S H Kelkar And Company Ltd (NSE:SHK) Q3 FY23 Earnings Concall dated Feb. 03, 2023.
Corporate Participants:
Anoop Poojari — Investor Relations
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Rohit Saraogi — Executive Vice President and Group Chief Financial Officer
Analysts:
Bharat Gupta — Fair Value Capital. — Analyst
Viraj Kacharia — Securities Investment Management — Analyst
Unidentified Participant — — Analyst
Manoj Bagadia — Equicorp — Analyst
Dilip Sahoo — Private Investor — Analyst
Raj Kumar — Private Investor — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the SH Kelkar and Company Limited’s Earnings Conference Call. As a reminder, all participants’ lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]
I’d now like to hand the conference over to Mr. Anoop Poojari of CDR India. Thank you and over to you sir.
Anoop Poojari — Investor Relations
Thank you. Good afternoon, everyone, and thank you for joining us on SH Kelkar and Company Limited’s FY23 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 — Whole-Time Director and Group Chief Executive Officer
Good afternoon, everyone. We understand that our performance for the quarter has been poor, and I would like to take this opportunity to address the key issues and outline the action plan going ahead. During the quarter, our performance was impacted by notable decline in revenues from Global Ingredients division. This division has been facing various challenges in recent times including impact of raw-material price inflation and dependence on China for the raw-material. This has affected its competitiveness in the international markets.
In the earnings presentation, we have shared the results of Global Ingredients division separately as a result, to give a proper and a clearer picture. To address these challenges faced by the Global Ingredients division, the company has developed processes for complete backward integration in India and is evaluating collaboration of partnership with specialty or agrochemical companies to increase its competitiveness. This will help reduce the overall cost for the product and make the product competitive. The dependence on raw-material supplies from China will also be mitigated.
We have also initiated a farmer development program through Keva Aromatics, a promoter owned company, to further reduce dependence on China sourcing and cultivate aromatic plants like Geranium and Vetiver in India. This will create sustainable and cost-effective supply-chain, working closely with the local farmers. This security and reliable raw materials will support our long-term business goals.
Moving on to an update on the European operations. We have seen a decline in revenue in the contract manufacturing business. In the post pandemic period, the company is taking steps to streamline operations, increase efficiency n the European business by merging the entities. As a result of these mergers and consolidation of resources, our organization structure will get simplified to rationalize costs, paving the way for future growth without requirement of additional capex.
Coming to our core fragrance division, it has reported stable performance despite the ongoing challenges. Our flavor domestic business continued to grow strongly to double-digit growth in both organic and inorganic space. However, the consolidation of distributors in the Middle East resulted in a one-time destocking of inventory, impacting sales worth INR12 crores in our Flavor exports. Despite the sluggish environment in the international markets, the sales in January have been restored.
Coming to the update on the request for proposal from leading global FMCG, I am pleased to inform all of you that we have already submitted proposals for a range of brands in different categories with total value of more than rupees INR100 crores. These submissions demonstrate our ability to offer world-class products and services. In the coming months, we are scheduled to submit additional proposals worth more than INR300 crores.
Although the process of securing the order has taken longer than anticipated, we are optimistic about the potential for long-term growth from this account. We understand from the client that this process for such projects involves long lead times of six to nine months before consumer tests are finalized and commercial orders begin. In conclusion, I want to state that we will focus on the actions needed to be taken in this challenging environment.
Now I open — the moderator to open the forum for any questions or actions and suggestions that you may have.
Questions and Answers:
Operator
Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]
We have first question from the line of Bharat Gupta from Fair Value Capital. Please go ahead.
Bharat Gupta — Fair Value Capital. — Analyst
Hi, Kedar, good afternoon. So while I was reading your presentation, a couple of things from my side. So first, on the remarks on the global supply-chain issues, so how well are we protected with restricted procurement of raw materials, whether it is for SH Kelkar alone or it includes the global ingredient supply as well and what’s our exposure towards China?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
We are fairly well protected from the global supply chain given that we have holding good levels of inventory and we continue to do high levels of inventory than normal for protecting against a quick supply-chain disruptions. As regards to the disruption or supply-chain issues with the global ingredient, this is specific ingredient raw-material, which is used as an intermediate also in agro and pharma industries.
And this has seen globally consolidation into one or two suppliers in China. As a result, the prices and the availability has been tight. As I mentioned already, we are taken — We have developed the process. We are in finalization stages with some partners in collaboration with agro-chemical or specialty chemical companies to make this product for us in India.
Bharat Gupta — Fair Value Capital. — Analyst
But currently, how much are we importing from China —
Anoop Poojari — Investor Relations
This particular product, we are 100% dependent on China. So, we will now develop our own alternate source. In overall business, about 20% of our procurement is coming from China.
Bharat Gupta — Fair Value Capital. — Analyst
Right. And also, 20% of our procurement comes out from Europe as well, right?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes.
Bharat Gupta — Fair Value Capital. — Analyst
Like, we were enhancing and focusing more on the backward integration capabilities, so still if you look at the gross margin profile, that remains below 40% odd level while earlier it used to trade above 42%, 43% level. So, what’s our target in terms of improving on the gross margin trend going forward?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I would focus your attention on the sequential quarter. We have seen improvement in gross margin on a sequential basis and we foresee further improvement on gross margin quarter-on-quarter going-forward.
Bharat Gupta — Fair Value Capital. — Analyst
So in terms of — if I look at three to five years horizon —
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
It is only last year seen quite a strong inflation in the second-half of last year. So the third quarter last year was on a pre-inflation cost price base. This year is on a full inflation in the RM situation. So it’s a big dip. Last quarter was even lower dip. We went from 41.2% to 39.8%. And I think, — from 39.8% to 41.2% and we will see it continuous improvement in the gross margin as we go forward.
Bharat Gupta — Fair Value Capital. — Analyst
In regards to the [indecipherable] earlier in the last con-call also, you were highlighting the fact that several of the tender offer due in the month of December, we were waiting for some of the tender. Like we have submitted the bids for the same bid, any plans finalization coming basically within one month or with regard to revenue potential for you has highlighted that?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Process will be six to nine months after we start to submit. So, we have started our submission cycles from January. So, over the next six months, we will continue to make products and submit the products for testing. And the first results are expected six to nine months from there. The second-half of this financial year, we will start to get the results.
Bharat Gupta — Fair Value Capital. — Analyst
Is it respect to a different one, you earlier have a contract with respect to different FMCG player, right. Now, for the submission of the bids, which we are doing, that is for a different FMCG player or it is with the same FMCG player?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Let me just rephrase the question and what I understood. This is regarding the global FMCG — large global MNC where we are working. This is a multi-year project that will go on for three to four years. The first year of this project is now coming to a close and our submissions are getting finalized with their development team and the products are being sent for a final evaluation to the consumers.
This process has begun. Our submissions will go on over the next two quarters, product-by-product, brand-by-brand in different geographies. While these testing results are expected to start coming in six to nine months after three submissions. The first submissions have gone in January. We expect that from July-August onwards next — this calendar July-August onwards. Every month, it’s a cycle of submission and there will be some results coming out from the — what we have submitted.
As I like to — I mentioned in the opening remark, INR100 crores worth of submissions have already been made and more than INR300 crores worth of submissions are in the pipeline over the next two, three months. So, we expect that INR400 to INR500 crores worth of business proposals will be on the table, which start to — we will know the results only in the second half of this calendar onwards.
Bharat Gupta — Fair Value Capital. — Analyst
Great. After the second quarter of the financial year. Just in the margin front on the RFP side. So, are the margins are in line with current business, which we are in or it is on a lower side?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So the net margins are in line with our current business, The gross margins will be lower, but the volumes will be higher, so the operating cost will also be lower.
Bharat Gupta — Fair Value Capital. — Analyst
Thanks. And also after getting out the RFP [indecipherable] from the FMCG, so is there any approach, which has been driven by other FMCG players also in regard to you can see outsourcing the product base to us or to any of that way?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So there is, we are working with many FMCG’s. There is no change in that. That continues as has been our business on many decades. Didn’t quite understand — yes, there are also other —
Bharat Gupta — Fair Value Capital. — Analyst
Is there any other interest which has been shown by different FMCG guys. This is in regard to outsourcing, just like similar what is your lead or the FMCG from which very we have received the RFP approval. So similarly in-line with that, other players are also approached?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
This is not outsourcing or contract manufacturing. This is basically that we are now partners for their product development. So, this is not a contract manufacturing business.
Bharat Gupta — Fair Value Capital. — Analyst
Right. So, my question was similar to what we have received now, has there been any other interests or query we have received from any other company?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
One-to-one subsequently, because I’m not able to clearly understand your question.
Rohit Saraogi — Executive Vice President and Group Chief Financial Officer
If your question is are we also working with other MNCs?
Bharat Gupta — Fair Value Capital. — Analyst
Other MNC guys, right.
Rohit Saraogi — Executive Vice President and Group Chief Financial Officer
The answer is yes, but it’s in a very preliminary stage as of now. We have started engaging with them and we are getting small briefs on which we are working.
Bharat Gupta — Fair Value Capital. — Analyst
Also, can you highlight a bit on the domestic scenario like currently, do we have delivered I think around double-digit, but going forward, how the traction has been in the fragrance and the flavors space?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I think, the traction at the moment has been muted. It really depends on what the macro and how the inflation and growth pans out. We are closely observing, I don’t want to put out prediction for six months down the line, but if the growth resumes, we are tracking and we are doing growth plus in terms of our growth vis a vis market growth.
Bharat Gupta — Fair Value Capital. — Analyst
Also when you are looking at substituting Europe, so like with regard to CSF, how much revenue contribution will be coming from contract manufacturing side and what’s the update in terms of the headwinds, which is there in the European market? So, is it disrupting the demand, which you get to our product basket.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
No, it is not disturbing any demand from our product basket. Contract manufacturing is a separate business altogether. And that has its own on-brand related challenges. It’s largely in the European space. And I believe with the uncertainty around Europe, this business has declined versus last year. We are negotiating with the brand to restore the base around which the contract manufacturing costs can be redefined. So in terms of per kilo absorption, we would need to re-negotiate the prices, which we are doing at the moment.
Bharat Gupta — Fair Value Capital. — Analyst
Okay, sir, last question from my side. In order to and company’s growth prospects over the next three years, preliminary focusing on next year’s while the current headwinds there, what can be the key growth lever? I know RFP is there, but what do you think can be a turnaround point for our business?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I think, right now, like I mentioned in the opening remarks, we are focusing on the actions that we can do. We have the product development teams ready. We have the product prototypes, everything that we are geared and ready, capacities installed, product development teams as well as prototypes ready. We will grow once the general market outlook is not recessionary or depending too much on the effect of inflation. Once that eases out, I think the growth will restore and it will not be linear. It will start to grow faster than the overall GDP growth.
Bharat Gupta — Fair Value Capital. — Analyst
Right. And the [indecipherable] maximum volumes will preliminarily coming in from the RFPs alone. That is the core strategy which we are focusing on right?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
RFP is incremental growth for us. Apart from that, we have all the necessary tools and development and products ready for normal business environment globally.
Bharat Gupta — Fair Value Capital. — Analyst
Thanks for that. That’s it from my side.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Thank you.
Rohit Saraogi — Executive Vice President and Group Chief Financial Officer
Thank you.
Operator
Thank you. We have next question from the line of Viraj Kacharia with securities investments Manager. Please go ahead.
Viraj Kacharia — Securities Investment Management — Analyst
Yeah, just had one question. Regarding the global ingredient business, before this whole impact of consolidation in China, what are the kind of margins the business you did?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So, we had about 40% gross margins on this business.
Viraj Kacharia — Securities Investment Management — Analyst
No, I meant operating level. So, even a rig level what we show in the presentation is, yes —
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So it depends — like many other specialty chemical, it depends on the volume utilization and plant loading. This quarter was a particularly bery low from the point-of-view of the sales and the cost impact of raw material inflation. But typically, if we did normal production, we have a 40% gross margin and it could slow down to INR3 crores to INR3 crores EBITA.
Viraj Kacharia — Securities Investment Management — Analyst
Okay, so why I asked is because even before this whole consolidation, like if I look at FY22 number, given the scale of say INR80 crores. This business was not profitable at the operating level. So, this time, trying to understand in a normalized environment, post the initiatives we are taking, what does the base profit or margin this business will do for us?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes, so, ’22 you have put it correctly. I think the raw material prices have increased in the pandemic and consolidation in China. So ’21, ‘ 22 already the effect of that raw material mismatch between our supply contracts and our purchase contracts has started to kick in. But this is the result of sort of the historical stock and force majeure pricing.
If we look at going-forward cost of raw-material in terms of our backward integrated or if you go in the history 2018, 2019 kind of ’21, ’22 is actually where this whole raw material situation has panned out. And then, we’ve moved and we have readied ourselves for full backward integration. So these are not the right comparisons. As a business, it is a bulk chemical specialty and it has more than 30% gross margin at the production level. It’s a combination of the plant loading where the margins will flow into the bottom-line.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. And second question is global RFQ, which we have submitted on the bid in the part one. So as you said, there are four different phases. So can you just give some color in terms of what is the kind of addressable or the opportunity size in each of those spaces and any indication of how that structured and for for Phase one would, if in case we win as per our expectations, would we have to do any CapEx to meet that account?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So let’s be phrase this in with a caveat that it is the first time we are participating in a global RFQ of this nature. So we are also learning as things unfold. It is typically in three phases. One is the selection of partners, which was done last year. Subsequently, they have opened us various parts of their different categories, different brands, which we will engage with them. So they have done that exercise in the last year. And I think in June, July and between June and August in that, they have started to award us various categories where we need to work, and the submission phase has started in January.
So we are in total out of their $1 billion or so global business, we are shortlisted for between $300 million to $350 million globally, and we are now participating on the active briefs of roughly 100 submitted and 300 plus a few more, which are getting action at the moment. So somewhere around INR500 crores worth of projects, which we are in active submission phase.
And over the next one year, we expect that more projects will come. So the overall pipeline of projects, we would estimate is at this point, about $100 million of projects. So INR300 crores, INR400 crores in the immediate future and then another INR300 crores to INR400 crores, thereafter, it will be the project pipeline. And with a lag of six to nine months, we will know the results.
Viraj Kacharia — Securities Investment Management — Analyst
And in terms of the investment of the capex.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
There is no real capex. There will be obviously cost of development, there are some additional fees and specific consumer test costs et cetera which we will incur for the product development. There is also tender fee and cost linked to participate in the basis. So all of these are the costs. As far as the cost of manufacturing within Asia or Europe or India and Europe, we don’t have any additional capex required.
Part of our longer-term production expansion, we have already initiated manufacturing [Technical Issues] for supporting our business. That same capacity will also be useful for any additional volumes in Southeast Asia for the RFQ business.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. And just one more question on this. So as you said, that the gross margin for the bid in RFQ will be low, but the operating level or the net level, it would have a similar margin as what we are on in existing business. So this is after including all the costs for, either in terms of development or servicing or bidding for the contract, right?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yeah. So typically, we would amortize our investment in development and bidding in a three-year volume. So yes, it will be almost the same after including all the costs.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. And I had just one more question on the overall net working capital. So I think a couple of — two, three years that we started having a more higher inventory than normal levels we should have consent kind of volatility and the inflation environment. Now as you also talked about in the earlier remark that, we are seeing the easing in of raw material and improvement in gross margin. So in terms of the inventory holding period, how should one — want understand if you try to think that it will kind of keep moderating in coming quarters?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes, I think we are waiting for the China reopening in the coming week after which we will know a very clear picture in terms of supply chain from China coming and joining back into global supply chain. My best guess is that the inflation is easy. There may be some softening of prices and quite reduction of our inventory, if there are no — there is no pressure on price increases further.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. So in that sense, the debt which we have which around INR550 crores. The large part of the cash, are we looking to kind of..
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
On the debt, Rohit you can give numbers.
Rohit Saraogi — Executive Vice President and Group Chief Financial Officer
Yeah, so the debt is INR522 crores, which is with translation impact of currency. And what we look forward to is the endeavors to reduce that month-on-month. However, we are also cognizant about the investments on the projects we are working on. Therefore, we are looking at a level of INR450 crores in next six months.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. Can I squeeze in one more question on the European business?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes.
Viraj Kacharia — Securities Investment Management — Analyst
Yeah. So on the CFF, if you look at the growth and the scale up in battle business over the last few years, most of the clients are regional and there are a lot of new edge brands also, which we have kind of partnered with them and we have seen a good healthy growth. So the performance there for that particular business has been better than the local market growth there. So in the kind of environment we are right now in. How are you seeing what kind of communication you’re hearing from those brands or customers? And how should — I want understand the growth in that particular business going forward?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So you made a very valid point. We’ve done more than 12%, 13% CAGR growth in our acquisition in Europe in the last three, four years. At this juncture, we are looking at the Holland Aromatics acquisitions, which has also been growing in the last two years very strong double-digit plus.
So we are looking at consolidating these two into one European business, that will free-up capacity for [Indecipherable]. So today, we are at a situation where we are approaching 85%, 90% of capacity utilization. And to further grow aggressively, we first need to rationalize our capacities and free-up using the synergies between the two plants.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. I’ll back the in queue. Thank you.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Thank you.
Operator
Thank you. We have next question from the line of Amit Kumar from Determined Investments. Please go ahead.
Unidentified Participant — — Analyst
Yeah. Thank you so much. One question on this transition — raw material transition from China to India. How much time do you anticipate this is going to take? And in the absence of supply of these raw materials, I mean what sort of happens to the business in the interim?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So we have supply from China and we continue to hold stock of the inventory. So we don’t see any disturbance in the business. In terms of time lines, so I think we are exploring sort of existing specialty chemical or agrochemical companies with capacity will be able to make our backward integration.
Unidentified Participant — — Analyst
How much time do you anticipate, any sort of tie-up and that supply shift from China to India we’ll sort of take?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I think in around six months, we should have an alternative supplier within India.
Unidentified Participant — — Analyst
And sir, your global ingredients revenue has fallen quite dramatically. So if you have inventory of raw material, then what was really the issue in terms of that business line? I’m not sort of clear on that?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So if you look at this business, there are — there is stock with the distributor. So it’s not that the business has stopped from the conjunction point-of-view. Fresh sales — prices for the fresh sales are sort of going up. We have January to December pricing. So we have a better realization from January. So we are not pushing given the raw material situation.
And we have a situation where there is low sales in this quarter. And we anticipate that once we have the full backward integration plans in play, we can be more aggressive to regain our market share and grow this business.
Unidentified Participant — — Analyst
Understood. Just one final question in my mind, you sort of mentioned that you lost some business in the Middle East in this quarter as well. I just wanted to get a sense, not as far as this particular quarter is concerned, but on a full-year basis, generally, what is the share of sales that Middle East exports contributes overall?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So it’s about 90% of our export business is in the Middle East. This is not a consolidation of distribution sort of, again, the gap between consumption and stock in the increasing price trend. I think even the distributors had higher stock levels, they bought and they kept in the stock. As the prices are softening, they are combining their stocks and reducing the buying. Our understanding from the distributors is that, the actual consumption at the consumer or FMCG side has not declined. It is stable. However, this INR10 crores, INR12 crores of purchasing is a consolidation in their stocks and reduction of their sort of distributor stock in this quarter.
Unidentified Participant — — Analyst
I understand the difference between the primary and secondary sales basically. Simple point is that what — in a normal sort of quarter or during the course of the year, how much was that — how much would be the export number? Or if you can sort of share the export number for — in this particular quarter, I think for the back calculated if not..
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So the exported number basically, for the nine months was INR65 crores. Last year, it was INR75 crores in the sales here.
Unidentified Participant — — Analyst
The difference in sales. Understood. Thank you so much. That’s it from my side.
Operator
Thank you. We have next question from the line of Manoj Bagadia from Equicorp. Please go ahed.
Manoj Bagadia — Equicorp — Analyst
Hello.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Hello.
Manoj Bagadia — Equicorp — Analyst
Yeah. Can you hear me?
Operator
Please go ahead sir.
Manoj Bagadia — Equicorp — Analyst
Yeah. First thing about the global ingredient. Can you just throw some light on what is the capital employed for this business?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
About INR160 crores.
Manoj Bagadia — Equicorp — Analyst
Okay. And what has been the capacity utilization in the third quarter for this business?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So the third quarter, while we had a low margin or low — not low margin, low sales on this global ingredient, we utilize the product capacity for some other smaller local ingredient manufacturer, but the capacity utilization was less than 50% in this quarter.
Manoj Bagadia — Equicorp — Analyst
Okay. What is — what would have been the normal capacity utilization here?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
About 70 — on the Global ingredient normal course is running the plant is largely 70% to 80% producing one product.
Manoj Bagadia — Equicorp — Analyst
Okay. So if you reach 70%, 80% capacity utilization, then you would have a positive EBITDA in this business.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
That’s correct.
Manoj Bagadia — Equicorp — Analyst
And is there any long-term strategic thinking about this business? Because good capacity utilization, you will generate INR2 crores, INR3 crores of EBITDA, right, on a INR160 crores capital employed?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
INR2 crore, INR3 crore in the quarter. We have a 70% utilization then we have a very good business. The main thing is that the raw material has gone up by almost 25%, and the selling price has only moved up by 5%, 6%. This is on account of China government and supplier policy. So they have lower cost of sales of raw material within China and when they export, they have higher cost of raw material and they have a subsidy towards the finished product being sold in the global market.
[Indecipherable] is largely sort of taxation and opportunistic scenario within China. And when we have an alternate non-China supplier and supply situation that we have, I believe, the probably most competitive or lowest cost producer in this product.
Manoj Bagadia — Equicorp — Analyst
So once we have a domestic supply in six months, that you are secure about the supply, right? Or does it give you some cost advantage?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
We have secured. We will make — because it’s our process, we will make a tie-up with a local agro or chemical company. And with that security of supply and cost, then we will be able to regain our market share quite easily.
Manoj Bagadia — Equicorp — Analyst
So this business eventually in a couple of years, would generate what kind of return on capital employed? I mean, will it be like 15%, 18% kind of [Indecipherable]?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I will get back to exactly numbers. But effectively, it will have a swing of minus 10 EBITDA to a plus 10 EBITDA this product.
Manoj Bagadia — Equicorp — Analyst
Okay. You’re talking about on an annual basis?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
On an annual basis.
Manoj Bagadia — Equicorp — Analyst
On an annual basis. Okay. Still, I mean, it will not be very lucrative in terms of the return on capital employed?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yeah, that is just one product. The capacity of the plant when we have smaller products and there is additional capacity. So this is just the bulk product, which next plant. And..
Manoj Bagadia — Equicorp — Analyst
Is this a strategic for us for the longer-term this business? Or I mean you might want to hive it probably in the separate subsidiary and do something around that?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Well, we have separated it out as a segment. We are open to joint venture strategic partnerships, anything that may come up on this side of the business, because one product particularly is now multiple large producers in China as well. We don’t see it being a unique position like we had in the past. But it’s still very much integral part of our business. We would like to keep it. But just to — I believe that once we have the domestic raw material sourcing, then position will be very strong.
Manoj Bagadia — Equicorp — Analyst
So effectively, we should be okay next year onwards on this business?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yeah.
Manoj Bagadia — Equicorp — Analyst
Can you throw some light on the debt repayment or road map for next two, three years? I mean, six months, we are talking about INR450 crores. Then how do you see it for over the next 18 months from there?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I think our target is to have between INR10 crores and INR12 crores of free cash flow per month. This is ongoing even in this quarter, which is, I would say, not been a great quarter. We have done about INR30 crores of operating cash flow. If you kind of look at the net debt, while it has gone up, it’s largely the conversion of euro to rupees that the net debt has gone up. We’ve been able to reduce it by INR15 on like-for-like basis. And we will continue to do that, I think, at a faster rate. bring down the debt to less than INR400 crores, INR300 crores in 18 months period.
Manoj Bagadia — Equicorp — Analyst
Considering the uncertainty, what we are seeing, it would be prudent to reduce the debt, I mean, for kind of business and I hope, there are no plans to acquire further?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes, there is no plan at the moment.
Manoj Bagadia — Equicorp — Analyst
At least for a couple of years, we will not see any acquisition?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
If you prove me one more time, I think our answer is not 100% no. If things change, things, environment, I hope that the environment is much better. We have a few good strong quarters in business, the RSP business starts flowing in, things will look differently. So I don’t want to talk about two years down the line, but until we have the debt well below INR400 crores and so on and so forth, we will not look at any additional outlays.
Manoj Bagadia — Equicorp — Analyst
That’s good to hear that significant focus on the cash flow. This is the 6 months, 12 months ago [Indecipherable]. And about the European operation, when you combine these two apart from getting some additional capacity, is there any cost synergy?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes. There will be cost synergies on raw material buying a number of management roles which are duplicated will get reduced. So there will be cost synergies, but largely, the capacity freeing up is — it’s very good because the two companies independently would need to invest in capacity, but join together, they can have a bigger capacity because the synergy.
Manoj Bagadia — Equicorp — Analyst
All right. And any thoughts on the next year organic growth outlook? I mean as of now, considering the uncertainty what we are seeing?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I think I wanted — again, in the opening remarks concluded, we are actions that we need to take. We will focus on them. We are ready from plant capacity, product development, work that is happening at our end. The actual growth number that translate is, I think, largely dependent on the macro as much as what we can control.
So I don’t want to judge a number on a global basis what the growth rates look like. But I would only say that the growth rate of the company will be more than the GDP growth of the different economies where we are operating.
Manoj Bagadia — Equicorp — Analyst
So earlier, what we used to plan 12%, 15% at least growth. We are not sure as of now because how things have been depend on?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Basically saying 12%, we have everything that is required for 12%. If the demand environment doesn’t give us opportunities, it looks very difficult.
Manoj Bagadia — Equicorp — Analyst
All right. Thanks a lot Kedar. Appreciate you.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Thanks. Thank you. Hello.
Operator
We take the question from the line of Rakesh Chaudhari. Sir, please go ahead.
Unidentified Participant — — Analyst
Good afternoon Kedar. In your opening remarks, you spoke about some initiatives relating to farmer development with a related party, which is the promoter-owned group entity called Keva Aromatics, I believe. You can throw some light on what exactly this activity is. Whether it has already commenced. And to what extent is it already begun? And how is it likely to shape up going further?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes, so I alluded that in my opening remarks. Keva Aromatics is promoter company, where we are basically collecting from hundreds of farmers, small quantities, 5 kilos, 10 kilos, these kind of picture collection center, where we collect aromatic essential oils, particularly germanium, which is substitute to China. And this is combined and transfered to the S H Kelkar with a 2% markup. This is basically an activity where we collect and we have quality control and large compliance requirements, which are all managed in this company. And then it’s one bulk lot, which is then approved by the parent company and ship to the parent company. So agreement with a 2% markup on the collection and sales.
Unidentified Participant — — Analyst
What kind of size of business are you doing through this company?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So we have done about INR30-odd crores this year. I expect around INR40 crores for the full-year. And maybe — so the geranium oil, we have ballpark INR15 crores to INR17 crores of our own consumption. We expect this INR15 crore to INR17 crores, INR20 crores being year-on-year activity. The first year, there is a higher quantity because their quantity has come in. We are taking it. So we will have some stock. But after that, on a regular basis, it will be around INR20 crores, INR25 crores annual basis.
Unidentified Participant — — Analyst
So you believe that this will help mitigate our procurement pains to some extent. And that’s the reason for this relationship?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes. So this — the aromatics company has been set up for developing agricultural practices for these products that we need. It’s sort of a backward indication venture.
Apart from the Chinese geranium, there is products like vetiver oil, which is coming from Haiti and has very uncertain supply due to political as well as geopolitical as well as climatic and quick situation. So these kind of products where globally, their supply chain for our industry is affected, we are cultivating in India and building our own strong supply chain.
Unidentified Participant — — Analyst
Very well. Thank you so much.
Operator
We have next question from the line of Dilip Sahoo, an investor. Please go ahead.
Dilip Sahoo — Private Investor — Analyst
Yeah. I mean we — this is regarding the RFP. What I — what you say is, we got selected for the capex for set of category of products that will have an opportunity of $350 million. Do you have an idea how many competitors would be there in this $350 million category that we got selected?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So I — to the best of my knowledge, the entire $1 billion plus has been allocated with six or seven suppliers globally.
Dilip Sahoo — Private Investor — Analyst
Yeah. So we can assume run three to four, at least other people who are competing for this $350 million, if that would be a fair guess?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes.
Dilip Sahoo — Private Investor — Analyst
Yeah. The second question is, you said you have some expression of interest for INR100 crores and another INR300 crore, INR400 crores is in the works. And over a period of time, this will keep on repeating maybe INR1,500 crores of submissions in a year or so. So when you say INR100 crores, what is the cycle you are referring to? Are you roughly to the whole full years left in your contract INR100 crores? Or is it going be..
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Annual potential INR100 crores.
Dilip Sahoo — Private Investor — Analyst
Okay. So what you submitted in January, if it starts getting maybe opportunities in September to December. [Indecipherable]
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Three projects, totaling INR200 crores and one of them is INR25 crores annual potential. Then if we win INR25 crores., w will be continuously supplying this INR25 crores potential for a minimum of three years.
Dilip Sahoo — Private Investor — Analyst
Okay. This is INR25 crores into three. And so that the similar kind of comes in..
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
The total business is 3 times the value which I’ve given. So INR100 crores means we have bid for INR300 crores over three years, the INR400 crores will be INR1,200 crores over three years. And this is all potential.
Dilip Sahoo — Private Investor — Analyst
Sure. And talking to the customers, what do you think where is this whole requirement of $350 million will get exhausted? Will it take one or two calendar years for this whole $350 to addressed to. $350 million.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
I think it will take about 12 months more. So between — in this calendar, the submission phases should be over, and then we will move by next calendar of the — starting from second half this calendar, the results will start coming in. So it’s ballpark one year submission phase and six months delay, we’ll start to see the results.
Dilip Sahoo — Private Investor — Analyst
Sure. So just trying to understand a bit more. You have expensed out, I think, some INR4 crores, INR4.5 crores, which is the RFP. The procurement cost of RFP. What are the other costs required for just to fulfilling this — filling the proposals. Do you need any R&D cost and the cost for — I mean this whole $50 million in next 12 months?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes, so we typically have a large team of R&D, people working on these projects. So yes, there is ballpark INR12 crores to INR15 crore cost of running the projects in a year. Plus there will be related consumer tests, some marketing studies and so on and so forth.
Dilip Sahoo — Private Investor — Analyst
Sure. And once you get the request, there is no more preproduction costs required. You can just start off with nothing else if there is normal light production, right?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Yes, there is no cost for scaling up to manufacturing. We already have the capacity and know-how to scale up the products.
Dilip Sahoo — Private Investor — Analyst
Okay. Thank you.
Operator
Thank you. We have next question from the line of Raj Kumar, an investor. Please go ahead.
Raj Kumar — Private Investor — Analyst
Yeah, so most of my questions has got addressed. Thank you.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Thank you.
Operator
Thank you. We have next question from the line of Viraj Kacharia from Securities Investment Manager. Please go ahead.
Viraj Kacharia — Securities Investment Management — Analyst
I just had one question regarding the contract manufacturing business in Europe, just — you can just give some color in terms of how long the contract is for? And given that we are now kind of trying to merge both [Indecipherable] material in CFF to kind of free up your capacity. Is this an avenue where we can kind of reduce this exposure and focus more on scaling up, using the capacity for the Fine Fragrance and advertisements?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So the capacity is not different from Fine Fragrance capacity. So it’s a different plant. But yes, we can utilize it for expansion in our core business.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. And this contract agreement is for how many years?
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
So it is typically three years with an annual sort of renegotiation or annual reset. The ongoing contracts. So every year, there will be a discussion.
Viraj Kacharia — Securities Investment Management — Analyst
Okay. Thank you.
Operator
Thank you. Ladies and gentlemen, that was the last question. I’d now like to hand the conference back over to the management for closing comments. Over to you, gentlemen.
Kedar Vaze — Whole-Time Director and Group Chief Executive Officer
Thank you. I hope we have been able to answer some of your questions. Should you need any further clarifications or 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.
Operator
[Operator Closing Remarks]