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. Anoop Poojari from CDR India. Thank you, and over to you.

Thank you. Good morning, everyone, and thank you for joining us on S H Kelkar and Company Limited's Q2 and H1 FY '22 Earnings Conference Call. We have with us Mr. Kedar Vaze, Whole-Time Director and Group CEO; Mr. Shrikant Mate, EVP; and Mr. Rohit Saraogi, EVP and Group CFO designate 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 Mr. Kedar Vaze to make his opening remarks.

Good morning, everyone, and thank you for joining us on our quarter 2 FY '22 earnings call to discuss the operating and financial performance for the quarter and the first half of this year. We have reported a steady performance in the first half of the fiscal. Our European business registered healthy growth on back of higher consumption and demand during this period. On a consolidated basis, our revenue from operations in H1 grew by 31% on a year-on-year basis and on a like-to-like basis of 15% year-on-year. H1 FY 2021 results included consolidation of CFF for only 2 months, August and September. So on a like-to-like basis, CFF's core fragrance business grew by 39% in H1, and it maintains a 2-year CAGR of more than 10%. The emerging markets sales grew by 9% during the first half of the year. In the quarter, revenues from operations stood at INR 358.3 crores as against INR 351.9 crores for quarter 2 FY '21. This muted performance was on back of a challenging macroeconomic witnessed in the emerging markets and a higher base effect of the previous quarter, quarter 2 of last year. In the corresponding period last year, we had witnessed pent-up demand in various health and hygiene segment with new entrants in the category. This has subsequently normal -- come back to normal traction. In addition, Southeast Asia business was mostly impacted due to continued spread of COVID-19 and intermittent lockdowns. Overall, emerging markets revenue stood at INR 276.1 crores as compared to INR 313.7 crores in quarter 2 FY 2021. On the raw materials front, we continued to witness cost pressures on account of global inflation in raw materials. Our inventory policy, better product mix and our ability to pass on price increases helped us to minimize the impact on margin. Gross margin stood at around 41% in quarter 2 and H1 FY '22. And EBITDA margins on a like-to-like basis, including other income, stood at 15.3% and 15.8% in quarter 2 and H1, respectively. EBITDA margin impact was also on account of lower revenues in the emerging market. In order to efficiently mitigate cost pressures and to normalize our operating margins, we're working with our customers to undertake further price hikes in the future. Overall, we are monitoring the raw material situation that has been evolving in the recent past. Our reported PAT in H1 has come at INR 103.5 crores with PAT margins at 14.4%. In this quarter, there was a onetime exceptional loss of INR 6.2 crores due to floods, wherein the Mahad facility operations were disturbed, and an amount of equal amount is recoverable from insurance company. Accordingly, the company is in process of filing business interruptions claim in the coming quarters. However, for the quarter 2, this cost has been taken as exceptional cost. In quarter 1 FY '22, PAT also included a reversal of additional tax provision aggregating to INR 64.5 crores consequent to the ITAT order. Adjusting for this, our PAT stood in H1 at INR 45.2 crores. In addition, we expect somewhere between INR 8 crores to INR 9 crores of insurance claim in the future quarters. With that, our PAT will be INR 54 crores for the first half of the year. From a consolidated balance sheet perspective, our net debt stood at INR 347 crores as at September 30, 2021, compared with INR 334 crores as on June 30, 2021. This increase in debt was primarily due to higher working capital on inventory in the current environment. In another development, the Board at its meeting on Friday has approved the buyback of SHK's fully paid equity shares of face value of INR 10 each at INR 210 per equity share through a tender offer route. The total amount of buyback size will be a maximum of INR 60.9 crores. The company proposes to buy back 29 lakhs shares at the offer price, representing 9.64% of stand-alone and 6.65% consolidated fully paid up equity share capital and free reserves as per March 31, 2021. This signifies our confidence in both the balance sheet and our future cash flows over the medium to long term. The health and safety of our employees and communities has been a key focus area for us. I'm pleased to share that all our employees and their families have been fully vaccinated. We had also extended the vaccination drive to employees' relatives and secondary manpower and their relatives. Following this, we have fully resumed office from the 3rd of September onwards, with all necessary safety protocols in place. To conclude, we have seen recovery in the domestic macroeconomic environment. There are indications that consumption in the country will strengthen in the months ahead. With improving economic indicators in upcoming festive season, we are optimistic that the demand environment will pick up for the second half of this year. Overall, we are encouraged with the healthy client engagement and inquiries across emerging and European markets. Our focus remains on adapting and keeping pace with the changing external environment. Looking forward, we will be undertaking efforts to grow and invest in high-potential emerging and European markets, which we believe will fuel our business momentum. In a normal demand environment, we are confident that our emphasis on growth should enable us to report healthy performance going forward. Before I close, I would like to once again thank Shrikant Mate for his contribution to the growth of S H Kelkar and wish him best in his retirement. In the last couple of months, Rohit and Shrikant have worked closely to ensure a smooth transition. Rohit will formally take over as a group CFO with effect from 15th November 2021. With that, I now request the moderator to open the forum for any questions or suggestions that people would have.

[Operator Instructions] The first question is from the line of Bhavesh Chauhan from IDBI Capital.

So I would like to know about our margin performance. In last -- from last quarter, our margins have fallen from 20% -- EBITDA margin from 20% to 15%, and we are seeing quite a bit rise in input cost, as I understand, across many industries. So going forward, what is our outlook on margin? Are we taking any pricing actions or something?

So thank you for this question. I think we are now looking at a scenario pretty much like a hyperinflation on some of the commodities. We are working closely with our clients and looking at proper price hikes in the months to come. However, we will be in a better position to focus on absolute EBITDA and absolute margin rather than relative percentage margin as the sales price will get distorted quarter-on-quarter in the upcoming 2, 3 quarters. Given the situation, we will also be updating regularly over a couple of weeks when we have clarity on where the raw material pricing remains or pricing to the client is shaping. And we will give regular updates on this aspect. I expect that the situation should be normal by end of the fiscal. So April or May, we will see the normalcy in terms of ratios. But until that time, in 2, 3 quarters, we will require to focus mainly on the absolute margin and absolute profit. Without looking at the percentage on sales, that number will get be distorted.

Okay. Sir, that's quite helpful. And secondly, how is the demand environment currently? And are we seeing any new order backlog or new clients that we have added in the last 3 months or so?

So I think the demand environment is pretty normal at this point. In fact, it is quite healthy, given the festival and the recovery post July, August. I think from September second half, we've seen good recovery in the demand. Obviously, the demand recovery is one side of the story. And we are now looking at the raw material situation that we balance the growth and the margin profile.

Okay, sir. Sir, lastly, I would like to ask management on their views on capital allocation. Sir, we have some debt in our books, and then we are going for a buyback. And also, there could be opportunities for inorganic growth. So by doing a buyback, are we saying that we are not going to repay our debt in a very meaningful way, and also, there are no further inorganic growth strategy that the company is looking for?

So there is a couple of points. One is that last year onwards, we have been maintaining very low ratio of profit distribution given the uncertainty around the pandemic. We are now looking at the post-pandemic situation in Europe and we expect that in various parts of the world. And this is anybody's guess. Your guess is as good as mine. So we are now proposing and planning on the basis that we are in a post-pandemic situation and there is no extra need to conserve cash. We don't see any effect of complete stoppage of business happening. So we are now restoring back our confidence in the cash flows and distributing the profit as per the profit distribution policy. In addition, we have had a onetime gain of INR 64-odd crores in the first quarter as a result of a tax refund. So this is passed through to the shareholders that the buyback proposes to do. On the debt side, most of the debt in terms of the quantum is in Europe, acquisition in Europe, working capital in either euro or U.S. dollar. And the interest rate continues to be a very low interest rate. So we are comfortable to maintain the current debt level and continue to grow the business from there on. It doesn't make a very big sense to reduce the debt in the European markets where the debt interest rates are very low.

Yes, yes. Sir, that's quite helpful. The last question from my side, what is the sales growth that we would be looking forward to in the next, let's say, 3 to 5 years?

So we are committed to 12% CAGR growth. I don't see anything that's changed there on the business in the long term. We will not have -- I mean we obviously will have quarter-on-quarter ups and downs due to environment scenario of like force majeure or different kind of environmental factors, economic factors. But we are committed, and we continue to look at 12% CAGR growth in the mid- to long term.

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

Yes. I just have 2 questions. One is on the RM side.

Sir, I'm sorry to interrupt. Sir, your voice is not very clear.

Is it better now?

It's not louder. It's very softer.

Yes. Is it better now?

Yes, a little better.

Yes. My question is largely on the RM side. So if you can just give some perspective in terms of the RM inflation which we are seeing. What kind of further inflation we expect? So in Q2, we would have taken some price increase. And coming into October, November, have you taken any further price increase which covers the inflation? I am asking this because if we look at our competition, especially the MNC players in the industry in India, they have started this whole policy of surcharge to account for freight and exception RM inflation, and that's been going on for the last 1 or 2 quarters. So for us, where are we positioned at in terms of pass-through of raw material inflation? So that is one. And second is on the Mahad [ cleaning ]. We have been having this kind of problem repeatedly for last few years. So any thought on supply chain diversification just to mitigate this risk in the future?

Yes. So I think I can answer both the questions. On the raw material inflation, we are working with our clients on an ongoing basis. So there is no specific event-based or one we continuously have a dialogue around the price and cost inflation. I think in the events leading up to the last week of September, in China, there was further force majeure declared because of the energy prices and the closure of the coal power plants. Subsequent to that, we have witnessed another round of, I would say, hyperinflation or stock-outs and situation accordingly. Our inventory policy, maintaining high enough levels, we are quite well covered into the next couple of quarters. And we will look at gradual, phased manner price increases to our clients so that we balance the recovery in growth with the price inflation, and we don't want to end up with a situation where the price inflation stops the volume growth recovery. So that fine balance between the raw material price, selling price increase and continued volume momentum, we will navigate that environment. Having said that, we have on top of the scenario on the raw material with our contracts and our inventory policy, so we will be better placed through this couple of quarters to manage this. Coming to your question on Mahad, we have actually a plant in China which we had bought, which is a sort of a BCP for the Mahad plant. So we have 2 plants manufacturing more or less the same product. And in this lockout period or stoppage period due to the floods, we have ramped up our capacity in China, and we have produced additional materials to balance the shortfall that we face. As of now, we are -- we have not lost any business as a result of the Mahad flood. The only issue there is that the costs, which were incurred in this period, are not represented or reflected in the books of accounts until we have a confirmation from the insurance claim. So that part should also be coming in, in the quarters ahead.

Okay. So on the RM inflation side, again, I mean, just from an approach point of view, would the approach largely be on getting more volume, I mean, not be that aggressive in terms of pricing? Or are we kind of having a more balance...

I think we are -- we will work with the clients one-to-one. There are obviously pressures across the board, so we will work with our clients. And we are confident to pass on the cost increases as it's a flow-through. And we will be selective, and we will manage that we don't dampen our growth and future prospects. So we will ensure that we get into the next years with good momentum on the business growth. At the same time, we will enable sufficient price increases to cover for our costs.

The next question is from the line of Rohit Nagraj from Emkay Global.

Yes. Sir, the first question is on CFF. So the performance has been decent, and margins have been in the range of -- EBITDA margin is about 11%, 12%. We had indicated earlier when we acquired the company that since it is into premium category of products, we may look at expanding the product basket from Europe to some of the Asian countries. Any thought on this that we will be doing it? I mean, obviously, during the interim period, the pandemic has caused issues. But any strategy on this front?

So we continue to get the development work on both sides, so within India and Europe and, in fact, within Asia with our centers in Singapore and Jakarta. And they work together. We are, at this moment, not really pushing synergies because each business is faced with their local issues and the pandemic and workforce coming to office at various times. But once there is a normal travel and everyone is working in the office, we will further look at cost optimization and using libraries across various development centers to bring down the cost for -- I would say, R&D cost for -- development cost for revenue optimization on the overall sales. I think as a result of the pandemic, also, the gap between the markets in Europe and particularly Asia has increased. I expect that we will see a slow recovery from economic activity and higher premiumization, which was the trend previously. A couple of years of pandemic will put a sort of slow recovery phase. And by the time the recovery is in a normal economic cycle, we will have our product range ready in Italy for the launching into Asia.

Right. That's helpful. Sir, if you could just provide some understanding on how the recovery is happening across the user segments like fine fragrances, personal care, home care. And just to give an understanding how much we have reached in terms of pre-pandemic levels across these segments, that will be helpful.

So I think the part of the business across all sectors has improved. In the first half, I would say, May, June, July, sort of these were the peak decline months where a lot of the fine fragrance, deos, these kind of products saw, I would say, half of normal volume. Subsequently, August and September, they have restored and resumed their business. We have also seen, across May, June, July, a decline in small scale -- yes, yes, just a second -- decline in the small-scale business, and that has also subsequently revived.

Okay. That's helpful. And now we are halfway through the year. Would you like to give any guidance for FY '22?

I think our guidance remains the same. We have talked about a 12% CAGR in the year-on-year. I think we are quite confident to achieve that. Initially, last year, we had also guided for a comeback on the first half, since last year first half was muted. Unfortunately, this year, first half was also affected by the same pandemic-related issues. So we are confident of a 12% CAGR over last year and then look at continuing growth from there on, in the emerging markets, the base business. The European business has been clocking 12% CAGR over the last 2 years, and we expect that to continue. In the overall picture, I think we will also need to optimize some of the sales based on the margin and raw material inflation. So on the longer term, we are confident to do the 12% plus growth rates. The margin percentages will be something which will see a dip, and we will need to take a certain strategic hit in the margin in this quarter given the hyperinflation. But we will be able to restore that to a long-term 42%, 43% gross margin and continued growth.

The next question is from the line of Dhaval Shah from Svan Investment.

Yes. Sir, just one clarification I wanted. On the inventory side, you mentioned we are covered for the next 2 quarters in terms of the pricing. Did I understand correctly?

No. In terms of raw material availability, pricing remains a challenge, so cost pressures are definitely there. But in terms of supply situation, we are well covered for the next 2 quarters. We hope that the supply situation should restore sometime in this period, and then we will update you from time to time if we see any change.

Okay. So you meant you are covered in terms of volume availability and the pricing remains open?

Yes. The pricing -- also, we have covered our material. The price inflation, we will work out and pass on to our clients.

Okay. And when you mentioned about maintaining the absolute EBITDA and not the percentage, so historically, how have you worked around? Largely, you have been working on the percentage terms? Then what sort of renegotiation you would have in terms of the [ EBITDA ] margin?

So as a very basic situation, if my selling price was INR 100 and INR 50 was my COGS and INR 50 has become INR 60, I don't see any way that we will be able to pass on more than the cost pass-through in such a quick turnaround situation. So we will be able to pass on the 10% inflation or 12% inflation on the top line to our clients. Plus we will have to look at the product mix and make proper use of the available raw material and improve the overall EBITDA margin. So effectively, the control -- also, there will be cost control which we need to do. And effectively, the idea is to maximize absolute margin in line with what was the original budgeted numbers. The top line will get distorted on account of the inflated selling price, but that we will pass through cost increase to the clients.

The next question is from the line of Nikhil from SiMPL.

Yes. Am I audible?

Yes.

Just 2 questions on the comments you made during the call. In one of the earlier questions, you mentioned that we would be looking at a growth in next year. But subsequently, you mentioned we've been having a 12% CAGR growth. For this year, considering the weak first half, do you think that, that 12% CAGR growth is still possible for this year? Or do you think it's more -- the growth options are more from next year onwards only? Just to understand it.

So if you look at the first half with the emerging markets, India situation being muted, we have still done a 15% growth on a like-to-like basis, including Europe, and so kind of emerging and the European markets. So we are confident to continue that track. We also see demand revival in the emerging markets. So I don't see a big challenge to maintain the 12% growth, although the first half has been muted. I see this as very similar to last year. We have seen a big jump back in the second half. So on the growth, I am not seeing a big challenge. It's a question of maintaining and managing the gross margin percentage and absolute gross margin, which will be a challenge as the cost increase has been very steep in the last few weeks.

Okay. Second question, sir, you mentioned in the call and also in the presentation the emerging markets are weak. And over -- if I go back to our 2 to 3 years back calls, we had like 3 Is as the key markets, so which was India, Indonesia and Italy. Is it like the Indonesia market because of COVID has been disrupted significantly, and that is why the growth in this quarter has been slow? Or is it like this is across India, Indonesia, all of the markets have seen a major disruption?

So we have clearly seen the sort of pandemic and post-pandemic scenarios. So in Europe and Middle East, where the vaccination drive was earlier than in the emerging markets like India and Indonesia, we have seen the recovery phase already started. So we know that we can expect the similar thing in India, Indonesia and these emerging markets in a post-pandemic scenario, which is at this moment. We will remain cautious because the pandemic scenario is always news when it varies. So our business plans will maintain the agility in terms of able to react to any situation that may emerge. But we are going on this basis of a post-pandemic scenario and restored growth coming back in the emerging markets. India, for sure, we are already seeing the momentum. For the Indonesia, which is our 3 I or third I, the pandemic situation in Southeast Asia, in general, is still a bit more difficult than in India, and it will take more time to play out. But I strongly think that by end of the year, we will see the emerging market on Indonesia, Southeast Asia business also recovering.

And sir, just one thing. Southeast Asia would be contributing what percentage of our revenue, approximate?

7% to 10% on the fragrances, and overall, 5% of the total.

Okay. And lastly, you mentioned in Mahad, there was a cost which we have booked in P&L. What was the quantum which we have booked?

So we have booked INR 6.2 crores as exceptional cost in the P&L this quarter.

Next question is from the line of Anuj Sharma from M3 Investment.

Yes. Kedar, 2, 3 years ago, you had made a reference that the cost increase or the raw material escalation was maybe sort of, say, once in a Six Sigma event or maybe once in a century event. If you draw parallels to that raw material escalation and currently, what is the parallel? And is it a broad-based -- more broad-based escalation or it's driven by a few cost elements to material?

No. So a few years ago, when we had a force majeure scenario in our industry, it was very much industry-specific, very large inflation that was related to, I would say, 50%, 60% of our raw materials. At the moment, what we are seeing in terms of raw material inflation is a broad-based inflation in commodities, specialty chemicals, naturals. Basically, it's an average increase of inflation. It has been a sort of rebound after the pandemic with the demand going up, supply remaining muted, plus added layer of disturbance on logistics, containers, availability, cost of freight, cost of fuel and the latest events in China leading to further short supply. So in total, this is inflation which the clients are also facing and everybody is aware. So for us to get the price increases with the clients, it's relatively easy. It's a relatively pan-industry broad inflation and not specific to our industry.

All right. That's helpful. And just one more question. If I go back, our gross margin had shrunk to approximately 40%, 42%. When we compare it now and when you're seeing the next 2, 3 quarters, do we think -- while you said we are focusing on absolute, do you think we can catch back those numbers in terms of gross margin?

So when you look at 41%, 42%, we have some level of inflation inside. Plus, we have the effect of our Mahad plant closure. So we needed to buy some raw material and maintain our contracts. And at a low margin, we were able to continue to supply our customers. So this is muted largely on account of the Mahad situation. If I take Mahad recovery in terms of a normal -- if I account for basically all the insurance claims, then it would be in excess of 42% in this quarter. And it's in line with our long-term expectation. We also see the product mix scenario with the pandemic affecting more of the high-value, small-volume products than the lower gross margin, bigger volume products. So the product mix plus Mahad is accounting for a slight decline in the gross margin. Going forward, I think we are still on a strong base of 43% gross margin if I look at the actual product mix that we expect to sell now. Now that 43% is the starting point, and we will have to overlay the cost inflation from the raw material and selling price recovery that we are able to make with our discussions with the clients.

The next question is from the line of [ Rajesh Kumar ] from -- a shareholder.

Am I audible?

Yes. Please go on.

My question is, we have won an order for a home care brand of one of the MNCs of India. So congratulations on that. I just wanted to know if this is the beginning of winning few more orders from the MNCs. And second is, how big is this order?

Yes. So the -- this is, obviously, a beginning of our long-term strategy, where we have been focusing on new molecules and making development and research ahead of what we require. So it's a good sign that we have won an opening, and we will grow from here. This specific product will be anywhere between INR 25 crore to INR 30 crore annual revenue. And we hope to get additional more businesses in line with this long-term strategy. As we have discussed in the past, within particularly the India market, our market share in the non-global MNC is quite high. And the global MNC brands, which account for almost 40% of the India fragrance market, is our target for getting additional sort of incremental pass-through.

Okay. Very good to know that, sir. My second question is paint industry is doing extremely well in spite of COVID pandemic. Two years back, I think our products were approved by one of the leading paint manufacturers. So what is the latest update on this? And did we receive any orders from them?

Yes. So the industrials, as we call it, not specific only paints, but there are paint, textile, varnish, lot of companies in that industrial belt. So industrial products have already -- we have seen almost 100% growth in these areas over the last couple of years. So it is doing well. We will continue to see growth in those areas.

Okay. Sir, is this -- industrial products which you are mentioning, does it include the industrial fragrances which we had last -- which we had launched a year back, including Keva roll-ons and...

When I'm talking industrial products, it is fragrance sales to the industrial products. So these are not typically classified as FMCG products. It's not your soap and detergent only. So anything which is textile, paints, housing wood varnish, a lot of things that are used in the household but are not typically FMCG products. They are replacement products or sort of capital goods like goods. That market, we are seeing good growth, 50% plus growth year-on-year. And that's a nascent market, so we see a good runway for that market in the next few years as well.

Sir, how much percentage does it contribute to the overall revenues, this industrial segment?

At the moment, it is small. It's in sort of INR 10 crore ballpark. But we see that this will -- this is only, I would say, 1% or 2% of the total potential of this market. So if the market is very large, we are seeing this will be sort of a growth area for us all.

So when you say this 50% growth year-on-year, so does it include -- that means we have received the order from this paint companies also?

Yes. We are supplying from last year and the orders have doubled since last year. So it's a big growth over last year, and we will see this growth go -- I mean being there continuously.

Sir, my last question is, what is the status on the fragrance encapsulation technology? I think we had taken some trials a year back. So anything -- any latest update on that?

So we have -- also, on the encapsulation, we have put an expanded part of our capacity. We are doing well. We are also looking at first initial leads at European market for exporting these encaps and also in Middle East. So the initial trials and feedback from the clients is good. Again, it's a scaling-up business, so it's quite small at the moment, and we will continue to grow that as we go ahead.

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

Yes. Just 2 questions. First is, I just want to understand, if you can comment how are you seeing trends in the Fine Fragrance space, especially in the CFF or in the European business? Any color you can provide on that?

The Fine Fragrance business last year was very muted. This year, it has been -- it has picked up for us quite well, although overall fine fragrances globally remains weak and is expected to turn around this quarter once [ there's more ] sort of a post-pandemic demand. Our Fine Fragrance business is largely focused on the new brands and new entrants into fine fragrances, and we are doing good amount of business wins. As the fine fragrance is an extremely fragmented market, it takes a few years for any meaningful volume growth. But we have a good amount of wins, and our business traction in -- we are quite happy with the development funnel and business traction in the Fine Fragrance business.

So for us, I mean, for CFF, how much would be for fine fragrance? Would it be like 5%, 10% on their base? Or...

No. Today, it is smaller than 5%. It is 2% to 3% of the total business. But it's completely new activity which has sort of started 2, 3 years ago, and it will ramp up. Our long-term objective is to make 20% of our European business in fine fragrances, which is a healthy ratio for the volume and margin business. Most of the global MNC businesses have roughly 25% of their fragrance business as fine fragrances. And our objective is to increase this 3% to roughly 20% while continuing to grow the overall pie.

Okay. Second question is, so you said that we have a good amount of visibility in terms of growth, and hence, we kind of hinted for a buyback option as well. But if I have to look at for the next 2, 3 years, given that we are still kind of quite very strongly positive on growth and margin recovery, would this be more like a regular feature in terms of buybacks? So I'm just trying to understand between buyback and repayment of debt. I mean what is a -- I mean, how we...

So we are committed to our distribution policy, profit distribution policy of 30% to 40% per annum. We will look at both measures, dividend, buyback and any other route or distribution method that from time to time what makes sense in terms of taxation, in terms of shareholder value. We also believe that buyback gives a better representation and better value for longer-term shareholders than dividend where effectively people can own the share for one day and get a dividend rather than having to own it for a bit longer. And we are committed to the profit distribution policy which we have announced between 30% and 40% of the PAT that we generate.

The next question is from the line of Mr. [ Bhavya S. ], an individual investor.

Yes. Sir, my first question is, during the GST implementation, you had alluded that small businesses are also forming a part of our business and they faced demand in GST-led issues and a lot of businesses closed down, too. So right now, currently, are we seeing small businesses form a part of our revenue? And how are they growing?

So about 10% of our domestic business is in small customers, and they continue to maintain their business. We have seen, as I mentioned earlier, a lot of churn post GST monetization and the nature of -- or a number of customers that have degrown or consolidated at the marketplace. Today, we have roughly 10% of our customers and sales in the small market. It's a market which is quite robust. However, it is -- the sales are disproportionately affected when there is a lockdown or a pandemic closure because the customer said that the address is mostly in the bazaar. So the small shops and the bazaar market, if it is closed on account of lockdown, they see immediate slowdown. They are not really represented in retail, modern trade or home delivery brands as much. So this is a net effect when the pandemic lockdowns happen, this 10% business has a very acute slowdown. But we expect this business to bounce back. There is also pent-up demand from the consumers to buy these products.

Okay. Okay. And sir, my second question and last question is, can you throw some light on the Ayush front? Last call, you had alluded that it's a robust and growing market. And currently, are we seeing the same trend? I know it's only 3 months apart, but is there any update? And can you throw some light on the same?

Yes. So our wellness ingredients part of the business is also doing well. Our research in that has created a couple of new products. Again, it's a nascent market. We are -- the market is very big. We are coming in late in this market. But we want to be product differentiated by science because these natural extracts, there's a lot of players but with any undifferentiated product mix. So our approach has been to apply scientific principles and our science knowledge to these extracts with the quantification and the exact active ingredient definition. This market is nascent, but we see that this market, again, gives us a leg for large growth in the future. But it will take 2, 3 years of product maturation and building the product range to then go into this market.

Sir, just a follow-up on that. How much currently would it be contributing? And what do we tend to take it towards? Or is it...

It's small. It's around the INR 5 crore range per annum this fiscal. But that has good traction, and we are in discussion with some large MNCs as well as local players. So it's a new area of allied line for us, and it will take some time before the business is meaningful. In terms of growth rates, it will grow fast. But in terms of the overall number, we will still be in the INR 10 crore, INR 20 crore range for a few years.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

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. Before I end, I wish you all a happy Diwali, and thank you for your time to join us on this call.

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