S H Kelkar and Company Limited ($SHK)

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

Thank you. Good morning, everyone, and thank you for joining us on S H Kelkar and Company Limited's Q4 and FY 2026 Earnings Conference Call. We have with us Mr. Kedar Vaze, Whole Time Director and Group CEO; Mr. B Ramakrishnan, CEO, Fragrances Asia and U.S.A.; and Mr. Jagdish Agarwal, Group CFO of the company. We'll begin the call with opening remarks from the management, following which we'll have the forum open for a question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Kedar to make his opening remarks.

Good morning, everyone, and thank you for joining us for the S H Kelkar and Company Earnings Call for the fourth quarter and financial year 2026. Financial year 2026 was a year of steady progress for the company as we continue to strengthen the platform for the next phase of growth. Despite a dynamic operating environment, we delivered an encouraging revenue growth, supported by resilient demand across all our core categories and steady progress in the new markets. A key focus during the year was on building capabilities that support growth in the longer term. Creative development centers across key markets are now playing an active role in new product development, customer engagement and market-specific innovation. We are encouraged by the level of engagement with new and existing customers as these centers become more integrated into our global innovation and delivery framework. In our industry, customer conversion and scale up typically takes time given the nature of product development, testing, approvals and adoption cycles. At the same time, once relationships are established and products are embedded in the customer portfolios, they tend to be long duration in nature. Therefore, while these centers will contribute progressively, we believe they have the potential to meaningfully transform our business profile over time. These capabilities mature, they will enhance our global relevance with customers, support higher quality, higher-margin growth and strengthen the company's position across key international markets. We are also making good progress on our expansion initiatives. The Almere factory at Netherlands greenfield facility is now fully operational, thus debottlenecking our European growth, which was approaching full capacity utilization. The Vanavate facility in Maharashtra is expected also to go on stream in the coming months. These additions will provide us greater operational capacity and support the ramp-up of business across the regions over the next few years. Along with the rebuilding of the Vashivali facility, these capacity additions are expected to address our requirements in the respective geographies for the foreseeable future. It will also strengthen our ability to respond to customer requirements more efficiently as we scale across domestic and international markets. These capacity additions, together with our investments in customer access, innovation, market-specific capabilities, provide a stronger CapEx-ready foundation for growth over the coming years. The broader environment continues to be fluid, evolving geopolitical developments and supply side dynamics globally. Our strong customer relationships, diversified presence and improving operating platform positions us well to navigate these uncertainties and capitalize on the emerging opportunities. With that, let me hand over to Jagdish to walk you through the financials and key priorities. Over to you, Jagdish.

Thank you, Kedar. Good morning, everyone, and thank you for joining this earnings call. As we know, the global environment continues to remain challenging with geopolitical and macroeconomic uncertainty impacting business across sectors. Despite this backdrop, the quarterly and annual results we shared last Friday reflect a performance that has remained broadly in line with our set guidance. In many ways, the results reflect the preparatory actions we have been taking in anticipation of the current market situation. You would have noticed that during the quarter, we reported a one-off sale of approximately INR 35 crores of low margin product or negative margin product as a part of our ongoing portfolio optimization exercise. We are continuously reviewing our product and customer portfolio and taking conscious decisions to exit transactions that are structurally low margin and unsustainable, particularly in the current inflationary environment influenced by the Middle East situation and broader geopolitical developments. Our key objective remains clear, protecting margins while ensuring supply security for our customers. The situation remains highly dynamic, especially with raw material prices witnessing frequent increases. In several cases, unless orders are booked or blocked immediately, pricing can change literally even by the next day. So therefore, we continue to work very closely with our customers to ensure continuity of supply and operational stability. This approach may temporarily result in some inventory buildup and the increase in borrowing levels. However, from a medium- to long-term perspective, our focus remains firmly on cash generation, strengthening the balance sheet and reducing debt. From a profitably perspective, adjusted EBITDA stood at INR 283 crores with EBITDA margins at around 13.5%, remaining steady on a sequential basis. As highlighted earlier, the operating environment remains dynamic, raw material prices witnessing an increase due to geopolitical development in the Middle East and evolving supply side conditions. The current quarter did not see a meaningful impact from these pressures supported by existing inventory coverage. However, these cost increases may reflect in the coming quarters and we are actively working on appropriate pricing measures and cost optimization initiatives to protect margins. The profit after tax performance during the year was impacted by a higher effective tax rate at the consol level reflecting the impact of losses in subsidiaries. With that, we can open the floor for questions or any feedback that you may have.

[Operator Instructions] We take the first question from the line of Ritesh Gandhi from Discover Capital.

Sir, we have done about INR 350 crores of CapEx in the last few years. And despite actually all of this at the EBITDA level, we're just not able to show growth. I understand that we've had a few industry headwinds. I understand that there is some amount of expansion for which there are operating actually losses. But I mean, just wanted to understand your thinking around how long it's going to take until the CapEx and the business actually tends to give us the return ratios that typically this industry should be earning given how sticky and high-quality business is.

Yes. You're right in the fact that we are going through the CapEx cycle. In our industry, we should also look at the development center OpEx as a sort of CapEx because it takes 2 to 3 years before we start to generate revenue on that. So at this point, we are -- we have the new initiatives last year, which we have started in Germany, Manchester just came on stream this year and the U.S., which came on stream last year. So 3 centers, which is almost INR 70 crores, INR 80 crores of cost per year in OpEx are also of the nature of CapEx, and they will start generating revenue after -- progressively, but after 3 years in terms of breakeven.

So sir, how much are the losses at the OpEx level right now in these new initiatives and development centers?

So till that time, these centers are not going to generate the revenue. They are going to the cost center only. So...

Just how large is -- I'm saying how large are the losses which we are bearing in these?

It's roughly when you look at all the combined -- INR 80 crores to INR 85 crores annually.

I would say the investments are to the tune of INR 80 crores to INR 85 crores because they're not losses. We are producing products, we are giving samples. So the development work is happening. But it is to the tune of -- as Jagdish mentioned, INR 80 crores.

So if we add up the, let's say, INR 350 crores of the CapEx and let's say, another, let's say, INR 200 crores of operating losses, which we are seeing should be counted as OpEx. We are talking about INR 500 crores, INR 600 crores of investment here. I'm assuming out of the INR 500 crores, INR 600 crores, our internal hurdle rates will be to make at least 18% to 20% return on equity on the investment over and above how much historically the business has been earning. So is that what we are expecting to play out in the next 1 to 2 years?

That is what we are expecting, but it will not play out in 1 to 2 years. It will take longer than that. We are talking about markets which are 20x bigger than our original Indian market. So we will take time to build the capability and the market size. But the growth runway is very, very large. We're talking about markets which are 20 to 25x bigger than the Indian market.

But is there a risk that this doesn't play out as per our plan? Or I mean, is the traction which we are seeing in the response which we are seeing? Are we on track? Are we slightly behind schedule? Did we anticipate how hard it would be? Because obviously, in these old markets, it's also hard to break into these clients, right?

So on these markets, we are on track. We have also already seen business in the U.S. upwards of 1 million contracted. So we are on track for these markets. We have not anticipated and planned for any large CapEx in India. And unfortunately, due to the fire incident, we had to do a substantial relook and reinvestment in the Indian CapEx. So this is the part where we have got a temporary setback when we will be able to build up our factories back this year and be ready to go again.

So is there any guidance you can give us for the year ahead?

I think this is a very, I would say, difficult question to answer. We are faced with an uncertain future on what is the raw material supply situation, what is the pricing and inflation as a result of the Iran, U.S.A standoff. And given that we are not really in a position to give you a full year view, I think quarter 1, we have secured our businesses, both price increases as well as supply contracts and inventories. So we are on track for a normal quarter 1. Quarter 2 as well, I believe we have initiatives ready that are allowing us to maintain our margins and continue to grow. Thereafter, we will keep taking steps to ensure that we'll remain in line with the inflation and the market environment, all the regions that we are operating. I think beyond the first half, it's very difficult to give a certain view of where the market is headed or what is the net results on the inflation and growth rate that we can assume. As of now, we don't see any cause for concern for the first half of the year. We are adequately covered. We see enough growth, more than enough growth and good win rates in terms of our product range development for last year.

Okay, fine. And sir, in the event that there are any issues with RM pricing, I'm assuming we would be able to pass it on as per our contracts, right?

Yes, we are in a position to pass on the raw material price increases. What we are also preparing is in terms of raw material situation getting worse. As Jagdish already mentioned, we have transitioned out of INR 35 crores, which is roughly translating about INR 50 crores of business. which was low margin or negative margin in the new environment. We have transitioned out of that business with the onetime sale to these clients. We will continue to observe and closely monitor the sales. Given the raw material expected shortages and current price inflation, we will monitor closely where we are using the raw material. Our overall strategy would be to move the raw material, which I believe globally will not be available in its full entirety to use the raw material for the right long-term clients and the right margin profile clients.

And do we expect margins at least going forward to now slightly normalize to the teens, low teens at least?

Yes.

Okay. And this we expect to happen this year, I mean, it's tariff?

Yes. I think we will reach there quickly.

We take the next question from the line of Henil Bagadia from Equicorp.

Given the current situation, sir, what is the impact in terms of your RM price increases given that even the secret so that is orange, lemon, grape fruit also have been impacted and the crude derivative RM price have been impacted. And since you spoke that you have taken increases, is there -- will there be an aberration what happened in the past where we had actually tied up on high-cost inventories and it further took us 1, 2 quarters to get back to normalized EBITDA even after the situation actually cooled down. So do you see something like that even happening right now?

Not really. I think the inventory prices are going up. It's very difficult to put an exact number, but upwards of 12%, 13% plus. Pretty much across the board, there is inflation in operations in power and fuel and we expect further inflation on these operating parameters. We are prudently ensuring that we have raw material at the right prices, and we have contracts in place and material coming in. And then we are looking to sell to our clients based on the stock in hand rather than any future raw material pricing or contracts. So we are more or less looking at 2 to 3 months of inventory, raw materials in hand and communicating and committing to the clients the prices based on those raw materials. And we will continue to do this process every 2, 3 months to ensure that we are not caught with excess inventory and/or with a mismatch between the selling prices and raw materials.

Okay. Sir, if I come to the international markets, sir, we have seen that the U.S. has actually ticked about $1 million in terms of revenue. So what do you see in the time lines where U.S. would be profitable on first the EBITDA level and second on the PAT level? And also in the case of U.S. markets, if we see it's going to take us at least 1.5 years for breakeven is according to my estimate on the EBITDA level and much further growth for -- and much more time lines for even the PAT. And even if we consider the U.S. market to be homogeneous and a large opportunity, but it's way more competitive even compared to the Europe one. So how do you see our growth strategy other than the inorganic one where it can actually scale the growth in a very significant way given the current headwinds.

So I mean, if you look at the growth strategy, when we talk about inorganic, we end up paying 12, 13x of EBITDA, which translates to roughly 5 to 6 years of breakeven time. On our organic strategy, what we are investing in the U.S., we will have a breakeven of roughly 4 years or earlier. So we are well positioned to make the growth happen. We are seeing very good signs. I mean, disturbances like we are kind of seeing now are good opportunities rather than disturbance because clients will look at alternatives in this environment.

Okay. So when we entered the U.S. market, we did have some plans to use some of our patents. So also there, you could allude to the time lines where the patents that we filed are due for expiry. And also if we consider the patents for other -- for other F&F companies, which is due for expiry, what are the time lines where you see -- so first of all, are we interested in getting into those products and technologies and blends? And secondly, if we are interested, what is the time line from actually reengineering the product to the batch orders to actual large commercial orders out there?

So we are not like in the pharma looking at patents as a way of entering existing market or taking over market share. Our patents are more in line of new innovations and help us to create products that are differentiated for our clients. So the patents are not products that we sell directly. We use these patented products in our design.

Okay. So coming to the Europe one since the plant is commercialized, so what kind of time lines do you see where we can actually reach to an optimal level? And given that we have actually added almost the same capacity that we are operating right now, which geographies in Europe, the country that you plan to -- as a new entry and secondly, as increasing the penetration?

So as you know, we've started our center in Germany. We have now fully established the center with all the CapEx system, IT system, people, raw material for all the laboratories. So the labs are fully functional last couple of months. We have now the additional facility in the Netherlands in Alma. So we look at Northern Europe, East Europe, Poland, Germany and the Benelux region for the continued growth. We have roughly closed the year last year with about 10 million of sales in the Netherlands production site for sale. And then we continue -- we moved this to the new facility. So on day 1, it has already fully operational with the 10 million yearly sale.

Okay. Sir, and lastly, we've seen the antitrust, I mean, judgments that have come against the F&F companies. And the FMCG companies have also voiced that they want. They are willing to actually invest into joint development with other fragrance companies. So do you kind of see some kind of a strategic tie-up with some FMCG companies, whether it's the co-owners of IP and you get a framework order or is this just going to take a lot of time?

No. On the bid on the antitrust, there is no further work that or nothing that we are doing. But we do see that as an effect on some of the buyers so that they look at alternative suppliers. Second question, I mean, there is not a question.

So you don't see something like a co-ownership with the FMCG companies that we are currently working with?

No, what do you mean co-ownership, which...

In co-ownership, I mean the large F&F companies actually own the patent or the blend and they don't usually share the formulation secrets and due to which this entire thing is actually cropped up. So these guys want access to the IP blends.

I think we are doing a bit of this in Europe in tolling manufacturing, but it's not our core business.

[Operator Instructions] We take the next question from the line of Anurag Patil from Quest Investment Managers.

Sir, what percentage of our raw material is linked to the crude?

So about, I would say, 40% is directly linked to the crude and another 30% are indirectly linked to the crude in some part. Freight and logistics, et cetera, will affect across the board.

Okay. And sir, if we consider current situation persist on the raw material side, so in the first half, can we maintain this 40% gross margins or there is further risk on the downside?

I believe for the first half, we will be able to maintain this margin. As of now, we have covered the raw material and unless there is anything further, we will be able to continue the business 40% plus gross margin.

Okay. And sir, on the flavor side, you have -- your margins have improved sequentially quite well. So any specific reason?

No, I think the flavor growth has kicked in. So the margins are accordingly better. We also have operating leverage as a result of the rapid growth in the volumes.

We take the next question from the line of Abhijit Akella from Kotak Institutional Equities.

First one, just on the revenue growth side, if I adjust for the INR 35 crore one-off liquidation, which I believe was for the India geography, it seems like India revenues would have been a little bit down year-on-year. So some sluggishness there across India, maybe a little bit across Europe also if we adjust for the impact of the depreciation in the rupee. So just your comments regarding the demand environment and revenue growth profile. I mean, how are we seeing the market? And do we expect sort of accelerate on this growth in the coming year?

So let me address this in 2 parts. On the European side, like we talked even last year and throughout the few quarters, we have seen muted growth largely because our capability to execute, we were reaching to the full capacity level. So we tried to take only businesses which were meaningful. We have now the new capacity in Europe that will allow us to grow rapidly and restore the double-digit plus growth rates that we want to achieve in the next few years because we have doubled our capacity, and I think we can grow that business aggressively. On the India side, also Asia side, there is demand. There has been some delays in shipments going to Middle East and some uncertainty, which came in month of March. which sees the India business like volume drop. But these businesses have restored, our supplies have continued thereafter. So there is no demand per se reduction as we speak. We, however, remain cautious. I think the full impact of inflation in India has not been felt as the oil and petrol and diesel prices have not moved up. But I believe that as we see the writing on the wall, we see inflation hitting us. We are prepared for it and the environment of high inflation, our large sort of higher inventory strategy always plays out, and we always see good demand in inflationary environment. So even the overall business growth may be sluggish in the competitive space, our growth tends to be faster than the market when there is high inflation.

Okay. Just sorry, one clarification here regarding the comment regarding Middle East shipments. So when you look at the ROW sales for this quarter, they have grown by some 34% year-on-year. So I'm just sort of trying to reconcile that with the comment regarding some disrupted shipments in the month of March.

Yes. So the growth has been strong in the Middle East. We continue to see that growth.

Yes. So Middle East is separate from the India geography, right? I mean -- or are there exports from India as well to that region, which are shown in the India revenues?

No, Middle East is separate. But I mean there are people who also buy in India and they are kind of dependent on export to Middle East from their final product.

Okay. And just the other one I had was on the impact of ForEx. Given the sharp depreciation in the rupee, how should we sort of see the impact on our business from a revenue perspective as well as from the perspective of employee costs and other costs, which we have built up significantly in Europe and the U.S. And also, is it possible to just call out how much the FX contribution to revenue growth was in the fourth quarter and in FY '26?

Jagdish, you may want to take that one?

So it's in the range of 3%, Abhijit, when we look at either in quarter or in the full year. So 3% to 3.5% is the revenue due to the FX gain.

Okay. 3%, 3.5% for both the quarter and the full year?

Yes, more or less similar lines.

Okay. And are we a net beneficiary of rupee depreciation given that we have spent -- I mean invested so much in employees and everything in Europe and the U.S. So are we still a net beneficiary? Or would you expect some pressure on the margin?

We do see some pressure on the margin because we do have a dollar loan into our books, and that will have a translation impact. Otherwise, when you look at only revenue transactions, we are more or less neutral.

We take the next question from the line of Debanjana Chatterjee from Spark Capital.

I'm just going through the financials, and I can see that if we exclude the current scenario, even for the past 3 quarters, your profitability was quite down even though your revenue increased. So now that this added scenario has come in, so has this scenario not been there, so could we have like expected growth inability in this year?

Yes. Your voice is breaking, Debanjana, but I could -- is that you're talking about the growth number, right?

Yes. What if -- the question, Jagdish, is, what if the inflation environment was not there without these disturbance, where would be ending up the year? So as we have given a guidance and even if you look at the fourth quarter this year, we are at 13-something percent EBITDA from the operating -- sustainable operating business. We would be upwards of 13.5%, 14% EBITDA in a normal environment. We believe that we have taken adequate steps to keep close to this number at least for the first half of this year. And we will wait and watch and see and take corrective steps as necessary to ensure that we don't fall below the 12%, 13% EBITDA level, which we want to keep as a minimum.

FY '26 EBITDA margin was 10.2%.

That's correct. I'm talking about the fourth quarter this year, the one-off sales, if we adjust for the one-off sales, we have 13 in EBITDA, and that's what we expect going forward.

You expect 13% of EBITDA margin for the coming year as well, right?

For the first half of the year, I am very confident. And then we have to wait and watch if there are any major disruption changes. Accordingly, we will adjust our strategy and tactics. But for the first half of the year, I'm very confident to reach these numbers.

As I said, EBITDA.

So this 13% inclused other Income -- excludes other income and other things or just the core EBITDA number you're talking about?

It's like-to-like, Debanjana, like-to-like when we are talking about adjusted EBITDA, the visibility is that we should be in a position to maintain that in the first half. Definitely, first quarter is more creative, but second quarter, wait and watch. But we are driving all the required actions to ensure that at least in the first half, we should be able to maintain the adjusted EBITDA at the current level.

Okay. And going forward, can you just list down what are your major growth drivers which will drive the business in the coming quarters, if you can -- so if you can just give us consolidated kind of...

So let me talk about the business in 3 parts. We have basically the mature businesses where we talk about the India fragrance and the Flavors business. These are businesses that have been around more than 20 years. We have regular engagement with the clients. These are steady state, continuous engagement, continuous growth. There is no major CapEx requirements. Factories are in place, laboratories are in place. So this is roughly INR 1,300 crores, INR 1,400 crores of our business. Then we have the Aroma Global Ingredient business, which is affected by whatever is the inflation and the global outlook for the business. The areas of Southeast Asia, Middle East are what I would call Phase 2. We have been in these markets a good period of time. We continue to grow. In Southeast Asia, we have built our factory last year. We have the full centers in Jakarta, Singapore. So that's now kind of in the rapid growth phase with the engagement and breakeven on that business is there. Middle East is also growing rapidly in the last few years. European acquisitions, we had a slowdown due to the capacity constraint in the last couple of years. We have now the new factory, a new development center in Germany. So the European business, we look at restoring to a fast growth -- double-digit growth. This is the, I would say, mature and existing business. Apart from this, we have a center which we are just starting in Manchester for U.K. and global accounts and last year, which we started in the U.S. These 2 are what I call seeds will take 3 to 4 years for the revenue to ramp up in these geographies. But these geographies are fairly large markets. They are, as I said, 20 and 10x bigger than the market in India. So these are the growth revenue or growth areas for, let's say, the sort of 10-year horizon. India, Asia will provide us the growth -- continuing growth that we have. And Middle East, Southeast Asia, Europe and Southeast Asia will give us the interim 3 to 4 years rapid growth.

Okay. So you are saying that Middle East and APAC will give you 3 to 4 years of revenue visibility. India is already there. total this is a 10-year kind of horizon, right?

Yes. So this is 10-year horizon. We have long-term future investments in U.K. and U.S.A., midterm in Germany and Southeast Asia -- Europe and Southeast Asia and the short-term growth, which continues in India, Middle East in flavors and ingredients.

Okay. And what kind of borrowings are you planning, CapEx and borrowings in the current fiscal year FY '27?

Gross debt end of March, we had INR 851 crores. And temporarily, we do see that it is going to go up a little bit because we are just ensuring supply and in that bargain, we might have to build some inventory. But when we look at the long-term horizon, for sure, that we are expecting every passing year, we reduce our debt by 10%. That's target we have.

Reduction of 10%.

In the partial year. But interim, we might see in the next 3 to 6 months, we might see it's going to go up from where we are as of today.

CapEx side, our factory in Almere has started. Vanavate factory will come in this couple of months and the Vashivali thereafter. So the first 6 months of this year, we still have CapEx completion to be done. There will be some delay between the CapEx and the insurance amounts coming in. So we will see these debt levels remaining higher. And thereafter, the debt levels should start to come down.

If you can give us a number for both borrowings and CapEx for FY '27.

Come again?

If you can give us a number for both borrowings and CapEx for FY '27.

Will be around INR 140 crores of CapEx. This is all the CapEx, most of it is in front-ended first 2 quarters.

Borrowings?

Borrowing should remain around the INR 800 crores mark.

Okay. And what would be your cash conversion cycle? Will it increase 150 days? Or will it remain under the 100 days level? How do you see that?

So the cash conversion cycle is around 140 days at the moment. We see that remaining like this till the time that the inflation sort of becomes a steady state because at the high inflation, we are keeping higher inventory levels.

We take the next question from the line of Jatin Chawla from RTL Investments.

My first question is, when I look at your employee cost and depreciation, they have both continued to increase this quarter as well. So on a Y-o-Y basis, there is a big increase almost on employee cost from INR 75 crores to INR 100 crores and depreciation from INR 25 crores to almost INR 40 crores. So I thought by last quarter end, we were saying our PVC investments are largely done and these numbers would start stabilizing. Why are they still continuing to go up?

So when you look at our employee cost on a sequential quarter basis, INR 93 crores has gone to INR 100. And in March quarter, we had a one-off impact on MTM, which came to our trust. So around INR 6 crores is a one-off impact we had in the March quarter. Our normal employee cost in the range of INR 94 crores to INR 95 crores on a quarterly basis at this point of time, which is more or less in line with what we did in December quarter.

And on the depreciation side?

Depreciation, we have one reclass item, which has moved from other expenses. If you look at other expenses are lower compared to what we have in December. So there is a one-off impact of around INR 5 crores to INR 6 crores that has moved from other expenses to depreciation. So that's a reclass one we have.

Got it. Got it. I think on the last conference call, you had mentioned that you will be putting up a detailed plan as to how your adjusted EBITDA margins can move from 13% to 17% over the next 2 to 3 years. We haven't seen that yet. Any particular reason for the delay? And by when can we see that?

I think in last investor call, we talked about our 3-year outlook. We have stated that our reported EBITDA, which is at 10% is going to be 14% by end of FY '29. We talk about 400 basis points. But at this point of time, the situation are changing every alternate day and kind of a dynamic situation. We'll come back on that. But at this point of time, it's a different priorities and different situation.

Let me just reiterate, I think the environment post 7% of March has completely changed. So we are very much focused on ensuring the quarter-on-quarter delivery for the next few quarters rather than the longer-term strategy. The longer-term strategy is in place, nothing has changed there. So we continue to focus on ensuring that we don't get sort of don't fall behind the costing pricing and communication to the clients. I must say that we are pleased that even the large global accounts have sort of responded and confirmed their commitment to the supply with price increases to us. We are well for the first half of the year. And we will continue to keep monitoring the raw material and communicating with our clients on a weekly, daily basis to ensure we don't have any slippages in orders and ensure that we can maintain our margins in this scenario.

Just a quick follow-up on that. I think last quarter, you had also mentioned that some of your lower cost raw mat could not flow through to numbers because the revenue was a little bit lower, and you were expecting that latest by 1Q or mostly by 4Q. Yes, we see in the results in 4Q, it has not happened. But in 1Q, we were expecting gross margins to actually start improving given the lower cost RM that we had. So is it that now we should not expect any gross margin improvement and at best, they should be kind of at the similar 42.5% level that we had in 3Q?

So I think the gross margin improvement has happened, which is why we see this improvement. In March, especially in the last sort of last few weeks of March, we had to buy some of the solvents and some lower cost materials at market prices, which suddenly shot up. So we had some small dip in the margin as well. But 42.3% net of one-off, we have maintained in the quarter 4. We will see that the margin continues to be under pressure, but we will be able to maintain 42% and thereabout for the first half of the year. When you translate this on an inflation basis, this will be better margin because the -- both top line and bottom, so cost and revenue both will move up. As a percentage, this is -- this will create a pressure on the gross margin percentage. But in terms of absolute gross margin and profitability, we are very confident to maintain and push the pricing to our clients accordingly. Our objective this year is to ensure we keep the right kind of business, and we have already taken big steps to get low-margin business out of the sort of portfolio. So there will be a portfolio rejig. We are planning for good gross margin cash conversion business. So businesses which have long lead times on long payment cycles, low margins. These are all businesses which we want to eliminate. We want to use the raw material that is available for the right kind of clients.

And given that you have given up on almost like you said, INR 50 crores of business, will that have a negative impact on the growth that we expect in FY '27?

My sense is no. I think overall, there is a strong demand. What we expect is to ensure that the margin sort of margin portfolio or profile of the business remains in the correct way. I don't expect this INR 50 crores to create a growth challenge for us. I think we will continue to grow. We have very strong indications in the 45 days of this quarter as well. And there is -- I mean, there is strong demand, and we are preparing this for the worst-case scenario on the raw material that we don't have a sort of a negative margin product in our portfolio at all. This was one of the reasons for a big jump or big dip in the gross margins in inflationary times. So we have taken structural change, but I don't think this will affect our overall growth because our European growth will now kick in at a faster pace.

We take the next question from the line of Rohit Nagraj from 360 ONE Capital.

So first question is, given that our industry is dominated by mid- and small-sized enterprises and you gave a confidence outlook that for the next 6 months, we are secured from raw material supply as well as from the orders front. Have we seen any kind of shutdowns or maybe orders transferring from those mid- or small-sized players to us given that we have the capability to serve those customers consistently?

So I don't have an exact, let's say, an exact number or exact quantum. I think the sense of what has happened in the past is clearly that when the raw material prices jump very quickly because of our higher inventory, our selling price jumps are sort of calibrated and not sudden. We tend to gain market share. I think first few weeks of this quarter, also, we believe that we have gained market share in the Indian market, especially. So yes, I think the smaller you are, the less inventory buffer you hold, the more exposed you are to this volatile situation.

Sure. And second, in terms of slightly again on the outlook front. So FY '27, we had absolute EBITDA of almost INR 300 crores on a consolidated basis. This year, it has slipped by almost 18% on a Y-o-Y basis. Do we foresee that FY '27 we'll be able to make up the FY '25 numbers or probably it will be slipped to maybe mid- FY '28 or FY '28?

I'm actually confident that we will hit the INR 300 crore plus EBITDA for this year, very much so for the first half where we have more visibility, but I'm confident that we can do better than 25% or at least at the 25% level for this year.

We take the next question from the line of Tanish Jhaveri from [ Boring AMS ].

So my question was more on the demand front. How do you see demand shaping up over the next year and 2? And with the -- like you said that inflation going higher is good for us. But do you think that demand will be impacted because of higher inflation?

I think, yes, overall demand will be muted. I don't see the same kind of growth rate as the normal years. Demand will be muted. There will be a transition phase probably first half of the year while the demand -- the new sort of post-inflation scenario plays out. There will be some -- the overall industry level growth rates will come down. benefit in terms of the market share gain, we will see normal growth.

Okay. So can you quantify the normal growth and any way in which we can be sure of this? Like are you seeing any green shoots in this?

So we are -- I mean we've seen this in various times when there has been big disturbance in the pandemic or in other times. There is a big disturbance we've seen faster growth.

We take the next question from the line of Bharat Sheth from Quest Investment Managers.

Understand a little more, this optimizing of the portfolio. So this INR 35 crores, that's end or still there is a room for further optimization of the portfolio in next years. what extent do we expect?

So this is an ongoing exercise whereby from discussion with the clients in terms of pricing and where we expect the cost and where is the new price and corrections in prices as we go along. What we have done is some of the clients which are structurally low margin have been low margin and long lead times, credit crunch, all of the cash conversion cycle. And when we look at the sustainability of this business vis-a-vis the inflation, we've taken a call to exit those businesses. This has also been a strong case with some of our clients, and we're happy to commit that we have got price increases with many of the clients. So we have a good situation at the moment. But we will continue to monitor. We have set up a monthly monitoring system that every time there is a production order, the costing and the impact of the inflation is then communicated to the account manager and to be directly or indirectly to the customer. So we don't fall behind the curve anytime throughout the year. If the inflation continues, we have shortage or supply disruption on any material, we will pass on to the clients as soon as we have information. And we have taken additional inventory in last quarter end to make sure we have additional 30, 40 days of inventory in hand to offset the additional time to pass on the effect of inflation.

And is that fair understanding as of today, there is no further -- I mean, optimization we are expecting, correct?

So I mean, we are not expecting any significant quantum. We will continue to work with clients and continue to ensure that there is a fairness in the transaction and dealing. We cannot have a scenario where we see further compression in margins. So we will pass on the cost to the clients. And yes, I believe that we will be able to get these increases.

To understand the commissioning of this new factory that we are expecting in coming months. So when do we really start to expect to -- I mean it's really reaching the production level that we to make it a positive EBITDA level. I mean -- and second thing, again, same line approval, how long it will take approval from the client. So if you can give some color, so maybe 1 year time or 2-year time?

So the factory will be up and running hopefully end of this quarter. It will take 6 months of transitioning from one factory to the other. So it's not that on day 1, all factory -- all operations will be...

Yes, yes.

So by, let's say, first quarter next financial, it will be fully operational with all the products transferred and one other factory being sort of moved out and closed. So in this year, we will have transition between 2 factories. Next year, one of the factories in Mulund will close.

Okay. And this what is the status? When do we expect to start it?

Factory will only start first. The Vashivali factory will take time. We will -- we have basically -- we have restarted the building. So any time this year, probably third quarter of this year, that facility will be available. We may not need it in the current environment as we don't see so much growth, and we will implement that sort of slowly. Again, that factory should be up and running by next year.

Okay. How do we see this now with the European business, which you said is again will start? And is that fair understanding that it's a little higher margin business than the other business. So how do we see -- I mean, we think of -- I mean, again, that can help us some way in the improvement in EBITDA?

Sure. I think there are 2 parts of it. One is the cost in euro because of currency exchange also affect us a bigger way. So the more sales we have in Europe or euro or USD helps us in protecting our margins and overall operating cost in a better way. We have now the twin growth engines in basically having the Germany creation center fully ready with salespeople joining and taking up East Europe, Germany as a new market for growth and the factory in Almere Netherlands. So these 2 initiatives are now sort of pushing the European business in high-growth phase again.

And you said that from U.S., we have got 10 million kind of order. So what will be the implementation time? And so will it be over -- what time frame do we expect converting into revenue?

No, it is 1 million order. It is already converting for the year. So we have some 200,000-odd business in U.S. already which we have. So it is not sort of to be converted. It's already orders in hand. We expect further orders as we go through the year.

Okay. And last question on the flavor side, you were anticipating to get an order from large MNC like what we got it on franchise side. So any color on that?

So no further update on that. Flavor side, we have a good position. We continue to see strong growth. There is no specific one-off order, but we have -- our plant is audited, our plant is approved. So the sort of the signs and directions are in the right way. I think from flavors as well, we have some very attractive long-term contracts with sort of our vendors. Now we are not sure if all the contracts will be honored in the way that they should be. So far, we have seen that they are honored and there is no cause for concern. If that is the case in the next 2, 3 months, we will know that, I mean, the position of our cost structure vis-a-vis competition, we will be very well placed.

Ladies and gentlemen, we take that as the last question and conclude the question-and-answer session. I now hand the conference over to the management for their closing comments.

Thank you. So thank you. I hope we have been able to answer your questions. Should you need any further clarification, 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. On behalf of S H Kelkar and Company Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines.