MOSL: S H KELKAR AND CO. (Buy)-Results below estimates, impact temporary-Maintain Buy

​S H Kelkar and Co.: Results below estimates, impact temporary; Maintain Buy

(SHKL IN, Mkt Cap USD0.7b, CMP INR311, TP INR367, 18% Upside, Buy)

• Sharp decline in Fragrance business impacted growth in 4QFY17: SHKs consolidated revenue de-grew 7% YoY to INR2,475m (est: INR2,844m). Fragrance business de-grew by 15% YoY while Flavor business grew by 118% YoY for 4QFY17. EBITDA margins declined by 130bp to 14.9% mainly due to negative operating leverage despite gross margins improving by 60bp. EBITDA de-grew by 14% to INR370m on YoY basis. Tax rate was lower at 21% which led to PAT growing by 12.5% to INR274m on YoY basis. For FY17, revenue increased by 6% to INR9,805m while EBITDA margins improved by 70bp to 16.9%. Adj. PAT increased by 44% to INR1,048m mainly due to EBITDA margin expansion and lower interest payment at INR52m vs INR202m in FY16. Despite subdued performance, management indicated market share gain of 0.5%.
  
• Domestic fragrance business to recover going ahead: In 4QFY17, domestic fragrance business declined by 12% on account of 1) domestic fragrance (excl. service income) declining by 8% impacted due to slowdown in new launches in FMCG companies and continuing impact of demonetization, 2) Decline in service income (contributing 4% to decline) from INR120m to INR40m mainly on account of destocking carried out by customers in view of GST. However, management indicated that fragrance business is seeing gradual recovery and 2HFY18 to see good recovery while service income is back to normal levels. Overseas fragrance business declined by 21% due to unfavorable currency movement (3% impact) and sluggish global environment.