S H Kelkar and Company Limited

S H Kelkar & Co. reported a consolidated revenue growth of 12% year-on-year for H1 FY26, driven by steady demand across its Fragrance and Flavour businesses in both domestic and export markets. The European Fragrance business, however, experienced muted sales in the first half due to a soft environment. The Ingredients segment also had a muted quarter, impacted by demand softness and tariff uncertainties, though the long-term outlook remains encouraging.

The company's profitability in H1 FY26 was significantly affected by strategic investments in new initiatives, totaling Rs. 32 crore, with Rs. 17 crore incurred in Q2 alone. Additionally, Rs. 7 crore in extra insurance costs were incurred in H1. These factors led to lower reported margins, with the adjusted EBITDA margin for H1 FY26 standing at 14.5%, comparable to H2 FY25's 14.4%. Management expects margins to substantially improve over the next 15-18 months as these investments begin to generate returns.

Gross margins for H1 FY26 were approximately 42.5%, an improvement from the 39% seen previously, but still below the 45% peak. Management anticipates a further 1% improvement in gross margins during H2 FY26, driven by an improving raw material situation. They noted that the full effect of decreasing raw material prices has not yet been factored into the results, and they have visibility on raw material costs for the next 12 months.

The brownfield expansion in the Netherlands is on schedule and expected to be commissioned by the end of FY26, addressing capacity bottlenecks and improving cost efficiency. Regarding the fire-affected Vashivali site, a new greenfield factory is on schedule to begin operations in Q4 FY26 (calendar Q1). The Vashivali factory itself, after demolition and rebuilding, is now expected to be operational in H2 FY27, a delay from earlier estimates.

S H Kelkar & Co. has operationalized a new satellite development center in the U.S., focusing on global MNC accounts and domestic business momentum driven by tariffs. This center will primarily focus on developing consumer-like products and leveraging patented technologies, with manufacturing to be aligned with local partners through a tolling or lease model. The company has also added creative centers in the U.K. and Germany, bringing the total to 9 globally.

The company maintains a long-term vision of 15% year-on-year consolidated revenue growth (CAGR) over the next 3-4 years. On the profitability front, they aim to progressively increase EBITDA margins from the current 11-12% to 14-15% in H2 FY26 (with Q4 being stronger) and ultimately reach 18%+ by FY27-28. Management believes that operating leverage and factory reinstatement will contribute to faster EBITDA growth.

Analysts raised concerns about the company's historical volatility in margins and debt, questioning investor confidence. Management acknowledged the quarter-on-quarter volatility, suggesting a longer-term view (12-18 months). They also addressed the aggressive spending on new initiatives, stating that these decisions were made before the fire incident and that they are now 'very careful' about new capex/opex, with Q2 FY26 representing the peak of such expenses. They confirmed no further major financial investments are planned for the next 1-2 years.