MOSL: S H KELKAR AND CO. (Buy)-Facing transitory issues, expect a recovery in 2HFY19

S H Kelkar and Co.: Facing transitory issues, expect a recovery in 2HFY19

(SHKL IN, Mkt Cap USD0.4b, CMP INR194, TP INR257, 33% Upside, Buy)

• Sales rationalization due to RM shortage impacts performance: SHKL’s revenue grew by a muted 1% YoY (v/s our estimate of 16% growth) to INR2,374m in 1QFY19, primarily on account of severe supply side constraints. Fragrances business grew by 5% YoY to INR2,113m (domestic business grew by 13% YoY, while exports declined 11% YoY), although its PBIT margin contracted 400bp YoY to 14%. Flavors business de-grew by 26% YoY to INR247m (domestic business de-grew by 36%, while exports grew 3%) and its PBIT margin also contracted by 330bp YoY to 15.6%. On a blended basis, EBIDTA declined 21% YoY to INR340m (our estimate: INR415m), with the margin contracting 387bp YoY to 14.3% (our estimate: 15.2%). PAT declined 30% YoY to INR187m (our estimate: INR261m), with the margin contracting 353bp YoY to 8% (our estimate: 9.6%).
• Measures to mitigate cost pressures in place, expect recovery in 2HFY19: Despite buoyant FMCG-led demand, SHKL faced challenges in catering to entire demand due to unprecedented supply side constraints and a surge in key RM prices. This took a toll on SHKL’s revenue and margins. Consequently, SHKL emphasized more on execution of better-margin-profile orders. The company has already taken a weighted average price hike of ~5% YoY in 1QFY19 (and intends to take more such price hikes), the benefit of which will be reflected with a lag of a few quarters. Price hikes and operational efficiencies (shift of the Netherlands facility to India) are expected to drive margin expansion, in our view. We expect EBITDA margin to recover 270bp to 17% by 4QFY19.