MOSL: S H KELKAR AND CO. (Buy)-Regaining momentum, expect sustained recovery in 2HFY19

S H Kelkar and Co.: Regaining momentum, expect sustained recovery in 2HFY19

(SHKL IN, Mkt Cap USD0.4b, CMP INR179, TP INR244, 36% Upside, Buy)

• Fragrance revenues recover led by FMCG demand: SHKL’s revenue increased 28% YoY (our estimate: +15%) to INR2,845m in 2QFY19, driven by better consumer demand and product launches in the FMCG industry. Revenue was mainly driven by Fragrance business (+31% YoY); Flavors revenue grew by a muted 6% YoY. On a blended basis, EBIDTA increased 13% YoY to INR378m (our estimate: INR376m), with the margin contracting 270bp YoY to 13.3% YoY (our estimate: 14.7%). PAT grew by 53% YoY to INR288m (our estimate: INR277m); the margin improved 160bp YoY to 10% (our estimate: 8.9%).
• 1HFY19 performance: Revenue grew 14% YoY, led by price hikes of 9-10% and volume growth of ~4%. EBITDA declined 7% YoY, while PAT increased 4% YoY. For 2HFY19, we expect revenue/ EBITDA/PAT to grow 14%/27%/12% YoY.
• Sustained recovery in EBITDA margin: Gross margin is likely to improve by 200bp once the Tonalid plant is commissioned and becomes operational by 4QFY19. We expect the EBITDA margin to recover by 380bp to 17% by 4QFY19.
• Concall highlights: SHKL’s cost basket increased 30% YoY in 2QFY19. Certain raw materials that were imported from China are now being produced in-house at the Vapi facility to ensure stable supply and cost benefits. With capacity of 1,200 MTPA, the Mahad facility is one of the largest Tonalid manufacturing units globally.