SH Kelkar & Company's Q3FY19 results (Outperformer) - Disappointing performance

Q3FY19 results

• S H kelkar reported revenues below our estimates.  Revenues declined by 9.7% yoy to Rs2.5bn (est Rs3bn) owing to 20% decline in domestic fragrance business (international fragrance business revenues increased by 13% yoy). Moreover, growth in the flavours business remained soft at 2% yoy to Rs276m
• Gross margins declined by 60bps yoy (improved by 280bps sequentially) to 45.4% (est: 43.5%)
• Higher other expenses and employee costs led to 500bps decline in EBITDA margins to 15.1% (est: 16.5%). EBITDA declined by 32.3% yoy to Rs384m ( est: Rs526m)
• Despite higher other income , higher depreciation  and interest cost   led to 21.6% yoy decline in PAT to Rs213m (est :305m)   

Key positives:  Sequential improvement in gross margins

Key negatives: subdued revenue growth and profitability

Impact on financials: Cut EPS by 25.8%/25% in FY20E/21E to factor in subdued revenue growth and profitability. Introduce FY21E EPS of Rs9/sh

Valuations & view

SHK’s performance in the Q3FY19 was marred by slowdown witnessed in some categories caused by delays in GST refund for some customers thereby impacting overall revenue growth.  We expect the situation to normalise going forward with new launches and account wins driving volume growth ; while profitability will continue  to improve with 1) ameliorating raw material situation, 2) recent price hikes, and 3) ramp up of  mahad facility .  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. SHK has enunciated a 3x3 strategy, wherein the company expects to focus on 3 fast-growing geographies (India, Indonesia and Italy) for F&F and 3 key product lines - Fine Fragrance, Air care and Fabric care. The company has made several acquisitions which we believe will support its strategy and aid long-term growth target (15% revenue CAGR and 20-21% EBITDA margins). Maintain Outperformer with revised target price of Rs191 (21XFY21EPS)