SH Kelkar & Company's Q1FY20 results (Outperformer) - Healthy recovery

Q1FY20 results

• During Q1FY20, S H kelkar (SHKL) reported healthy 15.6% revenue growth to Rs2.74bn (above our est Rs2.54bn) led by 15% growth in the fragrance division, while the flavours division (10% of total revenues)  registered 14% growth.
• Gross margins declined by 120bps to 43.% (est :42.5%) as management had curtailed supply of low margin , high volume products in Q1FY19 in a bid to protect its margins owing to raw material supply disruption
• Cost optimisation measures undertaken by the company , ramp up of Mahad facility along with Ind as 116 impact of Rs39m led to 260bps improvement in EBITDA margins to 16.9% (above our est of 13.5%).EBITDA increased by  36.6% to Rs464m ( est :Rs343m).
• Higher depreciation and interest cost owing to commissioning of Mahad facility led to muted PAT growth to Rs187m ( in line with est : Rs185m)

Key positives: Healthy traction from large and mid-sized customers

Key negatives: Higher interest costs

Impact on financials:  No change in earnings estimates

Valuations & view

After a dismal FY19, SHKL reported a healthy start to the new fiscal with strong uptick in demand from large and mid-sized customers and wallet share gains in key customer accounts. On the profitability front, cost optimisation measures and ramp up in the Mahad facility led to strong EBITDA growth. Going forward management expects steady traction in enquiries from large and mid-sized customers. In the long term, SHK’s large revenue exposure to mid-sized domestic FMCG companies that are witnessing faster growth, new client additions both organically and inorganically and foray into niche fragrance categories ( industrial fragrance)  are the key growth drivers. Besides ameliorating raw material situation will lead to improvement in the working capital and enable the company to undertake large growth opportunities .SHKL retains the potential to capitalise on opportunities in the underlying FMCG space to achieve its long-term target of 15% revenue CAGR and 20% EBITDA margin. Expected recovery in earnings and improvement in return ratios make valuations attractive at 16x FY21E EPS. Maintain Outperformer with target price of Rs172 (20XFY21EPS)