Published on 25/11/2019 12:12:26 PM | Source: Motilal Oswal Services Ltd

Buy S H Kelkar and Co Ltd For Target Rs.154 - Motilal Oswal

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Revenue in line; Miss on margins owing to one-time cost

* Revenue growth in line: 2QFY20 revenues declined 2% YoY to INR2,793m (v/s est. INR2,873m) on subdued demand in the domestic market. EBIDTA stood at INR383m (v/s est. INR503m), up 1% YoY. EBITDA margins expanded 45bp YoY to 13.7% (v/s est. 17.5%). One-time organizational restructuring cost of INR40m impacted margins. PBT declined 44% YoY to INR186m. Adj. PAT was down 46% YoY to INR154m (v/s est. INR245m).

* 1HFY20 performance: For 1HFY20, revenue/EBITDA/adj. PAT came in at +6%/+18%/-28% YoY to INR5,537m/INR846m/INR339m.

* Fragrances biz. flat; Flavors biz. declines significantly: Fragrances business was flat YoY at INR2,550m (+5% QoQ); overseas business saw strong traction (up 15% YoY) while the domestic business remained subdued (down 6% YoY). Flavors business declined 25% YoY (-24% QoQ) to INR212m due to decline in the domestic business (down 54% YoY).

* Concall highlights:

(a) Company has maintained double-digit volume growth for FY20, which is expected to be driven by both domestic and international business.

(b)Raw material pressure has started to ease, thus gross margins should improve;

(c) Company expects working capital days to improve gradually from 160 days to 120 days over the next few quarters.

* Valuation view: We cut our revenue/PAT estimates by 6%/18% for FY20E, largely on account of subdued domestic environment and non-recurring cost, which is expected in 2HFY20 owing to organizational restructuring. We expect revenue/PAT CAGR of 21%/24% over FY19-21E partly driven by CFF consolidation and better RM pricing environment, thus leading to improvement in gross margin and demand dynamics in the domestic market. We value the stock at 16x FY21E consol. earnings of INR9.6/share. Maintain Buy with revised TP of INR154/share.


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