SH Kelkar & Company's Q3FY20 results (Outperformer) - Healthy performance

Q3FY20 results

• S H Kelkar reported revenue and EBITDA in line with est, while PAT (excluding exceptional items) was above est owing to lower tax rate.
• During Q3FY20,S H kelkar reported 13.8% revenue growth to Rs2.9bn  (est Rs2.93bn) led by 14.4% growth in the fragrance division, while the flavours division (10% of total revs)  registered 2% growth.
• Gross margins declined by 250bps to 43. % (est: 42.5%) owing to change in product mix. Cost optimisation measures undertaken by the company, ramp up of Mahad facility along with Ind as 116 impact led to stable EBITDA margins. EBITDA margins declined marginally by 20bps 14.9% (40bps above est). EBITDA increased by 12.4% to Rs431m (est: Rs425m).
• Higher depreciation and interest cost owing to commissioning of Mahad facility led to 22.4%  decline in  PBT to Rs245m ( est: Rs258m)
• One time impairment cost of Rs365m resulting from final closure of ingredients and R&D facility in Netherlands resulted in the loss of Rs110m. PAT excluding the one-time cost grew by 19% yoy to Rs256m (est : Rs201m) on lower tax rate.

Key positives: Healthy domestic fragrance business growth

Key negatives: Muted flavours performance

Impact on financials: Increase FY20 adjusted EPS by 12%, Introduce FY22E EPS of Rs8.7/sh

Valuations & view

S H kelkar’s performance in Q3 was driven by healthy uptick in core business categories and broad based normalisation in the domestic market. 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 which is expected to witness faster growth, new client additions 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 14x FY22E EPS. Maintain Outperformer with target price of Rs174 (20xFY22EPS).