MOSL: S H KELKAR AND CO. (Buy)-Subdued performance-recovery expected in 2HFY18

​S H Kelkar and Co.: Subdued performance; recovery expected in 2HFY18

(SHKL IN, Mkt Cap USD0.6b, CMP INR259, TP INR298, 15% Upside, Buy)

• GST-led cautiousness halts growth: SHKL’s overall revenue declined 8.6% YoY to INR2,529m (est. of INR2,629m) in 1QFY18, driven by de-growth in the Fragrance business (-8.6% YoY to INR2,187m). EBTDA margin contracted marginally by 20bp YoY to 16.9% (est. of 17.5%), as expansion in gross margin (+290bp YoY to 51.7%) was partly offset by higher other expenses (+190bp). EBITDA declined 10% YoY to INR427m (est. of INR460m). Consequently, adj. PAT fell marginally by 2.5% to INR268m (est. of INR263m).
• Fragrance division to recover post subdued performance: Fragrance business, which contributed 87% of total revenues, reported de-growth of 8.6% YoY (on account of lower offtake in the FMCG sector due to GST rollout), leading to a decline of 12% YoY in domestic revenues. 1QFY18 also witnessed a decline of ~45% YoY in service income to INR88m. However, the industry is expected to witness recovery in consumer demand, the impact of which is expected to be seen from 3QFY18. The recovery in domestic demand, coupled with steady growth in the overseas market, is expected to augur well for the business.
• Cost-saving measures to boost profitability: 1QFY18 witnessed a sharp increase of 290bp YoY in gross margin on account of the company’s continuous efforts to optimize cost. The company is further expected to invest INR500-600m to evaluate and improve current processes, which is expected to yield cost savings of ~EUR2m. In view of optimizing costs, the company is expected to continue optimizing operations in Netherlands, while simultaneously evaluating a shift to a lower-cost site over the next 12-15 months.