S H Kelkar & Company's Q4FY18 results (Outperformer) - Profitability declines
Q4FY18 results
SHK’s reported revenue growth ahead of our estimates, however EBITDA and PAT was below our estimates.
- SHK’s reported revenue growth of 22.9% yoy to Rs2.85bn (est: Rs2.84bn) driven by strong performance of fragrance business which registered 18.7% yoy growth.
- Gross margins declined by 519bps to 39.1% due to disruptions in raw material imports. Moreover higher other expenses (up 175bps) led to further margin contraction. EBITDA margins declined by 544 to 9.5%. EBITDA declined by 31.6% yoy to Rs270m (est Rs519m).
- An exceptional item of Rs27.8m was reported in Q4FY18 on account of operational reorganisation of PFW in Netherlands. PAT (including exceptional item) declined by 22.3% to Rs213m (est Rs311m)
Key positives: Strong volume growth in Fragrance business
Key negatives: Decline in gross margins
Impact on financials: Cut EPS by 7.6% /8.4% in FY19E/20E to factor in volatility in raw material prices and increase in overhead expenses
Valuations & view
SHK’s performance in Q4FY18 was impacted by raw material supply disruption from China. However volume growth in the fragrance division remained strong on the back of improved FMCG demand. For FY19E, we expect margins to improve with SHK’s focus on consolidating manufacturing facilities and rationalising working capital. Moreover the recently announced acquisition of Anhui Ruibang Aroma Co Ltd augurs well for SHK as it would ensure steady supply of raw materials. In the long term, SHK’s large revenue exposure to mid-sized domestic FMCG companies that are witnessing faster growth, new client additions (Patanjali, Haldiram and Himalaya) both organically and inorganically and increasing focus on fine fragrance are the key growth drivers. Considering earnings CAGR of 19% over FY17-20E, improvement in RoCE (17.2% in FY17 to 20%in FY20E),healthy free cashflow generation (~Rs1.5bn over FY17-19E) ,debt free balance sheet, we maintain outperformer with a reduced target price of Rs307/sh( 26x FY20E EPS).
S H Kelkar and Company Limited is an India-based fragrance and flavors manufacturing company. The Company is engaged in offering fragrances in various categories, such as personal care, hair care, skincare and cosmetics, fabric care, household products and fine fragrances. The Company offers flavors in various categories, such as dairy products, beverages, confectionery, bakery products and pharmaceuticals. It also offers a range of services, which include bio technology research service, cosmetic research service, cosmetic testing laboratory and custom synthesis services.
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