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S H Kelkar and Company Ltd
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Ladies and gentlemen, good day, and welcome to the S H Kelkar and Company Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone. And thank you for joining us today on S H Kelkar and Company Limited Q1 FY '23 Earnings Conference Call. We have with us Mr. Kedar Vaze, Whole Time Director and Group CEO; and Mr. Rohit Saraogi, EVP and Group CFO of the company.
We will begin the call with opening remarks from the management, following which we will 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 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 Vaze to make his opening remarks.
Good afternoon, everyone. And thank you for joining us on our Quarter 1 FY '23 earnings call. We will discuss the operating and financial performance for the quarter and give some idea about how the business is doing. I hope you had all the opportunity to go through the results. And we will get into the details of the operational and financial performance herein.
We reported a resilient performance during the quarter despite a challenging macroeconomy due to the inflation pressures. While we saw some operating constraints during the period, our client engagements and wins across the market remains stable. I'm happy to share that we have successfully and efficiently integrated our recent acquisitions, namely Holland Aromatics and NuTaste Food into our business model during the quarter. Overall, on a consolidated basis, our total income stood at INR 415 crores, higher by 15.7% year-on-year. And on a like-to-like basis, our revenues excluding the acquisitions at constant currency grew by 7.5% year-on-year.
Emerging market sales in the quarter stood at rupees INR 319 crores, registering an organic growth of 12% year-on-year. Acquired businesses delivery also remained robust, led by improved demand and volume off-take in the European markets. On a like-to-like basis our European core business grew by 8% year-on-year. During the quarter we continue to witness cost pressures on account of inflation in raw materials. Despite these challenges, we have maintained our gross margins at 39%. This was made possible through combination of price increases, inventory management, and somewhat flattening and easing of inflationary pressures in the market. Overall, our EBITDA stood in the quarter at INR 55.1 crores, with margins at 13.4%.
Cash profits in the quarter stood at INR 42.1 crore as against cash profit of INR 34.1 crore in quarter 1 last year. The reported PAT figure includes exceptional gain of INR 1.22 crores on account of reprocessing of raw material damaged in the Mahad floods last year. Converted into finished goods and corresponding profits were taken in this quarter. The quarter 1 FY '22 reported PAT also included a reversal of additional tax provision aggregating to rupees INR 64.5 crore, consequent to a ITAT order in the company's favor. So the adjusted for these one-offs, quarter 1 FY '23 PAT stood at INR 22.3 crores against a PAT of INR 16.9 crores in quarter 1 FY '22.
On a consolidated balance sheet perspective, our current debt position -- current net debt position stood at INR 469 crore as on June 30, 2022, against INR 509 crore as on March 31, 2022. A decrease in debt was primarily on account of healthy cash flow generation during the quarter. In the next quarter, you would see some increase on debt on account of payment of the second tranche of Holland Aromatics 19% stake and the balance 30% acquisition of Nova Fragranze in Italy.
From the medium-term perspective remain on reducing our total debt levels from next quarter onwards post the acquisition of these 2 stake of roughly INR 50 crores. On the business operations, I am pleased to share that our participation in the RSP by a large global MNC is going very well.
In the quarter we have signed the agreement with them making us one of the few global fragrance and flavor companies to be in their core list suppliers. This is a major milestone in our journey -- in our growth journey, and we remain optimistic on the significant multi-year business potential from this account. Currently, our team is already working on several briefs and we expect business to build on this from this calendar year itself.
[indiscernible] conclude, as we look ahead, from a demand standpoint, we are currently witnessing steady wins and inquiries across customers in our emerging and European markets. There are concerns with regard to the macros given the inflationary environment and accordingly we remain cautious. However, we have promising growth initiatives in place and from a longer-term perspective we are confident that the industry growth levers and our robust business model should enable us to grow and help report healthy performance.
On that note, I would now request the moderator to open the forum for any questions or suggestions that you may have.
[Operator Instructions] The first question comes from the line of Faisal Hawa from H. G. Hawa & Co.
[Audio Gap]
development budget in 1 year. And, sir, what kind of efforts are we making to penetrate the
[Audio Gap]
which are very amenable to our products. And what is the sales contributed by our top 3 products and our top 3 customers?
Mr. Hawa, we lost the question in between. You asked us about effort to penetrate the market to product. I'm assuming this is in allied lines or similar to our products. So we are obviously expanding our product portfolio to newer customers and newer opportunities. In -- the second part of your question was in relation to the top 3 customers and products. Our top 3 customers and products contribute roughly about 10% of the overall revenue of the company. So it's a very diversified portfolio of products and customers. On the fragrance side, we are catering to more than 4,000 large or medium FMCG companies across the regions. So we have a -- similarly on the flavor we have more than 200-plus customers in their flavor portfolio. Our concentration of customers is not very high.
[indiscernible] development budget and what kind of revenue do you expect new products to contribute to our sales in the next 2 to 3 financial years?
I think one important part of the business is the business momentum. As we are coming out of the 2 pandemic years, a lot of the R&D was focused on pandemic-specific products and launches. And now the FMCG companies with inflation are really looking at their strategy going forward in terms of new product launches. With that, we see that the new wins in the pipeline however they are strong. There will be some sort of gap between the time they are launched in the market. We do not know whether that is 1 quarter or 2 quarters, but we expect that the companies who have approved and the products are in the pipeline will look at the overall market growth and dynamics before the products are launched.
So quantify that on a yearly basis may not be a very accurate number. But we have roughly 50 crores worth of annual potential products in the pipeline which are approved with -- at various stages, which is a good number and in line with our expectations for growth in the future. In addition, our targets on the global MNC account are in addition to this INR 50 cores. So we are expecting good amount of conversion of projects in the next couple of quarters and then the growth momentum will resume.
Is there a assumption that you would be able to grow 15% CAGR in the next 2 to 3 years looking at the kind of approvals that we have and the products that we are going to put into the market?
So we're talking about 12% CAGR on our existing business across the next 2 to 3 years. We are confident of that outlook.
[Operator Instructions] Next question comes from the line of Madhav Marda from Fidelity International.
[indiscernible] Fidelity. My question was that, basically, sir, if you could just talk us through this global client RSP which we've been speaking about. Is it basically with 1 FMCG company or is it like 2, 3 companies with whom we're discussing for this RSP? And basically, what is the potential or the size that we're looking to target? And when you think that the order book is going to build up during CY '22 basically will the revenue also start this year or could be like next year? If you could give some sense, that would be helpful.
So, the RFP process as multiple parts, we have not even completed the entire tendering process. So one part of the tender is still -- tendering process is still going on. On the other part, the tendering process is completed. We have been assigned certain projects. We anticipate these projects to start to actually see the sort of product testing in the consumer phase starting in the second half calendar and then thereafter from first quarter calendar last quarter this year some revenues are expected from this RFP. We are very confident on the submissions and the work that we are undertaking for these projects. In addition, we have multiple other global MNC clients where we are, our engagement levels have substantially increased in the last 1 year. So overall, we remain confident to break into the global MNC accounts. As we have been working with the regionals, in the same manner we expect that the next phase of growth will come from the global accounts in the Asian region. And we continue to work with the small and medium accounts in the European and newer geographies.
And when we see that [indiscernible] engagements that these clients are scaling up in the last 1 year. And also, I think we've been trying to break into these large MNC accounts for some years but now we are seeing good traction. Is there something which is changing on the macro side which is helping us get better sort of foot in the door with these customers?
So I mean this we have, like you mentioned for the last past decade we have always been knocking on the door and it was at finalization stage or at various stages but never converted into a final brief and product development engagement. I think a number of factors are contributing to this as we go forward. Asia is becoming important market of growth for the global FMCG market. The shift of the kind of the epicenter of growth from China into Southeast Asia and South Asia MENA regions, so that is expected that larger part of the FMCG growth will be in the markets where we are traditionally present and where we have good presence and understanding. The second impact of the pandemic has been disruptions in supply chain. So there is a heightened move by most global companies to have more regional or more local sourcing. To that extent, we offer a very good alternative regional supplier to the local MNCs. So I think these are the 2 trends which are helping which has enabled that now we finally are in the operating side of the product development.
And, sir, the business which we are talking about, that supplier for Asia marketing business [indiscernible] MNC client that supplied for their India -- for the Asia business…
So the business vendor and what work we are doing is on the global basis. Obviously there are different brands which have different sales in different countries. So within the entire 1 billion we are seeing little bit more focus on the Asia brands. So brands which are larger in the Asian countries are where our engagement has begun. The brief is open for global, so we will engage as things progress to other regions as well.
[indiscernible]
Madhav, you are still there?
Mr. Madhav.
[indiscernible]
Mr. Madhav, there is some disturbance going on with your line. Madhav?
Yes, we can move on.
[Operator Instructions] Next question comes from the line of [ Chirag from Keynote Capitals ].
Sir, earlier we used to give a geographical bifurcation of revenue from fragrances and flavors separately. Could you please help me out with that number?
[indiscernible] geographical bifurcation of?
Fragrance and revenue.
Of revenue of fragrances…
Let's go to update. We used to give domestic and export fragrance and flavors as our geography. With the acquisitions in Europe, we are now moving into -- because there is some business cross-production, we are looking at the sort of 3 geographies, emerging markets, Europe and the rest of the world in terms of the revenue. And we have the similar bifurcation for the flavor as well. So the revenue, there is a -- you want the exact number of quarter, 123. The revenue for fragrances India is 196, Europe is 103, and rest of the world is 59. And on the flavor, the revenue is 34 for India and the rest of the world is 19.
Sir, my next question is what kind of stable margin can we expect in fragrance and flavor business?
I think we are today at EBITDA level of 13.5% ballpark. We anticipate that we will keep this, and going forward there may be slight improvement as growth kicks in. I am sort of optimistic that we have beyond the worst phase in the inflation of raw materials, so the raw material prices should start to stabilize. That will help us somewhat reduce our inventory and further improve the PAT levels. In addition, just one sort of black swan event scenario, if there is a raw material price crash, it might have impact on few of our ingredient sales in terms of the realized revenue. But in terms of the profit margin, that will remain intact.
Sir, my last question is, what kind of -- the growth that you had said, that around 12% that you would be able to grow for next couple of years, is it based on constant currency or is it based on something else?
Yes, it's based on constant currency.
[Operator Instructions] Next question comes from the line of [ Ganesh Shetty ], an individual investor.
Congratulations for the good set of numbers. [indiscernible] tight macroeconomic challenges. Sir, I just want to have some clarity on our debt, that last quarter to last quarter you had increased your number of debt. And now this quarter you had reasonably paid off some amount of debt. And going forward, are we going [indiscernible] and try to deleverage our balance sheet? Any thought on this. Can you please share it with us, sir?
Yes. So as I mentioned in my opening remarks, we have ballpark after currency conversion the exact number but about INR 50 crores of payments towards the balance acquisition of Holland Aromatics and Nova which is scheduled for this quarter is the second tranche of the acquisition. So that INR 50 crore outlay is our outlay for this quarter. Apart from that, we have no major large CapEx or other large-ticket expenses. So we are anticipating that we will progressively bring down the debt from current levels by end of the year to ballpark number 400 crores. So this is the target. The next 3 quarters we will look to reduce the debt, use the operating cash flows to continually reduce the debt.
Sir, as far as the macroeconomic challenges are concerned, last 2 quarters have been very tough for us. There was logistics [indiscernible] raw materials [indiscernible] and are you facing any type of accretion-related problems in our industry or is there some normalcy as far as logistics is concerned? Can you please shed some light on it?
I think the question was not very clear. I will answer. If I have missed a point, please requestion. In terms of supply chain, I think we have had pretty standard after the first lockdown in 2019 we were able to make all our factories COVID-ready and continue our operations uninterrupted throughout this period. Many of our products go to essential commodities like soap, detergent and others. So we were requested to be continuing production throughout this period. As far as the supply chain, there is no specific disruption on the horizon at the moment. We see that the supplies from China last quarter were a bit affected. But now, as we speak, things are coming on stream and we are seeing material availability starting to come in.
Related to that I had asked one more question regarding accretion and employee cost. Is there any pressure from that end? [indiscernible].
So we are we are managing to control our employee cost too within a band of acceptable levels. 2 years ago we did, or 3 years ago we did reduce our R&D expenditure and correspondingly employee cost came down to some extent. At this point we are in control of the overall scenario. And there is no specific program or specific plan except to continue steady state bring down the debt. As our engagement in the global MNCs increases, there may be some one off costs on development and engagement with them which we are confident will result in business revenue over the next 3, 4 years and offset the additional costs.
Next question comes from the line of Anurag Patil from Roha Asset Managers.
Sir, from this global FRP what sort of revenues we can expect in FY '24 and '25, any ballpark idea you can give?
As we talked earlier, the entire RSP is about $1 billion to be issued out within sort of 2 to 3 years. Realistically, we expect that roughly 10% of that is something where we will be participating in the entirety. And out of that, 100 million odd is the total potential. There will be 2, 3 other companies and existing suppliers. So that's the sort of maximum potential is 100 million over 3 years. And we expect to get our share through that 100 million anywhere between 20% to 30% of that share is good ballpark target if we do reasonably well. If we are taking more than 30% share, which it's possible, but we are participating for the first time, I want to be cautious. And I think 20% of the share is something which we will target in our first RSP.
Okay. And sir, in our European businesses, what percentage of revenue should be from essential product category? Very rough idea will be fine.
Yes. So in the European business, I do not have that specific number. It would be in excess of 65%. I don't have exact number. More than 2/3 of our business is going in home care, detergent and functional product. The balance 30, I am -- it's in various products. So it's difficult to quantify essential or unessential. But in terms of cleaning home care, detergent, fabric, these categories are 2/3 of our business in Europe.
Okay. So demand-wise, we are expecting stable scenario in the next couple of quarters?
Yes. So our business in Europe is not very much dependent on it. So it's not very dependent on fine fragrances or discretionary spend. We have various strengths. So within the business, we have certain large brand business and certain private level local brand business. And we see that during the time of fast growth, the large brand business grows faster. And during the time of recession, the mid-private label business grows faster. Having said that, we have the additional impact of inflation in Europe, particularly in Italy because there is a very big sentiment on the Russian gas costs, and that it will be available, and this uncertainty is reducing the consumer spending to some extent.
While Northern Europe, Netherlands side, we see less impact of this phenomenon. In Italy, there is clearly -- it's an important factor. We don't really have too much the past experience to judge how much it will affect us. But principally, we don't see any of our businesses being kind of stopping completely or starting with a big boom because of external. They are all essential commodities. And the growth rates may be a little less or more based on the macroeconomic and inflation and general uncertainty of consumer spending.
Okay. And one last question. On the raw material basket, are we already witnessing reduction in the prices or it is still at the elevated level?
So they are not -- I would say, at the full basket level, we are not seeing reduction as of now. We are seeing some stabilization. So there was additional expectation of further inflation due to the Ukraine situation. That is not happening at the moment. We see the same elevated prices. But no further aggravation of that. Some impact, small impact of the currency, which may come in the later part. Right now, we are hedged and we have the raw material stocks. But if there is a very big movement on the currencies, like in U.S. dollar-rupee, euro-U.S. dollar, there may be a small impact on the cost. But as of now, we see that the overall impact of inflation in our basket this quarter versus last quarter and the expected second quarter, it is flat. In the first quarter, we are not seeing additional inflation.
Next question comes from the line of [ El Lad ] from Progressive Shares.
This is [ Payal ] here. Well, I need a few clarifications from the annual report, if you could just highlight on the same. And firstly, there has been a mention in the AI that you are trying to focus more on the QSR space with -- via the NuTaste acquisition. So how is the demand and how big is the opportunity size that the company is eyeing at?
The QSR business is basically, the opportunity size is very large. It's about INR 2,000 crores of flavor and the savory products going to QSR. With this Nu Food acquisition, we are now starting to target part of that in especially the syrups, sauces, seasonings kind of product. We have doubled almost the revenue in this vis-a-vis the last couple of years of this acquisition. Although last year was a pandemic-affected year or the last 2 years are not exactly the underlying base. There is a very large future demand. So the expected market size for this QSR product ranges ballpark estimated to be INR 2,000 crores across the country. We are taking a certain small niche size of that. So we are looking at INR 200 crore potential market right away for us to grow from the base of INR 12 crores, and we continue to grow that part.
Okay. And how is the traction seen in the [ Ayush ] business? Like how is the favoring SHK?
So as I mentioned, I think the Ayush business has 2 parts. One is a combination sales with fragrances. So ayurvedic extracts going together with our fragrance offering. So that has seen good traction. We have some very nice products launched in the last 6 months, which have both fragrance as well as active ingredients from the company. So this is a good synergy. But the ayurvedic extract part of the business itself in terms of value remains small because they are added in very small quantity. They are not the major product. So the volume of that is very small, but it is helping us to crack and develop new innovative solutions for our clients.
Okay. And there was a mention like in a couple of -- 2 quarters as well, like Q1 '21 PAT had seen a reversal of additional tax provision pertaining to previous assessment years and also reversal and disposal of assets. So are these provision and reversals a thing of the past? Or anything is left to be undertaken yet?
No, these are -- actually the reversals and these are all one-offs. There is nothing left to be taken. We had the capital work in progress, particularly on the research. And unfortunately, in the 2 pandemic years, a lot of the projects got delayed. So as a result, we have written it off and we are now expensing all our development costs rather than taking to the CWIP. So it doesn't really change anything going forward.
Okay. Okay. And sir, one last question. You have been mentioning about undertaking calibrated price hikes. So I would just like to understand like what exactly is the structure of the policy at the company level? Like how does it happen? The frequency of the same.
So normally, frequency of our price hikes would have been sort of 12 months annually discussion with the client. The extreme inflation scenario we have seen in the last 12 months, we've had to do 2x engagement with the client on the price increase. And that's kind of -- we expect as a normal practice and annual discussion on setting resetting the prices. But this time around, we've done 2 times in the last 12 months. And with the prices stabilizing, I think hopefully we get good 12 to 18 months of stable pricing.
Next question comes from the line of [ Rajesh Jain from NB Investments ].
I had 2 questions. The first is regarding the RFQ of the global MNC, you had mentioned around $100 million over a period of 3 years. So it is not annual, it is over a period of 3 years. Is that understanding is correct?
So it is the annual potential of the business, but it will not be all issued out at one go. So the potential annual business is 100 million. So 300 million worth of business will be tendered.
Okay. So now you also mentioned that you are expecting minimum 20% of that business. Based on the way the speed at which they are processing and all that, can we expect some sales in the current year? Or will it go to the next financial year?
I think that it's a question of timing, it's difficult to ascertain exact time, but we are confident of some business -- additional business coming by quarter 4 this financial at least second half of this year. And the next couple of years, that business will continue to ramp up as projects get completed.
So you mean to say, maybe by FY '25, we may get the -- FY '24, we may get around -- whatever the share of business we get, we will be able to do that in the full year financial year?
Yes. So this 100 million-odd business will be spread into projects. Wherever we win, we will start to supply for 3 to 4 years horizon on that product. So it will keep adding. And as the cycle of this first cycle completes, the next cycle of product development and tenders will start. So it's a continuous. It's not that one happens and it stops at some point. Now we are on this. In the next 3 years, there will be product development happening. And parallelly sales will follow with a lag of, say, 6 to, say, 9 months to 12 months.
Sir, once you get an opportunity to develop a product, does it mean that you will also get an opportunity to supply also?
Yes. So the steps are the selection of, I would say, white listed or approved vendor. So we are now a qualified vendor. Now between the qualified vendors, there will be, I would say, a tender or bidding competition, design competition for the various brands at the sub level within the tender. So that work has now started. And we expect roughly potential annual 100 million is the kitty of projects that we will undertake. And 20% of that is our good starting point we are in this for the first time. So we are hopeful to look at 20% win ratio or win rate as a good target. And then this process will continue. I mean it's not that there is an end to this process in 1 year or 2 years. We've entered this process will run for next 2 to 3 years. Ideally, by the time this first wave and these tenders start to complete, we will have 3 years of supply time. And by that time, the next wave will start. So there will be an overlap, and it should not be like it will not end at some point. We expect to be in this on a continuous basis.
So you mean to say after 2 years, let us say you win 20% of this 100 million, and if any new products or new tender also you win, that would be in addition to this 20% of what we have won now, that's what you're saying, correct?
So let's assume we have won INR 50 crore business. This INR 50 crore business will remain for the next 3 years. That's the project cycle. And other projects we will keep working. So this INR 50 crore is in the supply, and there will be another INR 50 crore, which happens in the new development. So not everything will start on the same day and end of the same day. So there will be an overlap. In the 2 years period, we will have our maximum on this RFP. By the end of the third year, the RFP of the first year would have completed and the new tenders will start to come in. So I don't expect this to be ending like a sharp end. It will progressively go up and then there will be a steady state where we are working on projects, new projects. And then the win ratios will determine if our business continues to grow and how -- what pace it grows. On a starting base of very small, we expect it to grow to a steady state and expected to be around $20 million.
Okay. But I think you had mentioned this would be a very low margin business. Is that understanding is correct?
So typically, in terms of the volume and gross margin, so even in our current business, we have the larger clients are at a lower gross margin level. But the operating cost per kilo for the manufacturing are also proportionately lower. So the net margin level is not very different between the small clients and the big clients. And in this case, depending on the product, we expect that the gross margin will be on the lower side. But our net operating cost per kilo also will be much lower than our current size and scale of operation, which will enable us to maintain the net margin.
Okay. But this winning of any orders from this MNC will open a gate for the opportunity with other big MNCs. Is that understanding is correct?
Absolutely right.
But tell me, we have been acquiring lot of European [ F&F ] companies. Is that is not sufficient to go and approach the other global MNCs for us?
So yes, it is part of the strategy. Now there are so many factors. It's not just 1 factor that you have European presence are not presence. So there are so many factors in their decision making. But certainly, the acquisitions in Europe and having the presence and development centers on different parts of the globe have helped us take this additional global MNC contract.
Okay. Sir, my second question is regarding the margins. If you see, Q1 margins have been lower than the Q4 of last financial year. So my first question is, you said there is no increase in the raw material prices. So then why is that the EBITDA margins are down in Q1 of this financial year compared to last quarter of last financial year?
So I am referring to additional increase in this quarter versus last quarter because we have almost 2.5, 3 months of stock. Our price increase impact in the accounts happens in the next quarter. So price increase has happened in the first quarter calendar and the second half of last year. So full impact of that is seen in the first quarter of this year.
Okay. But now that there is no more further increase in inflation. And by the end of this quarter 1, you would have exhausted the earlier high-priced inventory. What I want to know is have we passed on all the increase in the cost of raw materials or the freight cost or whatever increases were there, are we in a position to pass on all that to our customers?
So I think we have passed on a reasonable amount. We are not in a position to pass on the entire amount. That's why our gross margins from 43%, 44% are now at 39%, 40%. We are not in a position to pass on the entire cost increases to our clients in a short time. We anticipate, as growth kicks in, I mean, at some point in the few years down the line midterm basis, we will slowly be able to improve our margins. But at the moment, I think the 39%, 40% margin is the level at which we will continue to operate.
Okay. Assuming that there will be no increase in the raw material prices, we had done in FY '21 around 45% of gross margin. To reach that level, how many more years we do require?
It's a very difficult question given the uncertainties. I think the question really is a question of what is the growth strategy and what is the margin strategy. So we are focusing on growth at this set of gross margin level. We could move the needle and say, okay, if we are looking at more global MNC business and the gross margin will be lower, the growth rates will be higher. Net margin level, PAT percentage level things will even out. And at some point, we may have to take a strategy to say, okay, we are kind of looking at slower growth, but we need to increase margin -- gross margin in the product mix.
So this is always kind of a balancing act. So we are sort of looking at now a 40% gross margin, 12% CAGR growth as our baseline. If there is challenges on growth because of macro or other things, then we will relook at this. But right now we are talking about this trend line. If, for example, prices start to soften, maybe it can happen in 1 year that our margins, if you go back in force majeure scenario 2018-'19 and couple of years we were able to jump back to 44%. So it's all a market dynamic supply chain supply/demand and inflation rate and growth rate. But our objective will be to restore back to 44%, 45%. We see that as a long-term target for our gross margin expectation.
Okay. Sir, and my last question is, we have done a lot of acquisition, both in India as well as Europe. But in one of the AGM you had mentioned if we want to achieve our vision of reaching 1 billion of sales, we need to have presence in America, which is, which is a bigger market for F&F. Keeping that in mind, I just wanted to know, do you have any companies or anything in mind to acquire it in U.S.A.?
Well, like I mentioned, we are not actively looking at any specific acquisition. You mentioned America, yes, that's 30% plus of the global market is in one country, and it's important. We will need to look at managing our debt level and the kind of stabilizing the current business before we do any larger next step acquisition. So as a springboard to the American business, we need to stabilize our European business, strengthen it further. And then we will go from Europe to America in Stage 2. But in that, we are also looking at -- so with this global MNC project, we may have some activity in America linked to their projects. So we are observing, looking at that. But there is no immediate plan of any big investment in America.
Okay. But if we want to achieve our vision, is it necessary that we have to have our presence in America?
I think long and short answer of that is, yes, because in relation to the global business, the America, North America particularly is almost 30% of the global business. So it is important that we at least have a presence in 2 out of the 3 big markets: China, Europe and America. Europe, we are already working, the growth in Southeast Asia, in South Asia and Africa. But on the short term, in the next 10 years to really take aggressive growth, we will need to have a presence in the U.S. as well.
Next question comes from the line of Pavas Pethia from Enam AMC.
Just wanted to understand this 12% CAGR target, does that include the RFP wins or that is separate?
So in a way, there is a overlap. I don't think the 12% CAGR is based on the RFP. It is an organic target for us in total. However, with this RFP, we are also utilizing some of our development and sales resources in this target. So we see that. But in a steady state scenario, our 12% ambition is without the global RFP. So the global RFP should be in addition. For the first -- I mean, I would say 2, 3 quarters, 4 quarters, we will have to make double-use of the development resources and, yes, so 12% CAGR is not with calculating the RFP into the account on a longer term.
But how much sales will be overlap initially say in 2024 first year?
It's not so much the sales, it's the opportunity. So we may have to not do some projects in the current customer base. We may have to be a little bit selective on the projects and adjust our approach with the global RFP for a year or, I would say, 18 -- next 18 months. So I mean if I have to put a number maybe for 1 year, we will be 9% in our current business and 3% in RFP and the year after that it will be 12% and additional top of 1%, 2% from the RFP. So something like this. I mean, it's very difficult to quantify. Our objective is to make sure we put the full resources on this RFP opportunity, which is a big opportunity for us.
And it is about the effort and return metrics, which we have to follow. And at some point in time, we have to cut the tail to achieve a larger objective.
Okay. And you also said that margins would be similar to this, on our gross margin will be lower, but on an operating margin it will be 14-odd, 15-odd percent, the RSP margins?
Yes. There is no impact at the operating level with the large business or large products or the small products. The gross margin level, there is -- it's a product mix scenario.
Okay. And how this RFP works after 3 years, the initial sales kind of die down and you have to bid again? Or is it that continues and…
No, after 3 years typically there is a second bidding process.
Okay. But does that mean that your chances of winning the next bid is higher because you've already supplied or is it a fresh process, different product?
Yes. I mean, obviously our chances if we are doing well in this RFP, the chances are better. That's clear.
Because today, we are acting as a challenger. If we work for 3 years, then we are -- we will be one of the key suppliers, and we won't be a challenger anymore.
Next question comes from the line of Sachin Kasera from Svan Investments.
Just wanted some clarity on this gross margin. So you said that you have taken a stand that because you want to grow faster [indiscernible].
Sorry, Sachin, if you can speak…
We are not able to hear.
Is it better, sir.
Yes.
Yes.
[indiscernible] you had mentioned that it has gone up from [indiscernible]. And you also mentioned on the previous queries that because of this sharp increase in raw material [indiscernible] customers and ask for a price. And now that the price has stabilized. So I'm a little confused that -- but you also mentioned that we may not be able to grow margin significantly in the short term. So it's a little confusing because if you are saying that [indiscernible] stabilized and we should be able to get a price hike. At the same point of time, you are saying in the short term the margins will not improve, but the long-term [indiscernible] it's a little confused here.
The price hikes have happened in the past. We won't be able to get additional price hikes. As the raw material prices remaining stable and our selling price is remaining stable our margins will remain stable. There is no further impact of additional inflation or additional pricing. So it will be steady state. Going forward next quarter, we don't anticipate any price increase, and we don't anticipate any raw material increase either. Now if the raw materials start to fall, at that time we will be able to negotiate with the clients accordingly.
And the way we have managed 39%, 40% gross margin is through our prudent inventory policy. That has also held us. Now in times when we see that the prices are stabilizing or it is going to soften, we will play it accordingly, and that will further help us.
No, but sir [indiscernible] business model [indiscernible] understand the way it works is that in the short term the price fluctuations are absorbed by the supplier. And eventually, over a few quarters once the raw material prices stabilize, the gross margins go back to the previous level. I'm still not able to reconcile. Is it that the our customers are asking us to take a 4% price hike on a structural basis to remain in the business with them, which [indiscernible].
Just understand dynamics of this. We have had a 25% ballpark cost increase. We are not in a position to pass on anything like 25% on our product mix within 3 to 6 months period. So we have taken a hit of roughly 10% on the gross margin side at our end. Right now the costs are where they are, selling prices are where they are. So our effective gross margin of around 40% will be the paradigm for the next 2 quarters. We have the material stock and the sales contracts and prices accordingly. As the raw material prices were to further increase, we will obviously be forced to give additional price increases to our clients, which we will do. But if the prices were to soften, then we will then look at re-existing the prices if there is a big change.
So I don't see anything. We are now in a stable state at 40%. Unless there is a huge sort of growth spot and big dynamic change in the market, we anticipate 40% to be the new norm for the next 6 to 9 months. It's anybody's guess. But if, let's say, there was a big recession and big challenge on the growth and the raw material prices fell, maybe the margins are better, the growth challenges will be there. So right now, 40% margin, 12% growth is what we see. If the growth is remaining like this, we don't see how the cost prices will dramatically change.
Sure. Well understood, sir. But then can you then explain how do we reach back to you? Because you said the long-term goal remains 44%. So while you expect very well that in the next 6 to 9 months, why you should [indiscernible] 40%. But then how the -- how things will change, which will take us to 44%, say, over the next 3 to 4 years is more like a long-term aspiration of the company?
Yes. So I think there is obviously steps on the backward integration on our costs, which we will keep taking and improving. So there is ballpark 0.5% to 1% of raw material price improvements, which we do with our research on the chemical or raw material side or vendor development side. All those things are not seen because of this major inflation at this point. And as the inflation stops, those initiatives will start to help us drive better margins.
So fair to assume that we should see some improvement, say, in financial year '24 and major improvement in FY '25 on this long-term journey of gross margin improvement?
I think as we speak now, yes, there are some other new factors which happened during the next. I want to caution that the uncertainty in all the forecasts are now very high. But if there is no additional big disruption, global disruption, then in 2 years' time things will stabilize, our margins will slightly get better and that will be I think, again, it's a product mix scenario of our global MNC. If RFP was -- becomes a bigger part of our business, then our overall gross margin, while they are lower, our operating margins will improve.
Yes. So that was my next question, sir. So with all these initiatives from a later long-term, say, FY '25, FY '26 perspective, as we also win this global tender, which we are very hopeful of, then how should we look at the EBITDA margin? Because, see, our highest range has been 18% to 20%, on the lower end we are between 12%, 13%. Is it that in 3, 4 years with all the initiatives you're talking on the gross margin as well as the new tender and the growth and operating leverage, can we aspire to become a 17%, 18% margin or that was like a one-off and sustainable number in -- like even from a 5-year perspective is like more like 15%. What is your take on that?
Yes. So you have basically answered the question in the question itself. I think on the lowest end, we are at the 14% EBITDA level, which is right now, and I think that the lower end of the range we aspire to be a 20% EBITDA business. We've done 18%, we have done 16%, we had -- at quarters we have 13.5%. So the -- I think the average range now with the new inflation existed basis is more or less 15.5%. If inflation were to kind of convert into deflation, maybe that can go up. But the kind of, I would say, 18% median is now 16.5% median in terms of EBITDA percentage. And as we go, our margin stabilizes, improves, our EBITDA percentage should we expect kind of level.
Sure. And sir, lastly, on the debt thing, you mentioned [indiscernible] right there you look the debt to be around [indiscernible].
Sorry, Sachin.
We lost you there.
Yes, I'm saying [indiscernible] you mentioned that you expect the net debt to be INR 400 crores by end of March FY '23. Is that correct?
So basically, net debt in this quarter will go up because of this INR 50 core second tranches. So it's not that in September-end quarter the debt will come down. I'm talking about INR 400 crores directionally. I think we also need to be mindful of what is the raw material situation. So I expect somewhat cooling off of the raw material and reaching the INR 400 crores target. Raw material prices remain where they are, maybe we reach INR 425 crores at the end of March. Now these are the operating level number. Depending on interim dividend or any other payout, then that's kind of -- so I expect to be between INR 400 crores and INR 425 crores by end of March as of the cash flow from the business. There will be some interim dividend or if we don't do any interim dividend, what are the cash outflow to the shareholders are not factored in this -- at this point.
Sure. And sir, just one last question on capital allocation. So we did one round of buyback and we are very confident of growth in margin coming back. So do you think that you expect to do maybe another buyback at this time from the open market because since then there's been further PAT correction, whereas our overall outlook and growth aspirations have changed. So once in the next 2, 3 quarters, the debt comes down further, we would seriously evaluate thing at our buyback because current variations are very, very low.
So we are looking at buyback and dividend as 2 methods for cash distribution or profit distribution to the shareholders. We have a policy of 30% to 40% of PAT to be distributed to the shareholders. We'll follow that consistently. The modality of whether we do buyback or dividend depends on the situation at that time, and we will consider various options. At the moment, there is no cash distribution or profit distribution to the shareholders in the plan for the next 2, 3 quarters. We are focused on operations, creating the growth and reducing the debt. And once that happens, we will evaluate the best form of distribution of profit to the shareholders at that relevant time taking into account the conditions at that time.
Sure. And just lastly, again, on the taxing. So what level of absolute debt or debt to EBITDA or net debt to equity is where we may kind of start to evaluate our or if any good acquisition comes we'll look very seriously. I think right now, the priority is to bring the debt down. But is it like some number, like, say, INR 400 crores or INR 300 crores or 3x debt-to-EBITDA, what level is when we may again start to look good acquisition opportunities?
See, the acquisition and strategic discussions are not time, right, it happens. There can be a very big market dynamic, some merger, some fallout, some distress sale by somebody. A lot of things can happen. So I don't want to speculate on that in the future. As of now, we are not in any active proposal to acquire or invest additional money. Our focus this year is on running what we have and bringing the debt down. Yes, that's the -- I mean, we don't have any specific level above which we will start again our active acquisition process in mind. We will continue to evaluate any opportunities if they come, but we are not actively seeking. So there -- if some opportunity were to come and it makes real sense, we could look at it. But as of now, I think the expectations in valuations and the debt level where we are, I don't see any deals happening.
As there are no further questions, we have reached the end of question-and-answer session. I would now like to hand the conference over to the management for closing comments.
Thank you. I hope we have been able to answer all of your questions satisfactorily. Should you need any further clarifications or would like to know more about the company, please feel free to contact us or our team or CDR India. Thank you once again for joining us on this call.
Thank you.
Thank you. On behalf of S H Kelkar and Company Limited, this concludes this conference. Thank you for joining us. You may now disconnect your lines.