S H Kelkar & Co.

S H Kelkar & Co. reported a strong H1 FY25 with revenues reaching Rs. 1,013 crore. This performance was primarily driven by steady momentum from small and mid-sized customers, alongside the execution of prestigious global MNC orders. Volume growth accounted for the majority of the overall growth, with price growth contributing approximately 1%. The company noted that 40% of the growth came from global accounts and another 40% from mid and small-sized customers, effectively offsetting softer demand from Tier-1 domestic clients.

The core European segment delivered an impressive 11.5% revenue growth on a like-for-like basis in Q2, supported by a favorable product mix and regional dynamics. To sustain this growth, SHK launched a Creative Development Centre in Germany in June and plans an additional center in Manchester, UK, by early next year. These centers represent an additional Rs. 10 crore cost in H1 FY25, with a recurring OPEX of Rs. 20 crore per annum, aimed at innovation and strengthening the talent base for European and American markets.

The company is currently operating at over 85% utilization across its facilities. Significant CAPEX plans are underway, with Rs. 47 crore spent in H1 FY25 and an additional Rs. 50 crore projected for H2 FY25, followed by another Rs. 50 crore in H1 FY26. This includes the rebuilding of the Vashivali factory (expected in 9-10 months) and a new factory in Vanavate (expected in Q4 FY25). Overall, SHK plans to invest approximately Rs. 200 crore for 4 factories, aiming to add 200% domestic capacity and 50% European capacity over the next two years. The Mulund factory will be closed post-Vashivali recommissioning.

The H1 FY25 adjusted EBITDA margin stood at 16.8%, with management expecting H2 margins to be similar. Gross margins are anticipated to remain in the 40%-45% range. However, the company expressed caution regarding potential acute shortages and price increases for certain natural oils (orange, patchouli, vetiver oil), which constitute about 15% of their purchase basket, in Q4 FY25 or Q1 FY26. While current inventory levels are adequate, management is monitoring the situation and plans to negotiate price adjustments with customers if needed.

The global MNC account is scaling as expected, contributing significantly to growth. Management noted that antitrust investigations against larger players like Givaudan and IFF in Europe and the US are opening up opportunities for mid-sized players like SHK. Furthermore, potential changes in the global economic order and trade barriers, particularly from the US administration, could create opportunities for India to take business away from Chinese suppliers, which SHK is actively evaluating as an additional growth area.

The company has seen a buildup in inventory, partly due to operating across four different sites and strategic procurement at good pricing. Management plans to focus on reducing overall inventory levels towards the end of the year, aiming to bring down Days Sales Outstanding (DSO) to around 135 days. Additionally, SHK expects to receive a substantial insurance payout of approximately Rs. 100 crore by December-January, which will contribute to lower debt levels by the end of the year.

SHK reiterated its commitment to achieving a 20% EBITDA margin in the next two to three years. With current investments in new growth areas not yet contributing to revenue, the effective EBITDA margin is estimated at 18.5% (16% reported + 2.5% for new investments). The company anticipates that the Rs. 20-30 crore annual investment in new centers will start generating additional revenues within 1-2 years, supporting the long-term margin expansion goal. Full-year sales growth is projected to exceed the midterm 12% CAGR target.