S H Kelkar and Company Ltd

NSE:SHK

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the S H Kelkar and Company Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you.

[Anoop Poojari]

Thank you. Good afternoon, everyone, and thank you for joining us on S H Kelkar and Company Limited's Q2 and H1 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 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.

[Kedar Vaze, executive]

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 earlier on the exchanges. In quarter 2 FY '14 (sic) [ '24 ], we sustained a healthy performance, continuation with our quarter 1 performance.

Our core Fragrance segment delivered 13% growth during the quarter. This segment's growth was supported by increase in domestic market, higher sales volumes reported across our diverse customer base. In particular, our engagement with large corporate and global MNC has started to show positive impact with excess of 20% growth.

Our strategy in Europe will continue to be focused on bottom line improvement as we have reached more than 85% capacity utilization. We are pleased to report that we have restored our EBITDA margin in European business back to normal levels. Overall, we have reported a 10% revenue growth and a 25% EBITDA growth, with the European markets showcasing steady results.

Regarding our Flavours division, revenues during the quarter were lower by 4%. In this segment, international markets witnessed a downturn in revenue due to channel destocking and strategic inventory adjustment by clients. On a positive note, our domestic revenues in this division continued healthy growth, registering 12% increase.

Consolidated basis, our operating EBITDA increased by 26% to INR 76 crores, maintaining margins at 16.7%. Our core European business also contributed to the improved performance, strengthening our outlook for the remainder of the year.

Moving on to the business update, I'm pleased to announce the successful acquisition of the remaining 19% equity stake in Holland Aromatics, making it a wholly owned subsidiary. This complete integration with our organizational framework is anticipated to use multiple synergies. By fully integrating Holland Aromatics into our European company structure, we expect to unlock several synergies. Collaboration of expertise, resources, market insights should help us further strengthen our presence in the European domain.

Coming to the Global Ingredients segment, we have continued to advance our backward integration strategy following agreement with a third-party vendor established in the previous quarter. This collaboration has helped strengthening our supply chain, and we have successfully reduced our sourcing from China by over 30%. We are confident that this will enhance our supply chain resilience as we move forward.

In conclusion, we would like to state that our commitment to growth and business excellence is highlighted by our extensive international footprint, strong client base built over the decades and continual investments in R&D. As the fiscal progresses, the expected upswing in domestic FMCG sector, coupled with our strategic measures, should enable us to close the year on a strong note.

On that note, I would now request the moderator to open the forum for any questions or suggestions that you may have.

[Operator]

[Operator Instructions] We have our first question from the line of Bharat Gupta from Fair Value Capital.

[Bharat Gupta, analyst]

Many congratulations for a good set of results. Sir, just a couple of questions from my side. First, in respect to the Fragrance fragment. So you mentioned in the opening commentary that it has been led by volume growth across the domestic and export business. But just some quantification with respect to like what percentage has been primarily driven by volume and the pricing trend?

And secondly, in respect to the customer and category. So you mentioned that 20% kind of a growth has come in from the large corporate. So just want to get a sense whether the growth has been broad-based across all the categories, irrespective of MNCs, or it is confined to them only?

[Kedar Vaze, executive]

So to answer your first question, about 2% of our growth has come from pricing. The remaining growth has come through volume growth. This is on an overall basis.

Then second question, if you can just repeat?

[Bharat Gupta, analyst]

Sir, just wanted to check like in terms of the volume growth across the domestic and the export...

[Kedar Vaze, executive]

Yes, volume growth across domestic/export has been robust across all segments. The volume growth on the large corporate global MNC has been higher, and other customers, the more mature markets, they continue to grow by double digits.

[Bharat Gupta, analyst]

Right. Sir, the large corporates should be constituting close -- less than 10% of our overall revenues, if my understanding is correct, sir?

[Kedar Vaze, executive]

No, it is about 25% of our overall Fragrance [ revenue ].

[Bharat Gupta, analyst]

All right. Secondly, sir, if we look -- and can you just throw some light with respect to the new products which we are working upon? So we are seeing that there has been an increasing demand for the premiumized kind of products in the personal care category. So in this particular segment, how are we placed? And what kind of products we are working up on?

[Kedar Vaze, executive]

So we are engaging with all the different types of clients, both start-ups, e-commerce, small clients, large clients, existing mature FMCG clients as well as global MNC clients. So we are working across all the segments for both premium as well as mass market or value-for-money products. There's not 1 or 2 projects. There are a large number of projects, which is part of our normal course of business. In addition, we have continued investments in cosmetic ingredients, which is a new area for us, and that will help us to boost our approach towards the upcoming premium e-commerce offerings that are coming.

[Bharat Gupta, analyst]

Sir, just in terms of the revenue contribution, from the products which we have launched post the COVID era, so how -- what kind of a contribution is coming out to the overall revenues?

[Kedar Vaze, executive]

I think about 6%. So in terms of the overall, it will be around 3%. In terms of the new products within the emerging markets, it's around 6%.

[Bharat Gupta, analyst]

Sure. The reason why I asked you this question is primarily to get an understanding whether the volume growth, which we are witnessing, so that has been primarily coming in from the new-age products or it is coming in from the existing set of products mainly?

[Kedar Vaze, executive]

So volume growth largely is coming kind of half and half. There is a normal growth of 5%, 6% year-on-year, which we are seeing this year versus last year where it was muted, a normal [ traction ] in the [indiscernible]. Plus, we have seen 5% to 6% of new products across the range. There are obviously some -- the percentages are very large because they were [ on trials ] for last year. So it's a bit incorrect to put these percentages. What we are doing across the board except existing business is growing as well as good engagements in the new products.

[Bharat Gupta, analyst]

Right, sir. Also, sir, on the RFP front, so like is there any kind of a finalization, which is [ you need ] -- you have the visibility for FY '25 now? Or still, it is a work in progress and probably we'll see the finalization to take some more time?

[Kedar Vaze, executive]

So RFQ is not one large ticket things. So there are many, many subparts, and finalization is happening on various time lines. I don't have anything -- any update to give between last quarter and this quarter [ as for the ] change in the position there. So that RFQ position continues as it is.

[Bharat Gupta, analyst]

Just, sir, irrespective of RFQ, if I look at FY '25 and with the kind of a product mix which we have and with the kind of a demand which we are witnessing across the domestic and export bit, can you quantify like whether the kind of a revenue growth of -- in double digit across the segments, whether it is Flavours or Fragrance, that kind of a growth is sustainable, excluding the RFQ part?

[Kedar Vaze, executive]

Yes. So we have given a guidance for 12% revenue growth in medium term. We are confident that we have achieved that for the half -- first half of this year, and we are confident to keep this trend going forward.

[Bharat Gupta, analyst]

Right. Sir, a couple of questions. Like in terms of the Global Ingredients piece, so primarily there has been a dip in the overall revenues. So just wanted to get an understanding, like whether the revenue decline, which we are witnessing, is primarily coming in from the pricing pressure from the Chinese players? And do you expect any reversal in the subsequent quarters as such?

[Kedar Vaze, executive]

So I think Global Ingredient is steady state. We have not been very aggressive on the market given the dynamics that the raw material is coming from China, and we are competing with very similar competitors who are sort of backward-integrated or whoever Chinese raw material supplier base.

So we have taken active steps to restore that. We are in a process to completely have Indian raw material for our Global Ingredients, everything [indiscernible] from China in next 1 or 2 quarters. With that, I think we will be in a position to grow this revenue and continue to grow it with aggressive marketing and volume growth.

[Bharat Gupta, analyst]

So I believe the backward integration will happen over the next, I think, 12 to 18 months time frame it will take, and post which, will we be in a position where we can remain on the EBITDA breakeven still?

[Kedar Vaze, executive]

[ Full ] integration is scheduled to happen in the fourth quarter this year, after which, we will [indiscernible].

[Bharat Gupta, analyst]

Right. Sir, lastly, on the debt front. So we have a net debt position of INR 450-odd crores. So any immediate plans for repaying the debt over the next second half?

[Kedar Vaze, executive]

No, there is no immediate plans to repay the debt. The debt as part of our operations every month, we are generating free cash flow, and that is reducing the debt progressively. We have just concluded our investments in our Indonesia plant and the Holland Aromatics acquisition. So all these extra cash flow generated in the operations has been deployed in this period. We don't foresee any large deployments in the next couple of quarters, and the debt levels should start to come down thereafter.

[Bharat Gupta, analyst]

So we will be able to maintain net debt to EBITDA below 2x, that remains on one of our priorities?

[Kedar Vaze, executive]

Yes. We will always maintain it at that level or below.

[Operator]

[Operator Instructions] We'll take our next question from the line of Bharat Sheth from Quest Investment.

[Bharat Sheth, analyst]

Kedar, congratulation...

[Operator]

Sorry, we cannot hear you.

[Bharat Sheth, analyst]

Hello, sorry. Am I audible?

[Operator]

Yes.

[Bharat Sheth, analyst]

Kedar, congratulations on good set of number. And [ taking forward ], what I mean when we say that in domestic market, how much we are getting a business which -- because of decline in the raw material price, the small vendor, which you are out of the system has come back? And how much are we are seeing that from global MNC presence in India? And how do we see some of these new start-up and direct-to-sales people? So if you can give some color on how do we see going ahead in the whole segment?

[Kedar Vaze, executive]

So let me answer that as I understood the question. I think we have a very strong presence in the large corporate and the global MNC. That has done more than 20% growth for us on the Fragrance and as well as domestic Flavours. And [ we do ] have a very strong engagement with the SMEs, the traditional MNCs, traditional FMCGs, and we are now building a strong portfolio of offerings for the e-commerce and start-up companies.

So across all the segments, we are uniquely positioned to take up all their projects and take our fair share and more than our fair share of growth that is expected in the next 2, 3 years. We are also proud to sort of talk about our cosmetic portfolio, where we have a large set of natural products and cosmetic actives, which our company has developed from the -- in terms of the science of cosmetics.

And we have a strong R&D pipeline, so these are -- so these cosmetic ingredients go hand in hand providing new [ claims ] and new ingredients to the e-commerce start-up, premium cosmetics, like what are coming on the sort of digital platforms. So we have a very good pipeline of offerings for those customers as well.

[Bharat Sheth, analyst]

Is it possible to say some kind of a color? I mean how much -- what is contributing as of today? And how does the growth in which is maybe growing faster?

[Kedar Vaze, executive]

So I think the bigger set of clients, which are our existing clients, are all growing at a volume growth of 6%, 7%, plus new products are being introduced. The larger corporate and global MNC business is additional growth for us because we are not only growing, but we are also taking market share. So that is a much higher growth area for us.

And it's very difficult to -- so on the smaller size, while the growth percentages will look very weak because the client was very small and now they're growing at 50%, 60%, it's not on a total Fragrance or total overall business of INR 1,700 crores, INR 1,800 crores. And the new start-up e-commerce businesses are not significant addition in the volume or value, but they are very important for us to sustain the growth in the future years.

[Bharat Sheth, analyst]

Fair. And how do we see gross margin from here onward and EBITDA margin?

[Kedar Vaze, executive]

So I think we have done 16.7% EBITDA margin for this period. And we see that is a good level, and we will -- if the raw material prices come down or there is a better tailwind, maybe we can do a little bit better EBITDA margin. But I am a bit -- I want to be cautious on guiding anything given the geopolitical situation, any oil crisis or raw material crisis or any disturbances as a result of what is happening around the world. I don't want to depend on that trend.

So currently, the trend is positive. We may do 16.7% and better. It depends on how the raw material and if there are no force majeures, no disturbances, no major macro events, I think we will do better than -- just to allude on that, yes, we also undertaken policy of having a good level of inventory at low cost, which allow us to support our customers in the next 2, 3 quarters in a good way. That is also a strategy we have taken.

[Bharat Sheth, analyst]

And how our pricing power is that we will be able to deploy to -- I mean in case of increase in raw material price, we can pass it on?

[Kedar Vaze, executive]

So we are very transparent policy with our clients. And when there is a raw material increase, we are in a position to negotiate and pass on the increase to the clients.

[Bharat Sheth, analyst]

Okay. And coming to this Europe business and the Fragrance -- sorry, flavor business, how do we see Europe business, whether it is stabilized? And there are also a lot of change in MNC level, so our -- any negative impact on account of that or large RFQ?

[Kedar Vaze, executive]

No, there is no change. In fact, it is beneficial for us. We are better positioned in our RFQ than maybe 1 year ago. So it's a good positive development for us. European business continues as it is. We are, as I mentioned, more than 85% capacity utilization. So at the moment, we are focused on the right kind of products and customers, and we will focus on them. We will wait to understand the overall growth and macro situation in Europe before making any further investments.

[Bharat Sheth, analyst]

On our export to the Southeast Asia and Middle East, how the things are playing out?

[Kedar Vaze, executive]

Things are running well. We have now a commencement of our Indonesia factory expected by end of this year financial. So with that, our overall capacity to address Middle East and Southeast Asian markets will double, and with that, we will be more aggressive in these markets.

[Bharat Sheth, analyst]

And Fragrance business would like to share some kind of outlook from here onwards?

[Kedar Vaze, executive]

So we are looking at a 12%-plus CAGR growth hereon, and we will continue...

[Bharat Sheth, analyst]

On Flavours side?

[Kedar Vaze, executive]

On Flavours side, I think we are also looking at a 15% CAGR growth. At the moment, our export business is under a question mark in terms of this quarter. Sales have been -- in exports, always been sporadic. There has been times when 1 or 2 quarters the sale is low and then the sales picks up. So we are waiting and observing how we look at the general trend.

Export market is kind of seasonal. With the full year, we will be at -- I think given that we are already behind minus in flavor export, I don't see [ we'll take over ] before the end of the year. But longer term, there is kind of structurally nothing wrong. Again, macro events in the Middle East are in the news every day. So we have to wait and watch and see how that plays out.

[Bharat Sheth, analyst]

Okay. And with all this kind of a new customer coming still, we are guiding for a 12% kind of a growth? Or is there upside risk is there?

[Kedar Vaze, executive]

Upside risk is there.

[Bharat Sheth, analyst]

Upside in the sense, it can grow faster.

[Kedar Vaze, executive]

So the 12% is not factoring anything with the RFQ. So whatever comes in with the RFQ additional is benefit or will give us additional top line.

[Bharat Sheth, analyst]

And even factoring this cosmetic side also, correct?

[Kedar Vaze, executive]

The cosmetics side and the other sort of allied businesses, which we have, are quite small. They are not revenue drivers for us. They are unique selling proposition. So the customer gets a combined package with fragrance and cosmetic ingredients. So we see this as more as a long-term play. A lot of the e-commerce and start-up brands, we service today, and we are able to provide that. The business will mature over the next, I would say, 10 years.

[Operator]

We have a next question from the line of [ Kunal Tokas ] from Fair Value Capital.

[Unknown Analyst]

Sir, can you hear me?

[Kedar Vaze, executive]

Yes.

[Unknown Analyst]

So my first question was, you mentioned in your opening remarks that the international market was affected because of the destocking that took place. So do you see this destocking trend continuing in quarter 3?

[Kedar Vaze, executive]

So this is largely alluding to the Flavours because we have a few large clients. And that -- we see that the orders have started to come in. So hopefully, before the end of the year, we will catch up on our run rate. But the destocking or the quarter 1, quarter 2, particularly quarter 2 was maybe destocking. We are already seeing signs of initial orders for this quarter coming in. And quarter 4, if there are no macroeconomic or geopolitical disturbances in that region, we are hopeful to make up the run rate for this year.

[Unknown Analyst]

Okay, sir. And my second question was about the raw material prices. So how are you seeing the raw material pricing trend in the future, given that 25% of our supply base is from China? Do you see any immediate benefit in margins from the easing of raw material prices from China?

[Kedar Vaze, executive]

I think there is -- there are 2 parts of this. One is what is the spot prices. The spot prices have seen a movement down. However, there are no supplies at these prices yet. So we need to wait and see if the contracts are honored by the suppliers and they actually deliver goods at the prices that they have booked. We already have [ seen ] some signs where default of contracts is happening at very low price or reduced price contracts and higher price contracts are being supplied.

So while on paper, the pricing has started to come down, we have also stockpiled on the inventory at this price level. We are -- we need to wait and watch whether there is any change in the supply situation. And so on paper, there are good contracts at good prices, but the supply -- actual supply may not happen to the full quantities or to the desired price levels. So we need to wait and watch and see what is the actual purchase prices. We will monitor it. And once the inventory is with us, we will then proceed to discuss with the clients on additional volumes and so on and so forth.

[Unknown Analyst]

Understood, sir. And also after the backward integration takes place, what will be our drop to exposure to China? And will we be able to match them on the cost front?

[Kedar Vaze, executive]

So I think on the Global Ingredients side, we will be 100% backward-integrated. We will have capacities to make everything in India. Then we are looking at, at least some quantity from China, rest backward-integrated. But from a capacity point of view, we will have full capacity backward integration in India possible.

Overall, our China dependency in terms of 3 years ago to now would be roughly 30% down in overall value of everything that we buy. Specific for the Global Ingredients business, we will be 100% independent of China.

[Unknown Analyst]

Okay. Understood. And lastly, sir, the CFF capacity is operating at nearly optimum utilization. So do we have some plans to shift some manufacturing to Indian facilities? And will it give us some benefit in terms of incremental operating profit margin?

[Operator]

Ladies and gentlemen, we've lost the connection of the management line. [Technical Difficulty]

[Kedar Vaze, executive]

Yes. So I was just answering his last question alluding to the...

[Rohit Saraogi, executive]

Is he there?

[Unknown Analyst]

Yes, I'm here.

[Kedar Vaze, executive]

Yes. European capacity. So at the moment, we will look at utilizing the capacity to the fullest. We are having our plans on drawing down the synergies between CFF and Holland Aromatics and further enhance our capacity. Our India capacity will also get augmented by the fact that we will have the plant in Indonesia.

So we will support some of the export businesses out of Europe from our India plant. So there is no immediate plan to invest in capacity in Europe. And after a year or 2 of business, we will -- depending on the market, we will have to invest.

[Operator]

[Operator Instructions] We have a question from the line of [ Ganesh Shetty ], an individual investor.

[Unknown Attendee]

Am I audible, sir?

[Kedar Vaze, executive]

Yes.

[Operator]

Yes, you are.

[Unknown Attendee]

Congratulations, sir, for a good set of numbers. The question is towards supply chain management and raw material costs. Actually, you had a lot of challenges in the last several years on this front. Now I think these are well addressed. So are you seeing any good improvement in EBITDA margin this quarter, this quarter 3 and ahead of this year?

[Kedar Vaze, executive]

I think while the overall commodity prices are coming down, specific products continue to have some challenges. We are optimistic that steps that we have taken, contracts that we have made will enable us to support and supply our customers in full and support all their growth. We are still keeping our fingers crossed in terms of what is the net inventory cost decline. So on paper, contracts are at lower price. Once the supplies are received, we can then benchmark that, put that in our costing and accordingly approach the client.

[Unknown Attendee]

Sir, my second question is regarding this festive season in India, I mean, mostly, in third quarter of the year, so will this result into any appreciable volume growth in the domestic market or any flavor growth market? Because many years, you are seeing a lot of headwinds in the domestic market. But this year, I think this domestic market is quite stabilized, so -- and as you have performed really well in the European market plus increasing [ the first ] stake in Holland also -- Holland Aromatics. So do you think the overall effect will be a better benign Q3 for us comparatively last year?

[Kedar Vaze, executive]

So I think all these effects that you alluded are already factored in the Q2. So Q2 is a good quarter. All of these effects are positive for us. We will continue to build on this in the upcoming quarters. There is no specific festival demand in Q3. There is -- because sales happens in Q3, the demand is in Q1, Q2. It doesn't work that after because there's a [indiscernible] lead time to the consumer. So the sales for the festive season have already been factored in the Q2 -- Q1, Q2 sales.

But we are seeing continued robust engagement across all our customers, whether it's in India, it's in Europe, Middle East, Southeast Asia. We are seeing good engagement. We are seeing new businesses, new products being approved. So overall, the growth is intact. Flavours domestic as well is growing well. We have good engagements with large clients. The only kind of immediate scenario, which will change in quarter 3 is on the flavor exports, where we have seen muted supply in the first half of the year, and we expect second half of the year to be better.

[Unknown Attendee]

That's all for me, sir. Congratulations and all the best.

[Operator]

We have a next question from the line of [ Amit Kumar ] from [ Datamine Investments ].

[Unknown Analyst]

Sir, just one question really. You sort of talked about Indonesia factory servicing Middle East, which is surprising. Wouldn't the Middle East be better served from your existing India operations as it is?

[Kedar Vaze, executive]

Yes. So we will service better Middle East because our capacity in India will shift to Indonesia. So we'll have more capacity in India.

[Unknown Analyst]

Okay. Okay. Okay. And then what would -- what proportion of your sales would be coming in from the Middle East territory as of right now, I mean, the first half really? Just a broad sense, I don't need exact numbers.

[Kedar Vaze, executive]

Yes, broadly about 10% of our overall business.

[Unknown Analyst]

About 10% of your overall business. Okay. And just one thing or a small point again on this double-digit volume growth, and how confident are you? Because I understand new products, but as far as we've seen the results from the large FMCG companies and I'm talking both from the Fragrance and nonfood side, we've not really seen the 7% kind of volume growth more like 3%, 4%, so I'm just sort of wondering, I mean, we see [indiscernible] very common in the industry. So how confident are you on this double-digit growth continuing forward?

[Kedar Vaze, executive]

[indiscernible] of volumes excess of the market growth because we're looking also at market share gains.

[Unknown Analyst]

Okay. But in terms of -- I mean that's what I'm saying. I get the point of new products, but the existing products, the existing clients, the...

[Kedar Vaze, executive]

[ The 3% ] new product for us can also be a degrowth for a competitor. It may not be a completely new product in the market.

[Unknown Analyst]

Okay. And anything specific which is sort of driving this kind of market share gain for you this year?

[Kedar Vaze, executive]

See, we have opened up a whole new set of customers for both fragrances and flavors in terms of global MNC engagement and in terms of large corporate engagement. These engagements are fairly recent. So we are -- we have low market shares, so we are able to gain market share in these areas.

[Operator]

[Operator Instructions] We'll take our next question from the line of [ Chirag Jain ], an individual investor.

[Unknown Attendee]

Am I audible?

[Kedar Vaze, executive]

Yes.

[Unknown Attendee]

Kedar, my first question would be, you told that in the near term, there would be inventory pent-up that you're [ stocking ] up. But just a broader [ term ] with regards to 6 months because now the world move into the just-in-time sharing. So with regards to inventory rationalization happening overall, would we see back to our working capital days which were earlier, which were lesser as compared to what we are currently? Because currently also, we had stacked up on the working capital. So just an opinion with regards to this. This is my first question.

[Kedar Vaze, executive]

Yes. So I think the working capital levels are on the higher side of the range that we want to be in. We will continue to do efforts to bring it down. Having said that, this working capital level, our objective is to grow the sales, and then the ratio of the working capital to sales will get normalized automatically.

[Unknown Attendee]

Overall, the working capital, which cycle will improve? Because with improvement in scale, then your receivables will also be something which would be bought in control, right?

[Kedar Vaze, executive]

That's right.

[Unknown Attendee]

And Kedar, my second question is, this is something which is of the market and the rumors, which I've heard that the company -- the promoters are entering into a real estate venture. So this is something -- and this is something with regards to S H Kelkar's facility which they have in Mulund. So they are probably going to [indiscernible] that, or they're going to sell it up and then develop a property. So how true is that? Just wanted to have it from your [ mouth ].

[Kedar Vaze, executive]

It's not true. The promoters have plots of land, which are not linked to S H Kelkar at all. Those plots are being developed by other developers. So there is no truth to this.

[Unknown Attendee]

So the Mulund facility where you have your research center, that will be still kept with S H Kelkar only? So promoters would be running this business independently because this is the bread and butter -- this is the original business.

[Kedar Vaze, executive]

S H Kelkar facility is not being developed. This continues as it is. There are other plots of land that the promoter holds, which some discussions are happening on development.

[Unknown Attendee]

The existing promoters would be continuing this business?

[Kedar Vaze, executive]

Yes, absolutely.

[Operator]

[Operator Instructions] We have a question from the line of [ Nitin Jain ] from Dimensional Securities.

[Unknown Analyst]

Hello? Am I audible?

[Operator]

Yes.

[Unknown Analyst]

Yes. My question was regarding the employee expense. So the employee expense has increased by 14% for this quarter Y-o-Y, and for the first half, it has been increased by almost 19%. So what is the reason for that? Any specific reason or has the employee headcount increased?

[Rohit Saraogi, executive]

Yes. So on the employee side, last year, there was -- first of all, there is an increment of 8.5% average increment which has been given to the employees. If you compare with the previous year, previous year, there was reversal in the variable pay as the performance was below budget, and that has resulted in an increase, which you see in the financials.

[Operator]

Ladies and gentlemen, as there are no further questions, I hand over the call to the management for closing comments. Over to you, sir.

[Kedar Vaze, executive]

Thank you. I hope we have been able to answer all your questions satisfactorily. Should you need any further clarifications or 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.

[Operator]

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