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

Ladies and gentlemen, good day, and welcome to the earnings conference call of S H Kelkar and Company Limited. [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's Q3 and 9M FY '22 Earnings Conference Call. We have Mr. Kedar Vade, Whole Time Director and Group CEO; and Mr. Rohit Saraogi, EVP 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 opened for a question-and-answer session. Before we start, I would like to point out that some statements made in today's call will 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 Vade to make his opening remarks.

Good afternoon, everyone, and thank you for joining us on our quarter 3 and 9 months FY '22 earnings call. We have reported a steady performance in the quarter and 9 months. Quarter 3 FY '22 grew by 6% on back of rebound in consumer demand and new client wins. Emerging markets reported 3% revenue growth on account of subdued volume in, particularly, in December due to pandemic disruption. European market reported constant currency growth of 8%, with 18% growth in CFF's core business. In our core domestic Fragrance business, we saw improved demand momentum, with revenues improving by 12% year-on-year and 3% sequentially. The Southeast Asia region continued to be affected by the COVID surge and is yet to recover. Furthermore, there were supply disruption during the quarter that has impacted export shipments. On the raw materials front, we continue to witness cost pressures on account of global inflation, with additional challenge due to supply chain constraints and logistics. This moderated our profitability performance and margins on a year-on-year basis. However, despite the ongoing challenges, on a sequential basis, our margins have remained in the stable range. Gross margin stood at around 41%, and EBITDA margin stood at 15.8% in quarter 3. In order to mitigate cost pressures, we are working with our customers and undertaking price hikes. Our profit after tax in quarter 3 has come in at INR 32.4 crores. Coming now to some key business updates. We are happy to share that we have acquired 62% stake of Holland Aromatics, a leading fragrance company in the Netherlands. The balance, 38%, will be acquired in 2 tranches, 19% each over the next 2 years. The transaction brings on board a high-potential company with strong local presence in Europe, particularly in Northern Europe and complementary to our CFF business. A proven expertise in the F&F industry along with the blend of capabilities from CFF, Nova and Holland Aromatics will strengthen our endeavor to tap upon diverse customer segments, ranging from local MNCs and, particularly, assist us in our endeavors to take global MNC business. Here, we are also pleased to share that we are now participating in a global RFP, that is a request for proposal, and engaging with a large global FMCG MNC or commercial tender submission. This is a global business in excess of $1 billion, which is up for negotiation. This is a key step in the world -- sets the stage for SHK to tap upon further global opportunities and a key focus area that should drive the next leg of growth for us. And another key development during the quarter, the Board has approved the acquisition of 100% stake of NuTaste Food and Drink Labs. This acquisition accelerates the momentum of our flavor business and enables us to further expand into the high-potential flavor categories, such as syrup, sauces seasoning, food preparations and other such premium-grade products. The transaction brings on board a solid and reputed customer base across the fast-moving FMCG and, particularly, QSR space. Overall, both these acquisitions are value-accretive, synergistic and growth-oriented. From a consolidated balance sheet perspective, our net debt position stood at INR 438 crores as on December 31, 2021, compared to INR 347 crores as of September 30, 2021. The increase in debt was primarily due to higher working capital in the current inflationary environment. I would also like to share that the following -- the conclusion of our latest 2 acquisition, we expect that our net debt will reach levels of around INR 550 crores in the coming quarter. As we had indicated in the past that we would be reducing our debt levels, these acquisitions presented significant potential for future growth. Both acquisitions are highly growth-oriented and, as such, rare in our globally competitive and highly consolidated industry. The alignment fit perfectly with our vision of emerging as a notable player, particularly with global MNCs. Having said that, we have historically been conservative on that, and we would continue our endeavor to reduce debt from the next quarter onwards. To conclude, the Omicron variant impacting discretionary spending to some extent, we witnessed moderate growth in December and January. However, we are operationally in a strong position, seeing healthy wins across the market, and our strategic initiatives and participation in global RFP should result in positive growth momentum over the next few fiscals. Overall, we are confident our driving growth should enable us to report healthy performance going forward. I would request the moderator to open the forum for any questions or suggestions.

[Operator Instructions] The first question is from the line of Viraj from Securities Investment Management.

First is on the acquisitions. So if you can just provide some more detailed perspective, what kind of complementary portfolio and addressable market opportunity kind of open up for us? And you kind of also related it towards a high growth opportunity, so if you can elaborate a little more.

So let me start with Holland Aromatics. Holland Aromatics is a niche fragrance manufacturer in Netherlands with about roughly EUR 6.5 million top line annual revenue and greater than EUR 2 million EBITDA. It is in close proximity in the manufacturing side to our sites, both the [ trial ] manufacturing site and the development laboratories in Amsterdam. Given its proximity and ability to work together with our development site, we are very confident of further expanding their business into Northern Europe covering Benelux and Germany as an additional market. We already have our CFF manufacturing site in Italy, which allows us to cover most of Southern Europe and Eastern parts like Turkey from supply from Italy. So these 2-manufacturing-site approach will help us to consolidate our position in Europe. Additionally, there are a couple of global MNC FMCG companies with a strong presence in the Netherlands from the development and headquarters or corporate global working. So the Netherlands acquisition also strengthens our [ lightening ] with the global headquarters or R&D centers in the Netherlands with these companies. So this allows us to grow the CFF and European business on a much faster field as both North Europe, South Europe demand can be fulfilled in one composite group. Additionally, Holland Aromatics has businesses in -- export businesses in Indonesia, and as you know that we have embarked on a 3I strategy, with Indonesia, India and Italy being our focus areas for future growth. So Holland Aromatic complements the business that we are doing in Indonesia and with their support, and there are some tie-ups in the Indonesian market, which we will benefit going forward. As to the second acquisition, which is NuTaste, NuTaste is -- [ in the ] space, which is traditionally between flavor and FMCG product companies. So for example, we are making chocolate flavors. They are making chocolate process and chocolate inclusions for this cake or bakery confectionery companies. And with this, the complementary set of products that go to FMCG and pharmaceutical companies, we are able to offer the full complement of products. They are already working with large FMCGs, like Unilever, Britannia and so on and so forth. And so with the offering of both flavor -- direct flavors and flavor plus addition products, we are able to cater to entire requirements of the FMCG bakery, confectionery, pharma sectors. So from that, we also have a solid milling powder flavor facility, together with our earlier acquisition, which has given us some amount of savory flavors, we are now targeting the QSR business and savory flavor business in combination with -- in all the food segments, there is this dual kind of approach. One is the concentrate flavors, and the other is ready-to-use flavors. And in this, the NuTaste FDL is complementing our concentrate flavor business by having ready-to-use products for QSR and FMCG companies, including nutritional supplements, nutrition business and flavor for beverage, pharmaceutical and bakery industries. Complement the flavor business, and it allows this to grow beyond the traditional R&D-led flavor usage to broader usage, including large canteens and some of the midsized food delivery and food companies, which utilize flavors in a ready-to-use form. So this has given -- is another growth opportunity for our flavors business.

Just one follow-up on Holland Aromatics. So we paid around EUR 13 million and -- for 62%, so total EBIT to sales will be slightly upwards of 3x sales. So internally, when we're saying that we expect a high growth, what kind of growth we are looking? And is it led by -- from customer...

10x of EBITDA, if you look at it in terms of high margins, it's 10x of EBITDA. And we are very confident to replicate CFF-type double-digit growth within Europe. The company has been growing at excess of 10% CAGR in the last 3, 4 years. And we will supplement and complement that with our CFF and Keva technologies to further continue this momentum.

Second question is -- so with the Holland Aromatics acquisition and then the other one as well, you said our overall net debt would be close to INR 550 crores. So over the next 1 to 2 years, do we have any aspiration or target in terms of what kind of a debt level do you want to settle down at and perspective, if you can share that? And we also -- in the December business update, we talked about paying that INR 12.5 crores fee for participating in global RFQ (sic) [ RFP ]. So that's including in the current quarter numbers or that is -- which will be reflected in Q4?

The INR 12.5 crores fee is WIP. It is not yet payable. It is not crystallized. So we are currently in the business discussions, and once the RFP is submitted, we hope to get sufficient business to be able to cover our investments in this tender process plus 3 years business growth. So the total tender quantum is excess of $1 billion, and we are waiting and expecting the first awards of business to come in, in the next -- probably next 2 months. And then it's a process whereby the entire business will be awarded over a period of 12 months thereafter.

And then the cost will get amortized over a period of the contract. So suppose if we get a contract for a period of 2 years or 3 years, the cost of INR 12 crores will get amortized.

Okay. And on the debt part?

Yes. So debt reduction, we are already looking at that, as we've talked earlier. The high inflation in the raw material has meant that almost INR 50 crores, INR 60 crores of additional raw material value we have taken for the same volume that we have been managing and keeping. We believe that once the raw material inflation stabilizes in 1 quarter to 2 quarters, this kind of money cash flow will quickly come back in addition to the operating profit of that quarter. So there is a ballpark INR 60 crores of working capital, which has gone in. And as the sales price increases take place, the -- this entire working capital has to go through the cycle for recoveries, and we will get the INR 60 crores out of the working capital in addition to the operating profit of each quarter.

[Operator Instructions] The next question is from the line of Madhav Marda from Fidelity International.

All my questions have been answered.

The next question is from the line of Lakshmi Narayan from ICICI Prudential AMC.

Kedar, just 2 questions. If we look at the history, the last 4 or 5 years, you have done several acquisitions, right? Be it small tuck-in acquisition to large ones, right? So if you just put it together over the last 4, 5 years, what has been the experience in terms of the total capital that has gone in for acquisition, how it has actually benefited the company either qualitatively or quantitatively? And subsequently, I mean, how do you look at it, whether these are -- this will yield resells? One should we look at immediately, should we look at long term? How do you look at it together with CFF? Last year, we acquired something. And this year also, we had this, right? While I understand it's around synergistic, just to understand how much capital has gone and what has been the presells qualitatively and quantitatively.

I think, Narayan, if you allow me to send that statement with the total capital outlay and a specific comment on each acquisition and where we are, that's probably a better way of looking at it. So we will make an update on this and send it...

Maybe one suggestion is that maybe, in your presentation itself, you can actually just put a chronological snapshot of acquisitions, what has been done so that it will be helpful for your...

It will be [indiscernible] in our annual report, whether we can do justice on the total discussion. So we will make a section in annual report with our last 5 years' view on acquisition and way forward.

Got it. But anything on the top of the mind you want to tell, not numerically that...

[indiscernible] so going back to the strategy of the acquisitions, we have done acquisitions: first leg of acquisitions on the ingredients; the second leg of acquisitions on the flavors; and now recently to expand further the fragrances business. In each way, we had a specific strategic target as to why we want to do the acquisition and whatever benefits for that acquisition. I think by and large, I would say, 9 out of -- 90% of the objectives have been met. In terms of the -- particularly the environment on GST and post the pandemic, the subsequent penciled growth rates of the economy or customer side have not panned out. And that's why some of the acquisition value and the debt has gone up faster than we had originally planned. But these are matters, I would say, within tactical 1 or 2 years of slow growth and the pandemic situation. Otherwise, by and large, if you see the CFF, which was not facing the same kind of pandemic pressures, we have delivered a double-digit growth on the various flavor acquisitions we have now integrated last year, and you've seen that last year or 2 years, we have a double-digit CAGR growth in the flavors. There is good traction in terms of product development and approach. So overall, I think the acquisition strategies have been well worked out, and it's working well. We now need to focus on consolidating the acquisitions to build the synergies that we will take up in the next 1 or 2 years that we consolidate what we have. The key point here is that now we've also been able to demonstrate manufacturing and capability outside India. And one of the key conditions of the global MNC RFP, as I've mentioned earlier, is innovation and the geographic spread beyond one location or one country. So with the Italy and now Holland manufacturing, India manufacturing and China manufacturing, we are now in a position to participate on the global RFP. So on the strategic front, the view that we had on the acquisitions have largely been fulfilled. On the tactical front is the revenue growth has not happened in the same manner that we had penciled when we did the acquisitions. But I attribute large part of that to the pandemic situation because as soon as we've seen nonpandemic quarters, we are doing good growth.

Got it. So if you just look at next 3 to 5 years, right, would you be looking for more acquisitions or you will first start looking to consolidating this, how you think of 3 to 5 years out?

So I think our appetite for acquisition is sort of -- there is a passive and active appetite. So right now, we are in a situation of consolidating what we have just recently acquired. Till we are able to consolidate, bring down our debt to levels of less than 2x of EBITDA, we would not look at any further acquisitions.

Got it. And in terms of your cost of debt, right, what is your approximate cost of debt? Because on the balance sheet appears to be less than 3.5% or so. I don't know if my calculation is right.

Yes, sure. That's right. The cost of debt is somewhere between 3% and 3.5% because most of the debt is in overseas, U.S. dollar or euro-denominated debt and underlying businesses are also generating sales and return on the same currency.

And we have been -- in the last 1, 2 years, you have been accelerating on acquisitions. Is it that there is some kind of a change in the landscape that a lot of assets are coming at good prices? Or one is, of course, your business need, but why a lot of assets are coming up? And how do you think about it, whether some consolidation is taking place or not?

I think the obvious answer that is a lot of liquidity in the market, and there is a strong consolidation, wave of consolidation, not only from our side, but as an industry, all the large players and the significant players are on substantial acquisition in the last couple of years. Plus these midsized and smaller businesses have had to deal with the pandemic and effects of the pandemic, which is making it attractive for them to sell their business or, in cases, joint venture or otherwise. So there is a situation between sort of 2 opposing forces, liquidity-driven acquisition plus sort of businesses are willing to make a deal at this time because of the uncertainties. That is why there has been a spate of acquisitions in our industry and, I think, in a lot of industries recently. The other clips of the reason we needed to participate in this also is to ensure that we have some of our strategic goals in terms of Europe and further growth on flavors that we don't fall behind and there is further consolidation of the industry that we don't get a chance to participate in the future. So some of the acquisitions we have needed to do, making sure that we have a foot in the door, and we know that there will be a player in the market in different geographies or in different business segments where we need to have our next leg of growth.

Just one last question from my side. So if you extend the business into India and non-India and, again, fragrance and flavors, which is -- which you think will grow faster and also, be more margin accretive? Is it the India fragrance will outpace or the India flavors will do or the international piece?

I think the opportunities are the following: We have the global RFP, which is largely on the Fragrance, which will not be only India-centric. It will be on a global nature. Our acquisitions in Europe are on the midsize and smaller end of the Fragrance customers. So they are the areas which are growing faster in the developed market. And we continue to engage with all our large corporate customers within India and South Asia, which is our third leg of growth. Having said that on Fragrance, I think the Southeast Asia region, particularly, has been affected in the pandemic on a sort of longer time lines than Europe or Middle East. And we are looking at the correct strategy and timing to restore the growth momentum in Southeast Asia. So out of the 3 regions, Southeast Asia has been lagging. India is following market. Italy has been ahead of market on both current and in terms of the future potential. In the flavors side, you are seeing the numbers. There is a strong growth, and we believe India and Southeast Asia or India as a flavor and food market is a very large opportunity for us in the next -- almost a decade or 2 decades as the trend towards packaged food and flavored products starts to increase.

Okay. And any -- I mean, what has been the 2-year CAGR of the Fragrance division, domestic and international? I mean I have the 1-year number, which is there, but what has been the 2 years growth?

So the Fragrance 2-year CAGR has been 4% on emerging markets and 11% on the developed markets in Italy, and flavor CAGR is double digit in gross.

Sorry, you said India is 4%? Is that what I thought, 9 months?

That's it. Yes.

The next question is from the line of Sachin Kasera from Svan Investment.

Yes. Hello, Mr. Vaze.

Sorry to interrupt you, Mr. Kasera. May I request you to speak on the handset mode?

Yes. Hello, sir?

Yes, hello?

Sir, my question is regarding the tender which you highlighted in our opening up in next couple of months. Could you talk in a bit detail about them? Who will be the peers? What -- which segment you will be looking at and the size of the tender of the business you are looking at?

So at this moment, I'm only at liberty to say that it's well over $1 billion total global annual potential, which we are bidding for. There are various bidders. And over the next 12 months, the tender, which is sort of a total global tender, will be broken up into specific bidding portions, and that process will complete in the next 12 months. We should have our first results in terms of business award or potential business award sometime in the next 2 months. And then following that, we expect the 12-month process, where various subparts of the overall business are then kind of tendered and negotiated, and going forward, the businesses start.

Okay. So what is the decision of the tender?

Multiyear agreement of -- excess of 3, 4 years agreement to supply, and it will start, I think, somewhere in April in terms of the time lines of the process, and it will continue thereafter business by business throughout the 12 months the next year.

Sorry, sir. I missed that. So from the time we get the -- win the tender, how long does it take for it to show in the P&L?

So assuming that you have a business opportunity tender in April, it probably takes 5 to 6 months before the change in the business happens. The tender is awarded in April. The business should start in 1st of October, something like that, 2-quarter delay between the award of the business and the actual revenue flow.

Okay. Okay. So versus a $1 billion tender size, what sort of -- are we looking at in terms of the business opportunity the customer will also look at our P&L side and kind of give the business according to you. How should we kind of understand it?

No, I think the -- obviously, we are bidding for all parts of the business. But in terms of our strategy and our current operations in Italy, India and Indonesia, we stand a better chance in these geographies and certain specific categories. It's a very complex process, and I'm not at liberty to divulge any more details at this moment since it's still processing -- work in progress. But we expect sizable growth opportunity in this tender over the next 12 months starting from April, May when the first results start coming in. And we anticipate that in terms of size of the business, the total size is over $1 billion. But very practically, even if we look at 5% of that business being materialized in reasonable short term, that's something which is exciting for us to take forward.

And sir, on [indiscernible] just clarifying, will be the tangible side of the revenue, it's over time of the contract?

So annual revenue size is more than $1 billion, and we hope to start somewhere with 5% to 7% of that business in the first wave.

Okay. And sir, can you please -- if you can repeat the flavor versus fragrance are [indiscernible] mentioned would be other participant [indiscernible] for the Indonesia, India and Europe market?

Yes. So India, as I mentioned, is 4%. South Asia, MENA, Europe is 11%, and Southeast Asia is minus 2% CAGR growth, somewhere minus 2%, minus 3%, where we have had supply disruptions and slow growth.

Okay. So this is F&F combined?

This is fragrance. Flavor is largely 11% CAGR growth in 2 years, and we don't divide it into domestic, or it's largely India, South Asia region.

11%. Okay. India and Southeast Asia mostly.

Yes, so it's what we call SAMEA, so Middle East and South Asia. This region, we monitor our markets in emerging and top markets, and further in South Asia, I'm pleased as one and Southeast Asia as a second.

Okay. And sir, coming to this Holland Aromatic acquisition, so you mentioned, we take 10x EBITDA.

10x EBITDA ballpark number, yes.

Okay. Okay. Okay. So that is almost similar to the -- our valuation?

That's correct.

Okay. Okay. So sir, are there -- I mean, how many other companies are there along with us?

In terms of?

In terms of bidding for the asset, were there any other companies or...

I don't have full information on that, so I don't want to speculate.

The next question is from the line of Bharat Sheth from Quest Investment Advisors.

Kedar, [indiscernible] all the questions have been answered. One question recently that Swiss company, which acquired a 10% takes in our company, which is, of course, we are already working with them. So with that -- their acquisition, do you think it can open up more doors for us, our company, to do business with them?

So we are already -- within the fragrance and flavor industry, customers and competitors and suppliers, it's a common pool we buy from all our competitors. Competitors buy from us various ingredients, and we compete on the final formulation and composite business of the FMCG. So there is always a buy-and-sell relationship within the industry with many people. With this 10%, really, it's just, I would say, industry insiders comes up on our strategy and growth potential. And we are already discussing and working with Firmenich on various initiatives as a normal business development. And I think this may open up some further initiatives on that front. I just want to stress that we are independent company in the industry. We have no tie-up with Firmenich or anybody else, and we continue to remain independent and operate our own strategy in the future.

Okay. Okay. And this Indian acquisition, how that big -- what is the size of that company and that how much really with the complementary products and cross-selling opportunity is there for us?

So they are about, this year, revenue INR 30 crores. Ballpark is estimated between INR 30 crores and INR 40 crores. They will end up depending on the pandemic scenario. If it's eased up, maybe the revenues will pick up, but we expect somewhere between INR 30 crores and INR 35 crores of revenue annualized basis. And that adds nicely to our own 30 -- also our [indiscernible] INR 120 crores annualized basis revenue.

And the EBIT, any color on the EBITDA margin?

So I think their EBITDA margins are lower. As I mentioned, we are in the concentrated flavor business. They are more ready-to-use business. Their EBITDA margins are in the 7% to 8% range. But that is on a much larger volume, more linked to commodities and QSR and direct-to-consumer usage and also with the FMCG customers. So they're sort of in between step, and the concentrated flavor is converted into either a chocolate sauce or a chocolate inclusion for a spicy sauce. And that -- those are then included by the FMCG or kitchens or direct-to-consumer product companies. So there is -- it's a step down from our concentrate flavors into a ready-to-use flavor market. So it's much higher volume from a volume point of view, but most of it is commodity trading and value addition comes from the flavor and nutraceutical elements.

Okay. So any cost saving opportunity in some of the -- our customers that may not be [indiscernible] and -- so just, can you offer...

There are good complementary set of FMCG and clients and certain segments which are not our current clients, like QSR and common kitchens can taste things like this, which are not using direct flavors, but using ready-to-use flavor mixes. So their business is a straight add-on business in terms of our approach to the client. The large clients who have a full-fledged R&D are often buying the concentrated flavors, but the midsized and the sort of kitchen canteens, QSR, fast food chains, they are interested to buy ready-to-use flavor products. You've seen, for example, Peri-Peri and all the fast food chains have their mixes on top of their products. And all these are QSR products, which this company also makes. So it's a very good direct approach to customer segment, which we don't have and a complementary product mix to the customers that are common.

Okay. Okay. So Kedar, if we can give some color on -- now with pandemic, maybe [indiscernible] and how the Southeast Asia market will open up? So next year, what kind of -- I mean your -- with the whole consolidated number you look and kind of EBITDA margin that we are [indiscernible]? And one last one, one small product that we have tied with [indiscernible], which was then R&D and, ultimately, BASF took and now we have got our marketing right for that product in India? So is that ramping up that product?

Yes, that is ramping up. Again, this is being an expensive product, it is not easy to ramp up during the pandemic situation because it requires presentation to the clients and users and how to use and so on and so forth. So we've had a stop and start. And between the 2 waves of the pandemic, we were able to convert new clients. That business has started ramping up quite well. I think next year, we expect it to touch INR 30 crores to INR 40 crores in annual revenue, if everything goes normally.

And the Southeast Asia market, how was your sales on next year?

So Southeast Asia market, I think our basic product range and product type, everything is well accepted. It's a question of the supply chain particularly being disrupted during the pandemic. We are looking -- as I mentioned, Holland Aromatics also has certain business in the -- in Indonesia, particularly, and we are looking at local manufacturing or local supply chain enhancement, which will allow us to regain some of our lost market share. In a normal environment without any pandemic situation, I think we will restore our 10%, 12% growth rate in Southeast Asia as well.

The next question is from the line of Suraj Fatehchandani from Compound Everyday Capital.

My questions have been answered.

The next question is from the line of Madhav Marda from Fidelity International.

Yes. My question was that earlier when we -- for these RFPs -- the global RFPs, it was a bit tricky for us to build. But now that you know the opportunities have started opening up, what has really changed that now we can bid for these large mobile tenders? Just wanted to understand on that.

Nothing has changed. We were always knocking on the doors. I think if you see the commentary, we've been talking about in the last 3 to 4 years that this is an opportunity of growth for us. I think finally, we have been able to initiate that and take it to the next level.

Okay. Okay. Good. And this new business, like you said, we are targeting something like 5% to 7% of that global tender. Like typically, margins on these kinds of contracts, are they similar to our existing business margins? Or are they like higher or lower given that it's a very large size contract?

So typically, the gross margin level will be lower, but the net margin levels would be similar because the typical volume and the kind of overhead per kilo cost and other benefits in terms of operating leverage. So we are looking at it in totality where we don't see an erosion of net margins. We would see definitely a smaller gross margin on a much larger base. So that will be a typical scenario. If you look at our current composite margin of 41%, it varies from 30% to upwards of 50% between the small and the large products. And with the size of the global business, we probably look at somewhere around the 25% gross margin level. It will have to be product by product, country and specific discussion. But yes, it will be on the lower end of our gross margin level, but there will be much larger volumes of business, with the shorter lead times and shorter inventory cycles. So we anticipate that is a different kind of business.

So it's 25% gross margins, and EBITDA margins are like 15%, 16%? Or is that a bit more?

Yes. I think the operating cost, and it really depends. We have no color on exactly how much business, which business we will get. But assuming we get an average cross-section of small and big businesses, we will be in about 25% gross margin and 15% plus EBITDA margin. Then it depends on the synergies with the rest of the business. If it is similar in the common raw materials, things like these, then we will have a further benefit in the EBITDA margins.

Good. And last question is everyone has been facing the issue around raw material inflation. Do you think Q4, we will be able to pass through most of it? Or is it going to like sort of impact the last -- more into Q1 of less business?

No, I think there is not that normative inflation is static. It's a dynamic thing. There is continuous pressure even in this quarter and as we speak. So we've been able to pass on some of it to the clients. Some of that we are managing through the inventory management and inventory stocking that we have done. I don't have a specific timeline in terms of when the inflation will stop or how things will pan out in the future. As of now, we see the first quarter, January, March, we should be in similar gross margin as the quarter 3. That's our target, and we will continue to push selling prices in line with the cost price increases and manage to hold our gross margin at these levels. However, if there is another bout of high inflation, it may not be possible to maintain the gross margins. We will come back in our business update.

The next question comes from the line of [ Vipul Shah ] from [indiscernible] Equity.

Kedar, just wanted to understand from your perspective, first of all, congratulations on this really brave step off, considering bidding for this huge opportunity, which Kelkar is looking at -- S H Kelkar is looking at. So apart from the fee which you have mentioned in your business update earlier, assuming that we -- assuming that our company is in a position to bag the contract, will there be a specific additional plant requirement to be put up? So how do you -- how are you looking at the CapEx for this?

So again, as I mentioned, it depends on the nature of business and the final award. The objective and the manner in which we have -- we are negotiating that if there is any additional CapEx, then it would be something that will get amortized over the period of the contract, and we will recover from the contract period. We expect not very large amounts of CapEx because most of the plant and machinery and the requirements for these are already in place. But in the event they need us to put any dedicated facility in any part of the world or somewhere, any sort of additional capacity for whatever reason, then we will have that paid back through the contract period amortization.

So what I understand is that if the contract size is, say, x amount, it can be catered to from our existing plants. But if it, say, beyond x, then we may have to do some CapEx, and as you said, we will be able to recoup in terms of IRRs, right?

Actually in the geographies where we already have a plant or operations, there will not be a capacity constraint. But tomorrow, since this is a global tender and, let's say, wants me to supply 1,000 tons of fragrance in Argentina, then we will have to set up something to manage that supply chain, and we will amortize those costs accordingly through the period of the contract. I believe India, Indonesia and Europe, we have assets on the ground sufficient for no real or large investments. For the other regions, particularly the Americas and Africa, we may require some investment if such a business does arise, but it will be discussed with them at that time from a CapEx-neutral point of view. All our proposals are based on zero-CapEx basis. So if there is a CapEx requirement, we will have that as an additional cost to be manufacturing.

The next question is from the line of Nikhil Upadhyay from SIMPL.

Am I audible?

Yes, sir, you are audible.

Kedar, congrats for this deal where we are bidding. The point which I -- I think this question was raised earlier by a participant, but I just want to have a follow-through. We've been saying for 3, 5 years that we were trying to get in and breaking into the MNC customers. And we were putting all the efforts. But just to understand, is it like now solidly our scale has reached to a level or our balance sheet strength has reached to a level that we are being invited for such kind of deal? Or what exactly has changed that we are able to go and participate in the deal now? That is first. The second part is, do you see that probably -- whatever the outcome comes, do you see that more such inquiry levels could be coming up in terms of -- for the future for Kelkar as a company?

Yes. So to answer your question in 2 bits. First is that it's a step-by-step development in -- 3 years ago, we got a small engagement, which we started the business last year, which was kind of annual potential of INR 1 crore, so it was sort of test. This year -- last year, September, we also -- so this kind of -- we won the business. So 2021 September, we won a local business, which is ballpark INR 20 crore to INR 30 crore annualized revenue. So I think the steps of Unilever qualification and we kind of have been taken through, and this is sort of indicated, and they have been able to -- or this information has been important that the global companies are looking at us.

Okay. Second part was, like many said, consolidation of our acquisitions. One is like streamlining the processes and bringing the cultural and the R&D team on single page. But in terms of growth aspects, then you probably did these acquisitions. And how do you see that growth aspect in terms of consolidation? So when probably, say, you said one of the companies which have INR 30 crores kind of a top line, another is a EUR 13 million kind of a top line, what kind of growth do you believe that, probably, once our consolidation phase gets over, this is the kind of scale these companies should achieve or, probably, this kind of revenue these companies should be able to provide to Kelkar? How do you see that growth in terms of the consolidation piece? And secondly, on the margin profile, do you think there is enough opportunity to improve the margins in these companies as well?

So as a general case, the margins in the European markets are better than in the Asian markets in almost all product categories. So we are adding -- that additional margin led to our overall product portfolio. We are also dividing our R&D expenditure over a larger base of customers and products to help us in terms of a probably lower revenue, cost of R&D to amortize it toward a broader base. So this benefits both the companies which we have acquired as well as our current R&D team to monetize their research at a faster time line. Having said that, the opportunities are different. The global opportunity we have already talked, plus we are looking at European market opportunity through these 2 acquisitions of CFF and Holland Aromatics. We believe that the European market, like most developed markets, has undergone a major transition point in the pandemic, and we would see a spate of new type of products, particularly going direct to customers through the digital platforms, which is the growth leg which CFF is already benefiting from, and we see similar growth in Holland Aromatics, and the combined -- combining these, we can bring further operating efficiencies and then further grow this midsized and smaller customer and new brand business in Europe. The other acquisition is in the food space. I think we are at the tip of the iceberg as far as QSR and food space in India is concerned. If I have to pinpoint in terms of revenue growth opportunity, that is a single largest exciting opportunity in terms of potential runway because we are, at this moment, INR 30 crores, and the business industry is already INR 2,000 crores and growing at a very fast pace.

Okay. Last question, Kedar, like, if we go back to our previous year's call, and one of the things was that the company had invested a significant amount in R&D and had created a big pipeline of products. And that is why you had mentioned that probably the R&D costs will remain flat or -- with these acquisitions like CFF and the subsequent, the 2 acquisitions which we have done, how large does the R&D molecule pipeline or the developed product pipeline become for us? Is it significant enough?

They have not. Innovator companies, as far as R&D is concerned, they add more users. So we have added more markets for our R&D molecules in the European market. [indiscernible] for additional R&D costs for us, it's actually faster monetization of all the products that we have been able to build and continue to build.

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

Just 2 questions. On the large global tender, so the customer, who are they sourcing from currently? I mean, is it one single supplier? Or any perspective you can share that? And broadly, in terms of approaching our post Holland Aromatic acquisition, so if I just want to understand earlier, we had a -- we're trying to make a similar approach to PFW a couple of years back and then kind of certify what we are thinking. Just trying to understand how different or -- how differently are we approaching with this acquisition and then the scale up?

Right. So the first question on the global tender, the -- currently, the global company is buying from multiple vendors. I don't have the full details, but I guess that it's 4 to 5 vendors on a global basis. And they will add a few vendors in the discussion. The main thing is that the vendors need to be approved in terms of quality, systems and process, and we are now sort of a qualified vendor to be allowed to be bidding. So that's the first milestone to get into the FMCG global system. The second question was in terms of acquisition in Netherlands. So we had done the PFW acquisition, which was largely in aroma chemical, and that has helped us to start to build our R&D capabilities, plus the relocation of that plant into Mahad. Holland Aromatics is now on the formulation fragrance side. So we will be catering to the demands in Europe with the local manufacturing. So the intention is to continue to grow that in -- on our EUR 7 million base, together with the CFF, and our objective is to reach a sort of a top line of EUR 100 million in Europe over the years.

Okay. Second question is, when you look at ASEAN market for us, so another, Indonesia, which would be the larger markets, and compared to the peak sales, we'll be doing that, what will be the current run rate we will be doing? Just to get a perspective in terms of...

Sir, I don't exactly understand your question. I think the Southeast Asia market is all the countries in ASEAN. They have, collectively, almost 400 million population ballpark. And we expect it to be roughly the size of India in terms of opportunity. So the size of the business is large. We are a relatively small player, but there is a huge upside on the total quantum of business that is happening in the Southeast Asia market or Asian market today.

So for us, what will be the annual business we will be doing in from Asia?

At the moment, it's a ballpark $10 million.

That's including -- I mean obviously, including Indonesia?

That's right.

The next question is from the line of Bharat Sheth from Quest Investment Advisors.

Just to take one more perspective of this global tender, when we are bidding, we inevitably may be aware that each [ of the journey ] need to put up CapEx and how much CapEx does it really require. So what kind of ROC targets that are we looking while -- if we won this business?

Sir, I think the ROC target would be higher than 20%. I think the 20% cut off, we will maintain.

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

So my question was, are we seeing any inquiries? Or are we working with any [indiscernible] brands who offer direct-to-consumer products for new fast-growing brands? Are we seeing any inquiries or working with any of them?

Yes, we are -- actually, we are working with many of them on different products. So it's a [ ample ] part of our business, growth and engagement. I think in the recent past, this business side has got higher momentum. There is a good amount of business momentum that the D2C has seen as a result of the recent IPO and heightened awareness in the investor -- investments that are going in the D2C brands.

Okay. Sir, the last question is, when we said in the recent 2, 3 calls that we had a couple of new wins. So is this -- are these new and coming from a particular part of the business? Or is it scattered across all the small -- other small players? Are they [ MNC ]? Are they -- what kind of...

We have a large number of new wins. What we have announced is only our win with the global MNC last year, and that's the one which has led to the RFP, which we are now participating.

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

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

Thank you. On behalf of S H Kelkar and Company Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.