SH Kelkar & Company's Q2FY20 results (Outperformer) - Weak quarter
Q2FY20 results
- During Q2FY20, S H kelkar’s (SHKL) revenues declined by 1.5% to Rs2.8bn (est: Rs2.9bn) owing to high Q2FY19 base (28%yoy growth in Q2FY19) and subdued sentiments in the FMCG segment.
- Fragrance division reported flat revenue growth to Rs2.5bn,while revenues from the flavours division declined by 25% yoy to Rs212m
- Gross margins improved by 80bps to 43.3% (est :43%) with stable raw material prices and availability
- EBITDA growth came at 4.2%yoy to Rs383m, below our est of Rs472m partly due non-recurring expenses of Rs40m relating to internal reorganisation. EBITDA margins improved by 74bps yoy to 13.7%(below our est: 16%).
- Higher depreciation and lower other income led to 47% decline in PAT to Rs150m ( est: Rs215m)
Key positives: Gross margin improvement
Key negatives: Subdued profitability, weak flavours biz performance
Impact on financials: Cut EPS by 29.8%/24.5% in FY20E/FY21E to factor in subdued Q2 performance, higher depreciation costs and interest costs
Valuations & view
S H kelkar’s performance in Q2 was marred by high Q2FY19 base and subdued demand in the festive season, while several one-off expenses impacted profitability. Going forward management expects steady traction in enquiries from large and mid-sized customers (maintains its volume growth guidance of 12% for FY20E). In the long term, SHK’s large revenue exposure to mid-sized domestic FMCG companies which is expected to witness 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 18-20% EBITDA margin. Expected recovery in earnings and improvement in return ratios make valuations attractive at 18x FY21E EPS. Maintain Outperformer with target price of Rs138(20XFY21EPS). ​
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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