MOSL: S H KELKAR AND CO. (Buy)-Severe supply side issues result in margin contraction

S H Kelkar and Co.: Severe supply side issues result in margin contraction

(SHKL IN, Mkt Cap USD0.6b, CMP INR250, TP INR303, 21% Upside, Buy)

• Revenue growth in-line, margins below estimate: SHKL reported revenues of INR2,851m in 4QFY18, YoY growth of 15% (est.14%). EBIDTA stood at INR271m (est. INR569m), decline of 27% YoY with EBITDA margin contraction of 544 bps to 9.5% YoY (est.18.5%) (includes one-time expense of INR50m). Adj. PAT stood at INR231m (est. INR357m), decline of 35% YoY with margin contraction of 300 bps to 8.1% YoY (est.11.6%). On a full year basis, revenues stood at INR10,430m, down 1.6% YoY(est.INR1,0627m); though FY18 revenues are net-off GST while FY17 revenues are inclusive of excise; EBIDTA stood at INR1,622m down 2% YoY (est. INR2263m) and PAT stood at INR942m down 2.2% YoY (est. INR1,143m).
• Fragrance drives growth; flavours marred by raw material supply issues: The fragrance business reported healthy traction during 2HFY18, it reported full year Y-o-Y growth of 8% in the domestic markets primarily driven by new launches in FMCG, while overseas market grew by 3%. The bounce back in FMCG and premiumization are expected to drive value growth in fragrances. Flavours business de-grew 9% YoY in FY18 as it was impacted by raw material supply disruptions and continues to witness challenges in the domestic and international markets. Supply side issues are likely to be restored by 3QFY19 and growth is expected to be more than 15% in FY19. However, the company has reported to have maintained market share in both segments in domestic markets.