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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's Earnings Conference Call.
[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mit Shah from CDR India. Thank you.
And over to you, Mr. Shah.
Thank you. Good afternoon, everyone, and thank you for joining us on S H Kelkar and Company Limited's Q1 FY '24 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 brief opening remarks from the management, following which we will open the forum for an interactive Q&A session.
Before we begin, I'd like to point out that certain 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'd like to invite Mr. Kedar Vaze to make his opening remarks. Thank you.
And over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on our earnings conference call today.
I hope you have gone through our results documents which were uploaded on the exchanges earlier. We have commenced financial year 2024 on a promising note, delivering a steady growth of 7.7% from operations in the first quarter. Notably, our operations in the Indian market showcased a healthy growth of 12.1%. This performance was supported by traction from our large customers and comparatively lower base in the previous year. Meanwhile, growth in Europe stood at 3% on a constant currency basis in spite of all the challenges in the region. Our focus in Europe will be to optimize plant capacity utilization and drive profitability through better mix and margin.
Our core Fragrance division delivered growth in profitability driven by upward price adjustments. Similarly, the European segment displayed improvements in margin. Particularly given last year's challenges, the margins were significantly affected by escalating costs.
On a consolidated basis, our operating EBITDA grew by 33.4% year-on-year, reaching INR 73.5 crores. This reflects a margin of 16.5% on sales.
Our flavor division faced a mild downturn mainly due to softer demand from international markets. At this time, we are in the process of building the capability and infrastructure to meet the next level in global standards in food and nutrition space, enabling us to cater to larger global customers. Moving on to the update on the Global Ingredients segment: We have entered into an agreement with a third-party vendor to support our backward integration efforts. We anticipate that we will be fully backward integrated from Q4 onwards and reduce our dependence on China.
As many of you might recall, last year, we were honored to be invited to bid on an RFP by a large global FMCG player. This invitation serves as a testament to our position as the largest Indian origin fragrance, flavor company with a presence in key global markets. Since then, our teams have consistently worked on various briefs issued by these companies. This collaboration has taken much more time than initially anticipated. Even with these delays, we remain positive about the huge growth potential this partnership promises in the future.
Despite various external challenges that have impacted our growth in recent years, we remain firm in our commitment to expand and enhance our global operations. This growth-oriented focus is underpinned by a global reach, solid client base and robust cash flow position. The expected volume growth returning to our underlying FMCG sector, we anticipate to -- our performance to sustain on these levels going forward.
On that note, I would now request the moderator to open the forum for any questions or suggestions that you may have.
[Operator Instructions] The first question is from the line of Bharat Gupta from Fair Value Capital.
First of all, congrats for a good set of numbers. A couple of questions from my side. First, in understanding about recovery in the gross margins. So primarily just to get a sense: Is it driven largely on account of ease off in the RM prices on account of excess supply in China?
No. We are looking at a gross margin improvement based on our pricing strategy and dialogue with the customers. There are signs of some raw material easing in the current marketplace, but these are very early days and we don't want to extrapolate this for longer-term trend. Some raw materials are available at a lower price, but it may not sustain at these levels, so we're not catching this trend for a longer or sort of a full year period. But yes. Tactically we will take advantage of some raw materials being at a lower cost.
And primarily, if I look -- should -- going forward, like, do we have to pass it across to the end customers? And then possibly there will be some pressure coming on the margins as such.
I don't believe there is pressure on the margins from the marketplace. At the moment, as you would recall, we have substantial cost inflation in the last 18 months. So this cooling off is only sort of restoring some of the normal levels of margin where it is a sustainable business.
Right. And we currently import around 25% of our requirements coming out from China, so like how do you read the scenario? Because like what we are hearing from the specialty chemical companies as well as for the -- from the other companies -- so there has been a good amount of [ over-reduction ] which is due to incremental capacity which has been coming out from China, so -- and given the way we are thinking like in terms of global ingredient supply chain, where our performance has remained weak -- and we are thinking of backward integrating it, so don't you think that can backfire in terms of our strategy going forward?
No. I think, if you look at the typical China story, there are years when they are almost at cost or even selling sometimes below cost. And then another year, they will be taking opportunity of monopolistic sort of market position, so China as a geography or supply is not stable in terms of their pricing and contractual obligation, so it is better to have your own value chain which is completely backward integrated within a domestic supply chain. What we also see is that our domestic supply chain and our technology is sufficiently capable to meet the cost challenges of Chinese competition. So we are able to produce. I believe that, post the end of the year, we will continue to remain the lowest-cost producers of some of the global ingredients that we make.
Also, post the integration, our RM exposure from China, that will continue to remain above 25%-odd levels. Or we think of [ calming it ] or reducing it going forward.
So it will substantially reduce post the backward integration and maybe by 5% or 7% further.
So it can be below 25% -- and 20% kind of levels going forward.
Yes.
Okay. Coming on the RFP side: So what's the progress primarily in regard to the RFP signed with the MNC? You highlighted there has been some sort of a delay, but when are we expected to start booking revenues? And overall what will be the margin profile in the segment?
So the revenues margin segment will be on the lower side in terms of the gross margin. On the operating margin, it will be similar to our current business. There will be -- so the volume expectations are different. We have a large-volume business at -- typically at lower gross margins but the same net margins. In terms of the business, I think we've gone through one round, one cycle of product development and submissions. The results came out in July. And there has been a change in the company's strategy and expectations from the marketplace. And accordingly, they have briefed all the companies for redesign, which is expected to close in the next 2 to 3 months.
So are we anticipating any sort of revenues coming in for this year itself, for H2 FY '24?
We can -- so it depends on when the -- when they commercialize a product. So typically we expect to have some win and kind of commercial orders by end of this calendar. When it gets actually commercialized will depend on the demand and volume and their stock position and contracts with their current suppliers, so I expected that we will win some businesses by end of this year. The exact commercialization may happen in quarter 4, may happen in first quarter next year. Some of the trial commercialization may also happen in quarter 3 this financial, so it's all up for grabs. In the next 2 months, we will know where the design stand and where is the -- where are the submissions.
Right. Also, in terms of the industry dynamics, so -- like apart from the contract which we have signed with the MNC, so -- are we in process of bidding or working with any other MNCs apart from it for the domestic and the international requirements currently...
Yes, we are working with multiple MNCs.
Right. Coming on the margin side: So in our Europe business, we have seen a sharp improvement in the margin, so is it primarily catering to the change in the product mix? And do we expect the kind of margins which we have been able to showcase in Q1 FY '24? So that will be sustainable going forward.
Yes.
Also you highlighted that our focus continues to remain on the improvement in the utilization levels, so what are the current utilization levels? And like in the regions where we operate in the European markets -- so what kind of a market share we possess.
So we have -- in Europe, we are basically looking at an -- quite a small market share as a total market, but within Italy, in the smaller market, we have a fairly large double-digit market share. We are looking at -- in terms of gross margin, yes, the trend on European business on gross margin will continue. The trend on EBITDA margin and -- I mean, in gross margin, will continue, so parallelly the same cost structure should remain. Our objective in -- we are more than 85% in terms of capacity utilization in our European operations. And we are looking at trying to maximize revenue on the volumes that we have to keep the high-margin businesses, so we will see margin improvement as we go forward. And we will look also to use our Indian capacity to service some of the clients from the European zone.
Are we looking at any sort of expansion out there in the European subsidiary?
At the moment, no.
Okay, but given 85% is our -- I think 90% is the saturation level for anything to work out, so...
Yes, but we have capacity in India, so we are working up modalities how we can utilize capacity in India and service some larger clients in Europe.
Right. Also like...
[indiscernible] end of the year, our capacity in Indonesia will also be on stream, so we will then use the additional capacity in India for further expansion in Europe and Middle East.
On a blended basis, what will be the utilization levels across -- like you mentioned European is operating at 85% levels. Across India, what will be on a blended basis utilization levels?
India utilization levels are very low, 45% for fragrance and flavors. Except the ingredient business, everything else, we have quite a sufficient headroom for growth.
But we will be able to match the [ cost ] standards which are there, like even if you operate from the Indian subsidiary.
Yes. So there is no challenge on the quality and standards. The challenge will be managing the logistics and supply chain because in Europe we will have a 4-week lead time. So to that extent, the cost versus the working capital, additional working capital, all that, we are planning. And we will trial based on few larger businesses on this front.
Right. And like in terms of margins, it's only 20%, 30% which we have been able to do in Q1 FY '24 in European. So that is sustainable, but on a blended basis if I look for the consol entity, what kind of a guidance do you want to give with regard to FY '24 and, going beyond, FY '25 as well?
So I think we are -- this quarter has been steady business. And we hope that, if there are no new macro challenges, we will be on similar platform quarter-on-quarter going forward.
So we expect that -- our margin profile to remain [ stable ], above 16-odd percent levels.
Yes.
And our top line growth which we are anticipating for this year, so -- that will be remaining in double digit only.
Yes.
Okay. Just a question on this because we have seen that growth primarily has remained muted after the implementation of GST. And there were some uncertainties which was coming out from Chinese [ angle ], so we have diversified across [ levers ] and doing custom manufacturing also for the clients. So taking into account that inflationary pressures on the RM side are behind and -- how do you see the company to evolve in the next 3 to 4 years? And is there any kind of a revenue and profitability target which we have set ourselves for the next 3 years?
So we are in the process of reviewing our next 3- to 5-year plan. I think the main challenge is -- while immediately, tactically, the raw material situation seems to have eased out, I think that these are typical pendulum swings in that, if its price -- the costs go, the prices in the market go below certain thresholds, certain capacities will go off stream. And then prices -- there will be shortage and prices will go again in a scenario which has been in the past few years. So it's not fair to look at this current scenario and say that this is stable pricing and we will be able to look at a 3- to 5-year horizon on the same basis, but at this point, we can see raw material pricing not being a challenge. And we can focus on growth avenues which we have been sort of deferring in the past; and addressing new markets, new customer briefs which we were reluctant to take given the raw material situation.
But given out the capacities which we have currently and primarily some are underutilized as well...
So there is a capacity and there is also raw material challenge. So when we had a raw material challenge, we were not aggressive to take in new volumes because we already were finding it difficult to service our current client base with the cost structures. So now that the cost escalation has stopped and there is a visibility on stability on some of the raw materials, we will look at more aggressive marketing to gain volume share.
Right. This is what I was coming to because, if I look from 3-year point of view, the growth which -- was early and missing. So that finally should be factoring in. And also we are working with some of the MNCs, along with some Indian players also, in regard to the product development stage also. So once the recovery happen in the rural and the urban markets in the domestic space and the good recovery is happening across European -- so going forward, that 20% kind of a CAGR which should be there in the overall revenue scheme of things -- so are we on track and we think on similar lines? Or do you think there may be a good amount of challenge? Or there will be some amount of risk [ taking back projection ] into account.
So I think -- let's understand that this business is not one product which sells across the country. It's tailor made for each customer in each region. So we will continue to grow good double digit. And if markets are growing well, then it can be a higher double-digit growth. But binding in place that, certain businesses on the ingredient and the -- where we have almost 70%, 80% global market share, there is not much headroom to grow. So part of our business which is cash cow or stable where the market is saturated or not growing, we will be unable to grow. That's the dynamics of the market, so I think the overall -- for the formulations and new markets, I think the 20% ambition is there, which should translate to a low or a kind of mid-double-digit growth in the next 3 to 5 years.
Right. Just sir, last question from my side, in regard to the gross debt which is there. I think it is pertaining to 583-odd crores and it has increased from March '23 levels. So what are the plans for reducing it over the coming years?
Yes. I think this jump from March is largely on account of 2 quarters of high sales. So the working capital in the receivables has gone up. And that is -- that will play out, as we are in this new level of sales. It will take 2, 3 months of collection time. And second quarter, it should start to be streamlining, but I think our focus is to ensure growth. A lot of our inventory buildup has happened [ for the striding ] over the difficult situation. Now that we see prices coming down, we're also looking at opportunistic and acquiring some of the stock at -- available at low cost. And then we are looking at a high, aggressive volume growth strategy in the remaining part of the year. The working capital, as a result, has gone up, but our sales will start kicking in. And the ratio of working capital to sales days will be in normal around 130 days in the coming quarters.
But any plans for -- like in terms of whatever free cash flow which we'll be generating? So any plans for reducing the current level of debts which are there on books?
So I think the free cash flow will reduce the debt in relation to what we are looking at, an aggressive growth. So if I add 100 crore of extra business, I will definitely need 40 crores, 50 crores of working capital for that growth. So based on the -- so I don't want to give a number of net debt because, if we grow aggressively as what is our strategy in tactically next 2, 3 quarters, we will need to continue to keep the working capital cycle. Until the cycle stabilizes, we will have to keep the debt on our books, but as a ratio of our sales and as a kind of days of sales, the numbers will come down. The absolute number: We have acquisitions and we have a payout in the coming quarter from dividend and acquisition payout, so there will be nonoperating cash flow expenses which will keep the debt level at a higher level, but in terms of operations, we will make free cash flow.
The next question is from the line of Chintan Chheda from Quest Investment Advisors.
Congrats for a great set of numbers. Sir, my first question is related to volume growth. So can you just share the volume growth in the Fragrance as well as the Flavours division?
So both Fragrance and Flavours -- so Flavours, the volume growth has been 0 in this quarter, quarter-on-quarter. And in the Fragrance, it has been 6%.
Okay. So Flavours business, even in India, volume is flat.
No. India volume has grown. Export volume has declined, but that's again seasonality. I think the export business doesn't work quarter-on-quarter or month-on-month. There are pickups and kind of stock in the market and then destocking then again stocking. So we see this trend over multi years, that 1 or 2 quarters, there is a very strong demand. And 1 or 2 quarters, there will be weak demand, so there is always this up-and-down in the export market.
Correct. So is that the reason why we have seen a sharp fall in the export market revenue for your Flavours vision?
Yes. In this quarter, the export revenue has been lower. Last quarter, if you look at it, we had a very strong flavor export quarter, so in terms of moving average, it is working well.
So on a full year basis, how should we look at our Flavours division revenue for India as well as for the rest of the world markets?
I think, the underlying CAGR of 12% to 14%, we are looking at and -- in the full year, and accordingly, we will track the business.
Okay. And...
As I mentioned in my opening remarks, we are now engaging with very large global MNCs on the food industry as well. We are investing to upgrade our facilities to global standards for nutrition and baby care and pharma applications, where the requirements for the factory are more strict than normal food industry. So these upgradations will happen in the course of this year. And then we will open an additional avenue of growth for the flavor business. When I say flavor, I -- we need to expand into flavor and food industry because there are other products in that range in terms of nutrition and flavor and taste additives.
Got it, got it. And sir, this quarter, we have reported one tender fee cost of INR 2.63 crore, so can you just throw some light whether we have received this tender or size of this tender? What is -- can you throw some more light on this?
This is the same RFQ and -- which we have been talking about. There's nothing new. We are just accounting for it since the -- it has been kind of expensed out over a period of time. It is reflecting in every quarter [ year-round ] till cost of that is gone, [ in this year ]...
So now when can we expect this RFQ?
RFQ work is already ongoing. We expect some commercial -- so from the timing of the RFQ, the commercialization should happen in this financial year, so accordingly, we have started to take the expenses. And we expect the commercial orders either third quarter or fourth quarter this year, so this is -- as per the original RFQ, the first year was design. Second year, which is starting now, we should be able to get some commercial wins. So second, third and fourth year, we will have the commercial wins. And accordingly, the expenses for this project have been made as advances in the previous year, and they are taken as expenses in this year onwards.
Okay, okay, got it. And sir, lastly, on the Global Ingredients business side, right: So last year also, we had some challenges over here because of dependence on China or RM shortages, so how are we seeing this business to get evolved over the next 2, 3 years? And when can we expect breakeven over here?
I think the -- if you see last year, same quarter, we had a minus INR 6 crore [ EBITDA ]. This year, we have a minus INR 3 crore [ EBITDA ]. We are very close to breaking even in the second half of this year. And once we are fully backward integrated, our position on the Global Ingredients will be substantially better.
Okay, great, yes.
The next question is from the line of Viraj from SiMPL.
Am I audible? Hello?
Yes.
Sir, just a couple of questions. Just continuing on the global ingredient business now. If you look at our own initiative on this particular business. I think 6, 7 years back, we undertook a major CapEx. And the idea was to have some captive sourcing and also to -- also cater to it globally. So how much of the current business with the capital requirement? And how much would be third party?
So what we are reporting on our results is only the third-party sales.
Right. But in terms of overall utilization, how much...
About 10% of the global ingredient is used in-house.
Okay. Just few quarters back, we were looking at the alternative structure for this business given how the changes in supply dynamics, especially from China. Now what we hear is that -- and our expectation in terms of this business on a steady status, low single margin, low ROE kind of. So -- and then we talked about looking at alternative structures or disposing it off. So what changed in the thought process and then going further investment and having a backward integration?
So we have not invested anything further. We are -- we were looking at exploring our -- or any kind of strategic alliance. We were able to close on a sort of a tolling model where we have provided the technology, and we are getting the backward integrated product manufactured to our specs on kind of a tolling arrangement with a third party. So there is no CapEx from our side, no large CapEx that are small storages and things like this, which we need to do.
But other than that, there is no large CapEx from our side for the backward integration. It is all done at the vendors end. The idea here was to explore what is the best method. We found a very good solution with the strategic supplier we have tied up with. So we are continuing the business as is.
Okay. And just to follow up on this, once this initiative and is largely done by, what is the kind of margin return we can expect from this business on a steady state? I mean the supply factors, say, from China, others has always been there. So on a steady state, how should one look at this particular segment for us?
I think the inherent sort of strategically, this business is a 10% EBITDA business, and we should be reaching those levels once we pull backward integration and our volume strategy is in place. We are quite confident to be able to reach those levels as we go forward.
What is the capital employed in the business in the segment after backward integration like initiatives?
So there is a INR 120 crores of fixed assets in terms of this business.
Okay. Second question is largely in terms of the ROW market. So if you look at the business was kind of impacted all year due to COVID and supply chain issues. How should one really understand the ROW especially the Indonesian market because we always talked about the 3I strategy. So, even Italy still is doing good in India. You talked about double-digit growth. But in terms of the ROW or especially the Indonesian market, how should one understand the scale up and our play there?
Yes. So I think the Indonesia market, especially during the pandemic, we had a very clear communication with many of our larger clients that they need local supply chain because there were disruptions in the logistics and container availability, et cetera, et cetera. So we had decided earlier and we've executed this year to put our factory in Indonesia.
Given the current dynamics, I think, globally, there has been consolidation in the industry -- further consolidation with Firmenich having merged with DSM, whereby we see opportunity of tying up with the larger clients, which otherwise were quite close relations with the larger companies like the big 3 or 4 companies, they are now much more open to have a second level of suppliers as we talked about large global MNC, other large companies are also engaging with us.
Most of these engagements are fitting into business, and that business growth will multiply kind of compound as we go forward. But there are conditions, preconditions to the business is to have local supply chain. With our Indonesia factory, we will open another kind of larger clients in that region, which currently are not engaging with us on a full basis. So our growth will continue to be faster in the coming years.
So a lot of this new business are large MNCs, so I understand the total [indiscernible]
Unable to hear.
45%, 50% utilization.
Hello, we are unable to hear.
Yes. Am I audible now?
Yes.
Yes. Question was, and I understand that we are looking to set up additional facility in Indonesia. But for the rest of the business, which we're looking to source -- get from large MNCs, further events would the sourcing largely happen from India given the kind of underutilization you have?
It depends on where the product needs to be supplied. So if it's a Southeast Asia product, we will supply from Indonesia, if it's India, Middle East, will supply from our India operations, if it's Europe or America, we will supply from our European operations. It depends on where the supply commercial supply required.
I think the advantage for us is that we have surplus capacity in the Indian factories in a quick manner we can scale up capacities. So that's a big advantage for any customer that wishes to kind of get additional product or taken products from us.
Okay. I'll come back in queue.
The next question is from the line of Ketan Athavale from RoboCapital.
I just wanted to ask since our products are tailormade, you mention that, and they are a trade secret. So you should be able to pass on any cost increase. Is that understanding correct?
Yes.
Okay. So you will pass on any cost in this. And your margin guidance is 16% and revenue guidance is 12% to 15%. Is that correct?
So 12% to 15% on the core business, so it will translate to around 10% on the total. And on the margin guidance and the EBITDA level, yes, 16% has been this quarter. I see this as a very normal quarter, we expect similar quarters going ahead.
The next question is from the line of Bharat Sheth from Quest Investment Advisors.
Congratulations on good results. Kedar, understanding, I mean for Fragrance business, India is still, I mean, contributing around 55%, 60%. And in last couple of years, post demonetization and COVID, these are somewhat, I mean, our small customers who are building up the business, the way we used to call it base business was severely affected. So now how do we see that business is coming back or is still gone is gone? Or so if you can give -- and how that will really help us to grow?
So I think the dialogue is a little different. We have business with large companies. We have business with midsized companies, and we had business with the small-sized traders and small companies. The small companies during the last 3, 4 years have had difficult time to comply with GST and demonetization and so many macros, which affected the business environment for them. And much of these market share was consolidated in the larger accounts. And in those 2, 3 years, we have seen slow growth.
Now the business is consolidated, we are growing with the larger accounts as the industry is growing. So we have no challenge for growth. The challenge was actually this migration of growth from the smaller to the larger because at that point, we also had a loss of business to somewhat to be global MNC players in the market from the small.
So when business has moved from small to the bigger clients, some of that business also gone to our competition. Our market share at the small end was probably 50%. At the top end, it was maybe 20%. So some of that business has migrated to our competition in this period. So the market share did come down. But on the new market share base, now we are continuing to grow.
And mid size also, we are, I mean, able to capture?
Yes, it's our main business. The midsize larger -- I mean, all the accounts were working well.
Okay. So how do you see sustainable India business grow and...
Yes, it will grow double digit. It depends on what is the overall industry and macroeconomic growth kind of expected GDP and inflation does not come up, we will see double-digit growth in India.
Okay. Coming to the rest of world, which is also showing a little slow growth. So how do we anticipate once the Indonesian facility is in the place. So -- and what are the challenges over there?
No. I think rest of the world has a couple of countries in terms of Middle East, countries like Egypt and others where a lot of currency devaluation or situation has been macro difficult, Sri Lanka. All of these countries have gone through last year a bit of a turmoil in terms of economic situation. And we've seen some of those businesses where we are unable to get a clarity on the payment terms or we had to exit some of those business.
So -- the rest of the world, while it looks flat, it's not flat because we've not grown. We have continued to grow in the markets. Few markets have had challenges in the last 6 months, and those markets are quite sizable for us. And that's why the overall impact of those markets is seen in the rest of world in.
And are we seeing now slowly regionally that is coming back to normalization? Or still, it will take more time?
So it's very country by country. Countries like Egypt will take some time. I think Sri Lanka, there has been some restoration of business and it should start -- the different countries in Middle East and Africa have different challenges. So we have, overall, some countries have come back, some countries, some regions will take some more time, some regions were not affected. So it's all -- it's a mixed bag. It's -- we are talking about 50, 60 different countries in the other it's very difficult to pinpoint.
But generally, where there was steep devaluations or economic crisis because of the inflation, the business has been very slow.
So are we seeing some kind of a revival of the growth from this 2.2% in this quarter to accelerate going ahead during the financial year end this next year?
Yes. See a big substantial part of the rest of the world, which is in Southeast Asia, almost half of the rest of world is on the Southeast Asia side, where we will aggressively grow. In the coming years, we may put a third segment in terms of the Southeast Asia and that segment will grow quite dramatically in terms of the fragrance demand.
And Europe will continue to grow in this region, constant currency sales, which is 3%. So how do we see that also with some kind of inflation pressure is coming down and -- these are kind of a late discretionary spend, so.
Europe, I think we are looking at what is the growth level expected. And we are looking -- focusing mainly on our margin growth. So we see that the margin growth sort of profitability will grow. The top line, we may look at rationalizing based on the volume of capacity volume that we have. So we will rationalize the product mix in a manner to maximize the capacity utilization.
So does it mean that high profitable product will do faster and low profitable product will try to contain and optimize the whole portfolio to achieve our best margin and...
That's correct. That's correct. We also have certain low-margin businesses, which we will try to service out of India. .
Okay. So how do we see the sustainable growth of this fragrance business?
Sir, on the bottom line, we see 12% plus growth in Europe and India as well, and top line will be close to the double digit, 9% to 10%.
Okay. And this Flavors business, how are we seeing this QSR business? And how much does it contribute currently?
So QSR business is also a part. I don't have the exact breakup in front of me, but it's maybe 25% of the overall flavors business. But I will get back to you on that subsequently.
And when initially we were commenting that it's a little low margin business. So are we able to make an improvement in introducing a new flavors and which we are doing for the whole market?
I think the QSR business has its own cycle, life cycle and business model. So it is doing well in relation to other QSR, we are making profit in the QSR segment. It's not a loss-making or a zero EBITDA business. But it will continue to be lower margin business and the flavor business. So it's a large volume, quantum of sales number will be higher and the margin number will be lower in the QSR as a general business segment.
And the rest of the world market also, when do we see and that can help us, as you said, that we expect to grow, say, 14% kind of 14%, 15% kind of flavor business growth. So when we see this rest of world to come back to a normalization level?
So flavor business is normal. There is no -- this quarter is a weaker quarter. Last quarter was a strong quarter. They will be ups and downs of quarter-on-quarter in the export market. So there is nothing specifically out of place in the flavor market this quarter.
And last question on the Global Ingredients, you said that EBIT level still there is a loss and there is around value is also going down, say, quarterly INR 14 crores. So how do we see that revenue run rate as well as now EBITDA is 10% -- EBITDA still will breakeven or be it will be still negative?
No, EBIT will be positive 10%.
Okay. So that next year, that will help us to grow overall company level EBITDA margin also?
Yes. I mean very clearly, if your EBITDA minus 3% for the quarter, if that becomes plus the new level plus 4% difference between ingredient.
Okay. How much are we pricing power kind of that we have in case of this sustainable decline in raw material, which is currently -- which is a little softer, and it continued then we have to pass on the benefit or we have to retain which we...
Answer is very simple that we have not gained all the benefit or all the cost in the past. So we -- there is no question of passing on or we are still in deficit of the inflation that has happened last year. So it has softened from the high point, but it has not come to a level where it is below the cost of where it was 2 years ago.
Okay. And overall, as...
Sorry to interrupt but maybe you can rejoin the queue, because there are many participants waiting for their turn. The next question is from the line of Richa from EquityMaster.
I have a few questions. The first is on the employee cost, there seems to be a sharp run-up I mean, especially compared to the top line growth year-on-year in quarterly trends also. Just wanted to understand the reasons for the same and the trend that you expect going forward? Is it likely to remain in the same range or grow further?
I think that is in terms of the acquisition cost of employees getting added. So when you look at a percentage of employee cost to revenue in Europe, it is normally higher than in India. So that would be the result of that.
So going forward, do we -- should we expect the same run rate or a further increments are expected?
I don't have the...
The same run rate, 13% to 13.5% would be the employee cost as a percentage of sales.
Okay. And sir, this backward integration that you were speaking about, could you share some kind of time lines and what impact on margins -- overall margins that could have?
So it will affect the Global Ingredients business that, as I said, which is currently in a negative EBITDA should reach a positive 10% ballpark EBITDA level. And the expectation is towards quarter 4 this year, we should be fully backward integrated.
Okay. And sir, what is the capacity -- CapEx plan considering all this upgradation that you were talking about for nutrition and baby care, any other plans that you're planning to put up in Indonesia for this year?
The Indonesia plant, we have already communicated last year. It's a CapEx of between USD 4 million to USD 5 million. The flavor upgradation and nutrition upgradation, all these will be relatively small, maybe INR 7 crores, INR 8 crores in total, INR 14 crores, INR 15 crores for all the plants put together.
Okay. And sir, this RFQ work, I think it will take some more time, but if you could just give us some sense of what kind of earnings you expect over next 2 quarters RFQ?
So I don't want to put a time line to the quarter. So the expected commercial value of this RFQ is INR 100 crore annual revenue, which we should be able to generate from this RFQ. The time lines are a bit old because both at the client and the testing has got delayed. But this is the full -- full potential, which we are sort of bidding for is about 7, 8x of this, about $100 million. And out of that, we expect to get at least 1/10th or 1/8th of the total amount.
Okay. And sir, if you could also share how our market share in the domestic market has moved, let's say, last 3, 4 years, for both the segments, flavor and fragrance?
I don't have any detailed market share numbers. Let me try to compile and keep it ready for the next call.
We'll be able to take 1 last question. We take the last question from the line of Hitesh Agarwal from Fair Value Capital.
Congrats on a good set of numbers. I wanted to know, could you give me the revenue contribution from Tier 1 and Tier 2 cities for us overall?
We cannot give you contribution for cities because we don't supply to cities.
Okay. Can you share something in regard to the new product development across our flavor and fragrance segment. What visibility you have in terms of launch of new products? And how is the demand scenario across international and domestic market?
The demand scenario is quite robust, both international and domestic. For the fragrance, new product development is ongoing. Nothing new to report there. It's a continuous process, looking at something like INR 50 crores to INR 70 crores of new business every year. So we continue to work on that.
On the flavors, likewise, we are looking at a 15% growth to come in from -- largely from new businesses. So we are confident the pipeline of projects is in place and it's working well.
Okay. Okay. So like what will be your revenue compression coming from Tier 1 and Tier 2 clients?
So about 50% of our revenue contribution comes from Tier 1 clients and 25% comes from Tier 2 clients. .
And do you see this revenue competition changing in the next 3 years?
No. Hoping the ratio remains the same as the market grows, new players will come in and some smaller players will become midsized clients and the midsize will become large. So this ratio is roughly the ratio of the market dynamics.
Okay. Any acquisition, which we are looking for in the flavor segment, right?
No, there is no specific acquisition active -- activity right now. We will look at if something comes up, we will definitely evaluate but there is no active project.
So like in the flavor segment, like in domestic market, we have a major share in revenues. So like we are supplying to Tier 1 clients in this segment? Any growth...
Flavors, we are supplying to Tier 1 clients in food. We will now look at Tier 1 clients in nutrition and pharma as the next customer base and accordingly upgrade the facilities. .
Okay. Okay. Sir, in our global ingredient. So like what will be your strategy for making the segment profitable any challenge or risk we need?
We already talked about our record integration that will help us to bring down the costs further and make it profitable.
And sir, what will be the order book status in this Global Ingredients segment at present?
At the end, we are looking at INR 15 crores to INR 16 crores per month order book, and we will ramp it up once our backward integration program is fully in place.
We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Thank you. I hope I've been able to answer your questions. Should you need any further clarifications and would like to know more about the company, please feel free to contact our team or CDR India. Thank you once again for taking the time to join us on this call.
Thank you very much. On behalf of S H Kelkar and Company Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.