next question is from the line of Jainis Chheda from Dimensional Securities.

Congrats for the good set of numbers. I just wanted to understand the long-term outlook for the company, how are we headed? And what is the 5-year story for the company? Since there is no CapEx plan, so how do we move forward from here?

Yes. So as I alluded earlier, we have done sizable CapExs in the past 3, 4 years and prior to the IPO as well. We are now looking at a maintenance growth business where we have sufficient capacity and we are looking to continue to grow the business with the capacity utilization and value upgradation of our current product mix. We are sort of planning for a normalized 12% cash up growth in the next 2 to 3 years. And this will automatically slow down in terms of cash flow and profitability growth as we grow our operating side vis-à-vis the CapEx and the operating lever that kicks in. So as we continue to grow our margins and the operating margins should slightly improve. And we will then focus on continuing to work with the markets which are the 3 markets of Europe, India and Southeast Asia, Middle East, which is where we are currently operating.

Okay. So what will be your current capacity utilization? And can we have a breakup in terms of labor capacity utilization and fragrances capacity utilization?

So fragrances capacity utilization is around the 55% mark. Flavour is also around the 50% mark. We have a capacity utilization in -- actually in the China plant, which is at the moment available for further expansion for us. And we continue to invest incremental investments to enhance the capacity. So we don't need any large CapEx for increasing the capacity within kind of INR 3 crore, INR 4 crore investment, we will be able to increase our capacity by 20% to 30%.

Okay. And in terms of margin, I suppose you will move towards more value-added products. So what will be the margins going forward, like 1 to 5 years?

So I think incrementally, we have indicated that our current 42%, 43% should go up to 45% in a 5-year period. We are planning to -- as part of our product mix, this margin profile should improve.

And in terms of EBITDA?

EBITDA level, we will manage around 19% to 20% EBITDA, which is the current year level. We will maintain it at that kind of right path.

So the increased gross margin will not flow to EBITDA like -- in gross margin expansion in next 5 years, so plus the -- we expect the other expenses will not grow as faster?

No, there will be partly other expenses and partly R&D expenses, which we will incur for future growth. So as we get margin expansion, we will also need to continue to invest higher on the R&D. If you go back 2 years, we had -- we have gone up from kind of in the last 5 years, 6 years from a 1%, 1.5% R&D to sales ratio to 5.5% 2 years ago. We brought it down to 4%. And depending on the market growth opportunities, we will look at improving the R&D expenditure to the relevant growth areas. In case there is no specific R&D targets, then we will obviously increase our bottom line EBITDA percentage. But typically, our expectation is to focus on future growth and continue to invest on growth, keeping sort of steady state 20% EBITDA level for the business. And incremental gains, we would like to invest back in the faster growth rather than more margins.

[Operator Instructions] The next question is from the line of Bharat Sheth from Quest Investment.

Congratulations on excellent performance. Hello? Kedar, going ahead, I mean, particularly in Personal Care and -- which is a part -- of fragrance part business, which is a part of the Personal Care, so where the consumer, I mean, call for transparency and traceability is increasing and people are looking for more of a sustainable product. And so what exactly we are doing to grow in that line, and so that gives a little more a premium category?

So Personal Care is largely products like hand wash and soap. It's not one of the premium categories, more or less, beauty products, Fine Fragrances is more premium category as far as fragrance is concerned. And there is obviously safety from transparency and regulation, which we are all following at the moment. We don't see any challenge on that basis for our company going forward. Whenever there is a demand from the client or consumers in terms of declaration, product declaration, safety declarations and so on and so forth, we are following all the norms, and we are focused on giving the transparent, reliable and proper product information to our clients and consumers.

Okay. And coming to this entry into these large FMCG entity -- MNC entity, now with Nova and CFF under our control, so how do we see that opening up the gate for our company sourcing from India?

No, there is no impact of CFF and Nova in terms of, say, global MNC, although with the fact that we have some of the global MNC headquartered in Europe, and we have local access with our office. But as such, the addition of Nova or CFF does not change our position for the supply to the global MNC. We continue to do our long-term research programs and engagement with them as before. And if anything, CFF and Nova has slightly enhanced that position by having a local office in Europe, but it does not change our position on the business forward.

Okay. So last question, you have been working the last couple of years to get entry into Indiana MNC, I mean global MNC in India. So have we been able to make some kind of inroad or if you can give some more color on new client addition during the year and also...

In context of that, we do have some inroads in the global business, within India, particularly last year and again this year, due to the pandemic, it has been largely focusing on current clients and new business with the existing clients and known clients. With the global MNCs, our engagement in this period has been lower than previous period. But as I alluded earlier, it's only a matter of time. It's not so much driven enough entirely in our control. We will continue to offer our service and continue to work with the global MNC as they develop their local brands and regional supply chain strategy.

And last question, if I -- with your permission, with this marketing, I mean, of BASF Isobionic's permission, I mean we will be just -- despite BASF having their own presence in India, so whether that can be helpful for us? And what is the underlying market size?

So the sandalwood oil, as you probably know, is a very unique material from the Indian forest products. Typically, sandalwood oil takes 15, 16 years of the tree growing to a certain size and then there is a potential deforestation and risk to scarcity or bio -- we effectively need to cut trees to make sandalwood oil. With that in mind, we have worked with a company in Netherlands called Isobionics, and we have made this product called Santalol, which is the main key ingredient of sandalwood oil. This allowed the usage of sandalwood oil in a more sustainable manner where it is made from biotechnology and renewable resources without deforestation or cutting down the sandalwood tree. So this is the primary objective for bringing this product back to the market. This is -- in terms of business size, the sandalwood oil market is in excess of INR 100 crores a year. So there is a good opportunity. But what we see is that more than the current market, having a renewable source with a stable supply will encourage the use of sandalwood oil again in scenary which has been declining in terms of volumes year-on-year. And as the volumes continue to grow, we will see the net effect of this business helping us to grow into the premium and upcoming natural-based products that is the new trend. So it is helping us to distribute this product to revive the natural products, which is now in short supply or in scarcity. And there is a lot of know-how within the company and in the industry for using sandalwood oil, which we are also seeking to revive as additional leg up for growth.

You said that this has been developed by us jointly with the Isobionics?

Yes. So we have been working with Isobionics via our PFW research development, Isobionics is also Netherlands-based company. Subsequently, Isobionics has been taken over by BASF. But we continue to keep our relationship and manage this product.

The next question is from the line of [indiscernible] from [indiscernible] Capital Advisors.

The question that I would want to check with you, so if we were to adjust for the CFF growth in the last 3 quarters, so we have done 13-odd percent, so in line with what you have been guiding a 4% growth. And if we look at before that, our growth was in the 5% range. So would you be able to give some color on, say, the top 3, 4 things which have improved that growth. What makes you confidence of the 12% growth going forward? And how are you kind of guiding for this 12% growth, what are you [indiscernible].

So I mean, we have had many, many years of double-digit plus growth in our portfolio and business. The 5% CAGR actually was the result of the dual effect of demonetization and GST, where there is a lot of smaller clients whose business actually degrew and net effect for us was a declining business in certain sectors and certain categories, which resulted in a lower growth rate in this year. Since 2016, '17 from year '19/'20, we are seeing that we are back on the normal growth level since the smaller clients where there was effect of GST demonetization that has kind of flown through and the base of these customers has reduced from roughly 20% to approximately 10% in '19/'20. So with the new customer base, which is most of the large and medium-sized FMCG in India and overseas, we are continuing to grow at a steady double-digit growth and it's not a new phenomenon. I think degrowth of certain category was actually a phenomenon which was specific to those peculiar large changes in the tax structures and other macro effects. Now that we are in normal environment, we are able to continue to grow. Our larger customers are still growing at more than 12%, maybe even around the 15% CAGR in the last 2, 3 years. And we anticipate that this growth will continue. Between the smaller customers growth and larger customer growth, the larger customers have been growing faster in this last couple of years. And we see this trend evolving and also, we anticipate a good level of new, what I would call, modern age startup FMCG products to come up in the next 2, 3 years, which will help us further get growth in the regional markets.

So just one question. I mean what are some of the new developments that are there in the company which can experience growth beyond 12%, say, after next 2, 3 years, where you can foresee the growth beyond that?

So we have, obviously, the Italian acquisition, which will help us to grow in that market that will assist us to take new markets. We have continued to invest in our product development, sales and marketing in Southeast Asia, Middle East markets to further enhance our growth. Within the domestic market, we anticipate that the overall market should grow at 7% to 8%. And with the 12% to 13% growth, we will be a healthy market share growth. If there are some new opportunities which come, we will take it up in terms of global MNC business and other opportunities. But the 12%, 13% underlying business growth is what we anticipate as the environment, and we will manage to continue to grow that within our current portfolio questions.

The next question is from the line of Dipen Sheth from Crystal Investment Advisors.

I hope you can hear me?

Yes, sir, we can hear you. Please go ahead.

Okay. So I have 2 questions. One, on the margin expansion that is visible during the year, what I can see from your consolidated summarized P&L statement on Page 5 of the presentation and I checked your results in Italian exchange as well for final details to recheck. This -- the margin expansion of, what, almost 450 bps on a year-on-year basis or a full year-on-full year basis, it's accompanied by almost no change in gross margin because your raw material expenses have risen around 19% in line with your top line, okay? Now I would understand that while it's unfair to look at a 1-year phenomenon. I want to understand that whether this is something that is likely to change in view of what is happening? And how do you see the fact that we actually cut down other expenses by almost 1% during the year. What were the hedges in those expenses, which you could cut down even as we were raising business revenues by 19% during the year, but that level is due to business margin expansion?

Yes. So on the expense rationalization, we have cut down on our R&D expenses, which we were additionally doing in the Netherlands. As a result of closing down one of the R&D expenditures there, we have got around 1%, which I alluded from 5.5% to 4% last year. As we continue to grow, we will reinvest in R&D for the future growth. For the balance in terms of gross margin management, we are managing the inventory -- inventories in a manner that we are selling basically to our clients from stock in hand, so that any large input changes are -- we try to pass it on to our clients with 2, 3 months lag. If you see this year, we've had some hit in the Flavours, particularly in the last month of the year. So we've had some hit on the gross margin there. But the price increase is for Flavours and the normalization of the raw material on the Flavours has already happened. So we anticipate, again, the gross margin should restore even in the Flavour, and that might add some small 0.2% improvement in gross margin. At the same time, I mean, there may be some new inflationary pressures on many of the bulk solvents and there is always this creeping inflation when oil prices are going up slowly, there will be effect of that eventually in the chemicals that constitute the supply of big stock for our industry. So eventually, we anticipate a 7% to 8% inflation to hit us in this year on average. And we look forward to passing this on to the clients at various stages step-by-step to manage our gross margin in the 42% to 43% range.

So certainly, from a forward-looking perspective, you don't see gross margins as being a big lever in our margin expansion deal?

No. I mean the gross margins that we have is a net effect of the product type. So they are increasing for bulk products, is lower for some specialty or for certain category is higher. So our average is around this 42%, 43%. And we are talking about 4,000, 5,000 different products, medium products. It's not that one product or new product introduction is going to change the nature of the business. It is all incremental. When we say 0.5% improvement, we are talking about introducing new products at 52%, 53%, maybe 55% gross margin. And that size of business, it takes 5, 7, 10 years to grow to any meaningful size. So effectively, I think the gross margin expansion is not an immediate, it will play out over a longer term, if you take 5-year or 10-year kind of horizon.

Okay. And my second question is with respect to how you report EBITDA and EBITDA margin. I can see that we've included INR 23.5 crores of other income for the year in our top line and that is the top line 13 -- INR 45.4 crores from which we deduct your total expenditure. So as I can see that there is a very large jump in this year on things that are not really recurring. There is a foreign exchange gain. And at spot contracts, it happens, you can also go into a foreign exchange loss, right? And then there is a big jump in other 1 head called other -- inside other income from INR 6 crores to INR 13 crores. So can you elaborate a little bit on that please?

No. So some of these are regular incomes, and this is a result of our hedging policies in terms of foreign exchange. When you look at the overall impact, while there is an impact of the foreign exchange gain, these are largely forward premiums sort of gain. So they are booked, and we don't -- we are not dependent on any speculative price or currency fluctuation. So each of our activity is totally hedged, and this is the incremental benefit out of the hedging of foreign exchange. With our imports and the exports and European business, we have largely internally hedged from foreign exchange input and output. And then we use the banking financial hedges to ensure that we have fixed rates, which gives this foreign exchange date. So this is not expected to be a one-off gain because of certain reasons. This is instituted in a policy. And while the gain, unless there is something measurably changing, this would be a normal feature of our cost structure.

Frankly, I'm not sure how INR 2 crores to INR 10 crores can be recurring. But anyway -- and the other part of other income, which has gone from INR 6 crores to INR 13 crores?

Which is that?

So it comes after the foreign exchange line under the other income head on Page 5. It's INR 13.4 crores for the year.

Sir, can I take that?

Yes, please.

Yes, Shrikant.

So this includes roughly INR 4 crores of provisions, which are no longer required with return back. So in that sense, it could be nonoperating, but there is some of the other provision because the closing of quarter or year involves estimation, and therefore, there is impact. So that is INR 4 crores. And there is interest, largely INR 3 crores is on the tax refund. So that one I would say is nonrecurring. Those are to depict apart from the other sale of scrap and for flavours sale.

Okay. Fair enough. Finally, if you'll permit me one more question. Once you review your requirement of cash that you have to keep on the books, would you rather retain the debt on the books or distribute some of the cash?

So we -- as I alluded earlier, we have increased our position of cash given the uncertainty in the last year and even at the moment. While the total amount of cash looks quite large, it's distributed over various operating and cellular regions, so it's a consolidated quantum. So we'd like to keep 1 or 2 months of fixed cost and some lever and buffer for the working capital and so on and so forth. Mindful of the uncertainty last year was very acute. We have increased our overall holding. I think we can review that and reduce the cash building and repay some of the debt on the -- reduce otherwise at this point.

The next question is from the line of Ravi Purohit from Securities Investment Management Private Limited.

Most of my questions have been answered. Just one more business-oriented question from a capital point of view. Historically, we've looked at our ROEs over cycle, right, across down cycle, up cycle. And it seems that we do kind of a lot of work for clients in terms of taking the working capital investments on our books, taking R&D expenses. So in effect, there is a lot of work that we do for our clients. But in terms of ROE, that the business has been able to generate over like 5-year, 10-year, 15-year period has been around 14%, 15% average net of tax. So is there an inherent nature of this business, like globally, your peers, everybody else around in the business kind of ends up making this much because from the previous calls, I know I kind of understand and learn that there's a lot of...

I think if you look at the -- just to answer that very clearly, if you look at the last 5 years, the results have been much more than normal times and the degrowth on certain clients and the whole changes due to the same. But on a longer term, so if you kind of look at a 20-year average, we are more close to 20% return on investment. We've gone through a phase of heavy investments and a couple of years of degrowth where these ratios are both numerator and denominator has been affected. And now we are looking to continue to grow. And if you see the assets and fixed assets, we need to set them, we need to grow our business on the asset base that we have. And the denominator being the same as the numerator increases, you will see these return ratios coming back to the ending levels.

So what's the potential for us to kind of sweat these assets in terms of where can we take the asset turns to from where they are today?

So from an entirely fixed asset, roughly, we have INR 700-odd crore of fixed asset in the network, which are currently enough for us to do even double or triple the revenue that we have today.

Okay. But the double to triple revenue, so it's just like how somebody else finds it very difficult to enter your business. You will also find enter to kind of -- so it's like a very, very sticky business from the end customer point of view, so...

We are not saying that we can double our revenue in 1 year or 2 years, it will grow at 10%, 15% business for year-on-year, but the CapEx outflow for next, say, 7, 8 years of growth is already done.

Okay. Okay. Got it. And the second question is on the small acquisitions that we've been making to kind of expand our end market -- addressable market. Now there -- again, is there any ROE consideration so -- what happens is we've seen most of other companies, right, that acquisitions end up being the drag on ROEs overall, sometimes they work, sometimes they don't work. So they'll kind of affect the balance sheet -- sell up their balance sheet, but do not kind of give you the expected written over the long run? Is there something that kind of the underwrite...

One of the points which is important to note is that while we are talking about consolidated ROE, we can look at the ROE on the European business acquisition based on the fact that the risk-free return on euro terms is almost close to 0. So even if we make 8% or 10% ROE in euro terms, then we are making similar risk-free return adjusted quite a good return on those investments. While the consolidated business, this is also the ROEs are -- in INR terms, also, they would be ballpark 20%. In euro terms, they are definitely very attractive because we also borrow and the kind of risk-free or the risk-free return on euro is almost at 0 level today.

So these are funded by low cost debt.

These are all basically funded by euro-denominated debt at a very low number.

The next question is from the line of Rohit Ohri Progressive Share.

I have 2 questions, which is related to the investments made in the ayurvedic extract business, which could be the next growth stage for evolution in terms of the value-added fragrances and flavors. So would you like to share some thoughts on that as to what opportunities you are seeing? And what would be the market size that is there in domestic or the international market?

I would club together the ayurvedic with the earlier discussion on santalol, which -- these are all the natural active ingredients or natural base product which is a general trend, which we see across the board. We call it the kind of wellness platform, natural and wellness platform. We are looking to enhance this. Currently, our business is around the INR 5 crores, INR 6 crores annual level. With the addition of santalol, addition of basic research around some of the well-known active within the Indian space, we will look to enhance this business more as a value addition for our current business offerings in fragrances. So by itself, there are other extract manufacturers who are already in the business, and that market is maybe estimated INR 1,500-odd crore market. But our objective is to use this for a value addition and making specialized extraction with science-based formulations, where we can enhance the value for our plant. So by itself, the ayurvedic and the santalol investments may not be a large -- maybe I would anticipate another INR 15 crores, INR 20 crores of business in the near future we will get from these activities. It is a platform where our product development achieves a lot of unique value addition.

Sir, the margin profile in this domain for ayurvedic products or maybe innovative boosters, these are...

No, the same 50% gross margin level.

The next question is from the line of [ Arham Shah ], as an individual investor.

Sir, only question, is it possible that we can maybe grow in the high double digit such as north of the 15%, 20%? So when renewable sandalwood opportunity or any other opportunity come in, is it possible that for 1 or 2 years, we can do a 15%, 20% kind of a growth?

So there is obviously businesses opportunities, which are large, say, INR 40 crores, INR 50 crores. If one of the opportunities materialize next year, you would see a year where we do 20% growth. But these are things which typically last for 2, 3 years, they are cyclical businesses. And when you win the business, you get a big leg up. And in an event that you are not able to defend or you lose the business, you look at a leg down where you will lose 2%, 3% of their business in 1 year. So this incremental 3% over and above -- 5% over and above the 12%, 13% underlying growth can happen for 1 or 2 years, and it has its own dynamics where the global brands have a poor listing, have a certain time frame life cycle for their products. So our underlying 12%, 13% growth indication is on our current business, which is not cyclical. And on top of it, we may get some additional business for a few years, which is more on kind of cyclical product life cycle. So the product can come in, we can have INR 50 crore business for 3 years, after which the business will go to somebody else and then you may lose that business. So this is in addition to the underlying growth of 12% that we have.

So is it safe to assume that with the -- as you answered the previous participant's question, on a INR 700 crore CapEx for next at least 3 to 5 years, we can grow at 10% to 12% on a conservative basis?

Yes, this is correct. So our CapEx intensity will be quite low. I anticipate around INR 25 crore mark for the CapEx. Largely in Europe now with the new investments there, there will be some additional CapEx there, plus some automation improvement in laboratory equipment upgradation, things like this. But from the plant and machinery and capacity point of view, we have adequately invested.

Correct. And as per your debt plan, as you mentioned, is it fair to assume that next 1, 1.5 years, you will be debt free?

I think the -- let us make the assumption a little different way. I am confident that we will be able to generate INR 300 crores of cash flow in these 2, 3 years period, probably kind of 2.5 years ballpark number. I would just put a disclaimer on the current situation given the COVID, there may be a few months of difficult growth and so on and so forth. But anyway, between 2 and 3 years, we will definitely have a positive cash flow of INR 300-odd crores, which would enable us to reduce the debt. But we will look at opportunities in case there are something coming up. So I don't want to target that we will have a debt-free situation, but to have the target that so much free cash flow is generated in the next 2.5 years. If we don't find any investment opportunities, then, yes, we will reduce the debt accordingly.

The next question is from the line of Nikhil Jain from [ Organic Internationals ].

Yes. Sir, I just wanted to understand, who is our biggest competitor in, let's say, the Indian market? And what would be the market share that we actually hold in India and in Italy, let's say?

It would not be very fair to compare our competitor in India. We have now almost 45% of our business outside India as well. In the overview, we have the global -- 4 or 5 global F&F companies like Givaudan, IFF, Firmenich, Symrise, which are the global competitors, which are also a large competitors within the Indian market or pretty much in all of the markets where we are operating. So I would look at these as our potential competitors in across the regions.

But would it be fair to say that the top 5 competition, right, including yourselves and the other 4 competition, would actually be controlling, let's say, around 70% to 80% of the market or maybe a little more?

Within the Indian market, yes. Outside, the situation in each market, each region is slightly different. But in general, top 4, 5 players are controlling 70% to 80% market in pretty much all the markets where we are operating.

The next question is from the line of Apurva Mehta from A M Investments.

So I just wanted to understand that any synergy benefits can be approved from CFF where we like have a common R&D structure or common raw material sourcing kind of things, any synergy...

Obviously, you've identified 2 of the main synergy areas where this product development, R&D, the development, sharing of product prototypes synergies and raw material, all of those are obvious synergies, which will play out and which we will take advantage in the years to come. At this moment, given the pandemic, we are pretty much -- we are not really driving the synergies aspect of the business, making sure that the businesses are running through the pandemic in the right sort of manner. And in a better environment, we will look to drive the synergies from further consolidation.

So any cross-selling of products to their customer or their products in Indian customer kind of thing?

Yes. I mean, obviously, the objective is to enhance the amount of offerings both for Europe as well as for the Indian market. Like I alluded, the ayurvedic extract and natural platform for Europe is a very strong platform where India is a well-known source of many of these naturals. So we are looking at value-added products from the naturals to be sold in European market. And likewise, there are certain categories where the European-based raw materials can be used, and we will use the synergies at the appropriate time. I would say that the synergy part of the equation for CFF and us and with Nova, we have not yet built into our results because they are more or less running a stand-alone company at the moment.

And can you just quantify that the new development, the new products which we have developed over the last 2, 3 years, what kind of contributions are you getting from the new development? And sir, are these new development also margin accretive?

So typically, new developments are margin accretive. There can be -- at an aggregate level, definitely, they are margin accretive. Maybe product by product, it can be slightly different. And to answer that question, roughly, I think, last 3 years, we have 12% of our business has been in new products and new business. It has been fairly steady kind of ratio between 10% and 15% of the business is products which has developed in the last 3, 4 years.

Okay. And on the customer, making new customers and all these things, how is the regular time lines for -- you get a new customer kind of from pitching to a new customer and getting to a new customer really selling some products?

So different markets, different situation. We have obviously, in India, quite a large market reach in the fragrance business. Flavours, we are still adding a lot of new customers. Outside India, Europe and Southeast Asia, Middle East, we are adding new customers and new products. So it's different in different markets.

And last question, sir, how is the Flavours market? Can we really grow at a faster pace in the Flavours market? Because our revenue is too small, so can we grow at a larger pace than definitely on the fragrance market?

Yes. I think the Flavours market, we are continuing to grow, and we will see a faster rate of growth as a percentage of growth in the Flavours market than in the Fragrance overall market. We anticipate basically excess of 15%, 17% CAGR growth in the Flavours market.

The next question is from the line Sushil Agrawal from top 100 public shareholders.

Dear Kedarji, we'd like to congratulate you on the fantastic results and year-on-year growth in such a challenging year. My question would be on -- hello?

Yes, go ahead.

Yes, my question would be on BASF Isobionics, what would be the top line expectations for FY '23, FY '24? And what margins are we looking at?

So the typical top line, we would [indiscernible] something like INR 25 crores from this business. And typical margin because we are basically distributing the product and margin in that would not be very high, I would anticipate a 10% margin. But there is no additional cost, so maybe 1% or 2% marketing cost and 7%, 8% should be the net margin for us on that product.

And how much of this santalol Isobionics we would be able to incorporate in our current F&F products, which associate sales currently?

I mean that value is another probably INR 5-odd crores will go in in-house consumption, which we have not considered at this INR 25 crores. So maybe another INR 5 crores will be announced, which will help us manage the gross margin to some extent to reduce our gross margin, but that impact is quite minimal.

And so what would be the terms for this contract? I mean, you have a long-term arrangement for 3 years, 5 years or 10 years, and would we be -- in future, the SHK group will be entered into joint venture with BASF or manufacturing the same in India?

So it is possible that various options we can look at in the future. I mean, we don't rule out anything. We have been working very close for collaboration with the company from the Isobionics from the beginning. So we have also contract manufacturing for them some other products. And we will look forward to some additional long-term association of manufacturing or -- it's early days in the product. So I don't want to comment anything for longer term. But it will make sense to have some kind of domestic manufacturing for this product in the future.

And my last question would be, what are the new molecule product launches we are looking at in current year?

New molecule?

New molecules or new product launches in current year?

So our -- typically product launches, we do roughly 500-odd Fragrance and Flavour launches in a year. So that's the main product launches. In terms of new molecules, we are not launching new molecules to the market. They are mainly for our in-house field, and we continue to develop and use them internally.

Ladies and gentlemen, that will be the last question for today. I now hand the conference over to the management for the closing comments. Thank you, and over to you.

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

Thank you very much. Ladies and gentlemen, on behalf of S H Kelkar and Company, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines.