S H Kelkar and Company Limited (SHK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the S H Kelkar and Company Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to Mr. Mit Shah from CDR India for opening remarks. Thank you, and over to you.

Thank you, Ryan. Good afternoon, everyone, and thank you for joining us on S H Kelker & Company Limited's Q1 FY 2027 Earnings Conference Call. We have with us Mr. Kedar Vaze, Whole-Time Director and Group CEO; Mr. B. Ramakrishnan, CEO, Fragrances, Asia and U.S.A.; and Mr. Jagdish Agarwal, Group Chief Financial Officer of the company. We will begin the call with a brief opening remarks from the management, following which we will open the forum for a Q&A session. Before we begin, I'd like to point out that certain statements made in today's call could be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I'd like to invite Mr. Vaze to give his opening remarks. Thank you, and over to you, sir.

Good afternoon, everyone, and thank you for joining us for the S H Kelkar & Company earnings call for the first quarter financial year 2027. We are pleased to have begun the year with a sustained solid performance and an encouraging revenue growth accompanied by improvement in the operating profitability. However, the operating environment continues to warrant caution. Geopolitical developments continue in West Asia have kept energy, freight and generally trade volatility remains high. At this time, the fundamental demand drivers of our industry in the consumers' preferences of fragrance and taste across personal care, home care and food categories have remained intact and continued to grow, but we are cautious on the overall environment. We, therefore, are not looking to predict the environment and the macroeconomic growth, but to be prepared for rapid changes. Our long-term priorities are unchanged: deepening customer intimacy, expanding the opportunity pipeline and we've invested ahead of demand in the R&D and creative development centers and manufacturing capabilities. These investments carry near-term costs, but they are what position us to win larger briefs, anticipate evolving consumer preferences and build durable differentiated positions across categories and new markets, especially in European and American markets. We are making these investments with discipline and with a clear line of sight to the revenue opportunities they are designed to unlock. We remain equally focused on supply continuity and service levels to our existing clients, areas where our proactive planning has allowed us to support customers without any interruption despite the fluid global supply environment. With that, let me hand over to Jagdish to take you through the financial performance in greater detail. Over to you, Jagdish.

Thank you, Kedar. Good afternoon, everyone, and thank you for joining us. The consolidated revenue from operations grew 14% Y-o-Y to INR 662 crores. The Fragrance segment delivered healthy growth led by Europe and select international markets. Our performance we are particularly pleased with given the subdued consumer backdrop in parts of the developed world. The Flavour segment recorded a strong broad-based growth across geographies and was a key contributor to the quarter. I would note that a portion of this growth reflects the timing of certain customer orders and the pace of the growth should therefore be read on an annualized basis rather than extrapolated from a single quarter. Gross margins were stable year-on-year, supported by a favorable product mix and proactive raw material planning, an outcome we consider satisfactory given the volatility in select input prices. Consolidated EBITDA rose 21% to INR 89 crores with EBITDA margin improving to 13.4% from 12.6% in the corresponding quarter last year, aided by operating leverage on the higher revenue base. Within the Fragrance segment, reported profitability absorbed higher operating expenses linked to the continued strengthening of our R&D capabilities and global CDC network. These are deliberate growth-oriented investments and while they will weigh on segment margins until the corresponding revenue scale up, that is central to the quality and durability of our future growth. The Global Ingredients business saw a softer quarter on lower demand in select export market, and we are watching this closely. On the balance sheet, net debt increased by INR 65 crores during the quarter to INR [ 864 ] as of June 2026. This reflects 2 conscious decisions: strategic inventory buildup to assure supply security for our customers in uncertain geopolitical environment and continued capital deployment towards capacity expansion and growth initiatives. While we continue to navigate near-term headwinds, we remain firmly committed to deleveraging our medium to long term. During the quarter, we recognized exceptional income of approximately INR 30 crores towards the insurance claim relating to the fire incident. The claim process is progressing well, and we expect full settlement within the current financial year. Looking ahead through FY '27, the pace of revenue growth may vary across quarters depending on the timing of demand and orders and geopolitical situations. Notwithstanding these quarterly variations, the current business momentum keeps us on track to deliver double-digit revenue growth and improved margins for the full year. We remain focused on balancing growth with financial discipline through appropriate pricing and cost management initiatives, improved cash conversion and prudent capital allocation. With that, I would request the moderator to open the forum for questions. Thank you.

[Operator Instructions] We take the first question from the line of Abhijit Akella from Kotak Institutional Equities.

Congratulations on an improvement in this quarter's numbers. I was just hoping to dig deeper into a couple of areas. One was on the revenue growth front. First of all, Flavours, as you pointed out, has grown extremely strongly, maybe some lumpy orders this quarter. Would it be possible to share some outlook for the full year in terms of what your budgets are for that business just in terms of revenue growth for the full year, just so we get some perspective of how the rest of the year might be? And then on the Fragrances side, the India piece seems to be a little bit soft, flat revenues year-on-year. But is that mainly because of a high base from last year's 1Q? And if so, how are you seeing trends in the India Fragrance business? And finally, just on the foreign exchange contribution. just given the sharp depreciation in the rupee, could you just spell out how much that might have contributed to revenue growth this quarter?

So, I think on the revenue side, while the overall revenue of the quarter is in line with the budget, the internal dynamics of the product mix is skewed more towards Flavours being higher than the budget and the Ingredient business being lower than the budget. But the overall revenue is in line with our expectation. For the future remaining quarters, we expect AID to catch up as the year goes through and the Flavours to normalize, I would say, I think we did INR 112 crores revenue for Flavours this quarter. and ballpark INR 95 crore would be on a normal basis. We expect that 1-odd month or 2 or 3 weeks of preponement of orders by clients given that the lead times and shipping times were not normal. So, we have seen uptick in the orders from some of our clients. However, in July, we don't see any decline in this momentum. So, there is continued demand. But I would look at something like INR 95 crores, INR 96 crores of Flavour sales of quarter 1 and guesstimate about INR 15 crores of preponement through the kind of extra stock buildup in the distribution. Yes. Then you had a question on foreign exchange. I think 9% is the like-for-like growth and net-net 5% is our additional FX sales due to exchange rate. You had a third point.

[indiscernible]

Yes. Yes. So Q1 last year was quite a strong quarter in comparison. And we have taken conscious decision, as we pointed out in quarter 4 to exit from some low-margin businesses, and we have kind of held back on over sales to clients and only given what they actually regularly consume and not taken any additional advanced orders as the pricing movement has been happening in the quarter. So, as we increased prices, we have rationalized the margins. We have made sure that we are selling the right products to the right people at the right pricing in a much more disciplined manner and less or more focused on the overall business given that we are not confident of having raw material to service all clients in the first quarter. I think subsequently, with our inventory buildup and the current scenario, we are servicing almost all the clients.

No, that's really helpful color. The other point I just had was on the margins. So, one thing is you've mentioned the possibility of some margin expansion this year, along with double-digit revenue growth. Given we've reported 13-odd percent margins this quarter, any broad range that we might be comfortable sort of offering from a full year perspective? I mean would it be, say, 10% to 12% or maybe slightly higher than that? Anything you might be comfortable talking about? I also just wanted to check, should we expect gross margins to remain around these levels, current levels given all the volatility in the marketplace? And finally, just on Flavours, Flavours have been reporting extremely strong margins. So, what is a reasonable number, sustainable number to work with going forward?

So, on the Flavours front, I think the margins are obviously fast growth has resulted in a very healthy bottom line. We continue to see the growth. So, at the moment, we are quite bullish on how the Flavour business is evolving. Quarter 1 is, I would say, very strong. We may not see the same sort of momentum in the remaining quarters, but it is doing exceedingly well. There is repeat demand, new product adoption last year has been good. We are seeing that momentum continuing into this year. So, Flavours will outperform as the current year vis-a-vis the previous year's trend. So, it is in line. To your question on the bottom line, so I think this quarter is not an unusual quarter in any way. So, we would -- if there are no big changes, we should look at similar sort of margin and growth. We just remain cautious. I think the demand and the overall geopolitical situation, if it affects different parts of the world and it affects some parts of our business, then that will affect the overall results. But at the moment, we see strong double-digit growth across the board. And if that double-digit growth is sustained and remains there, we should be in similar margin EBITDA level at least in terms of absolute numbers. Probably percentages can vary 1% here and there based on the pricing and the sales momentum. But we are in -- no way this is a kind of exceptional quarter. This is the baseline normal quarter.

And just one last thing for me before I return in the queue, if you'll permit me. So, what -- just the time line for your factory rebuild and the other expansion, if you could please just give us an update on that. Number two, on the debt front, should we expect some further increases during the course of this year? And finally, on your tax rate, it seems a bit on the higher side. What's the full year rate we should work with?

Okay. Abhijit, when we talk about the factory, I think we are looking [indiscernible] in the third quarter, most likely we will move into the third quarter. Debt positions more or less are going to remain same what we have in June, slightly may go up probably in September. But otherwise, when we talk about the long term or midterm, fully deleveraging and there will be a path to reduce debt. So I don't see that that's going to be the same situation as what we have on debt. You talk about the effective tax rate, Abhijit. So definitely, when we had March '26, our ETR was very high. And it's going to get moderated as we start making the growth into all other subsidiaries and when we look into the overall profitability. So even today, when we look at June quarter, we are around 31.5% to 32% kind of ETR. Our target is that should be less than 30%. That's what we are working on that.

We take the next question from the line of Pranav Tendolkar from Rare Enterprises.

So I understand that you're not giving a quarter-on-quarter similar growth in Fragrances. But what is the opportunity set here like in, say, 2 years, 3 years down the line, whatever investments we are doing, whatever relationships we have and this industry is relatively unexplored, so what is the opportunity set here? Can you just spend some time on evaluating that or explaining that?

So if we look at the Fragrance business market size in, let's say, just U.K. and U.S.A., which are our latest new initiatives, this market is roughly 35% to 36% of the global demand vis-a-vis India, which is 5%. So we are talking about a market size, which is 6 to 7x bigger than the India fragrance market. It's a different magnitude of size and scale of business. So we are putting our first, let's say, efforts in that market. We have seen some traction. We will continue to grow that over the next 2, 3 years. So the market opportunity is very large. It's basically $10 billion of opportunity or market size. But we are new. It will take us some time to keep building the relationships and start to build this. But the overall market size is quite large compared to the Indian market -- the Asian market.

And this market size is actually addressable with the skill sets that we have?

I mean, effectively, in the longer term, yes, I think we are targeting the $100 million-odd market in these markets, which is sort of low-hanging or easily addressable by us as we continue to build our R&D capability and customer engagement. So we have more than adequate, let's say, market opportunity for the next 2, 3 years. On the longer term, we have built the platform around innovation, around patents and processes, which we are able to market. So it's a sustainable advantage we want to build in the market and continue to grow. So yes, entire $10 billion is an opportunity for us. It will take 10 years to reach that kind of opportunity space. But the capability to reach all $10 billion is already sort of built in with the patents, with the back-end systems and IP generation.

We take the next question from the line of [ Shivam Gupta ] from [ Pria Asset Managers ]

Earlier question is that as customer preference continue to evolve, are you seeing faster growth in premium fragrances compared to mass market product? And how do you expect this trend to influence your product mix over the next few years?

So, I think generally speaking, as customers have higher disposable income, there is a move to premiumization. This is a normal phenomenon year-on-year across the globe. I think in years of high inflation, which we expect this year to be a bit muted on the premiumization because of inflation. But in general, this trend is a normal trend where people going for more premium product or up marketing. The brands also bring in better versions and higher spend products. And this is a normal trend. So it's not disrupting in any way for us. The benefit of having -- working in Europe markets for the last few years is that we have already product developed for the next wave of products that will come in Asia. We are cross-selling previous sort of -- previous versions in Europe, which are still in trend in Asia.

Okay, sir. And my second question is like what percentage of your revenue today come from the product launched in the last 3 to 5 years?

About 10% to 11%.

We take the next question from the line of Jatin Chawla from RTL Investments.

My first question is that we have seen a lot of raw material volatility. And given that we have kept some strategic inventory, are we seeing some benefit of that in the gross margin? And going forward, can there be some negative impact on the gross margins once this inventory that we have starts depleting?

So, we have prepared in a manner that we have 6 months visibility on the inventory and our contracts or pricing to the client. So we have increased the inventory to ensure that for the next 4 to 5 months, we don't -- I mean, 6 months from July, effectively, we don't have any additional cost pressure on the raw material. So, all the prices are fixed with stock in hand or contracts in place. So, we don't see any big changes in the profile or selling price or cost structure in the next 6 months on the part of the raw material. We will obviously keep updating what is happening on the raw material month-on-month. And we have got, in a way, extra 45 days of inventory in the system to allow us to pass on any big shocks or any big changes to the clients in proper time and not take a hit on the gross margin at our end. So, we have additional inventory to allow us to go back to the clients well in time and ask for and push for the recalibration of the selling prices if required.

Got it. Got it. A related question to that is that if we are confident that our gross margins can be maintained, then shouldn't our EBITDA margins go up as the revenue scales up because your CBC investments are largely done now, so that fixed cost absorption should improve going forward?

Yes. Your comment is absolutely right. We are just not in a sort of position to anticipate or predict the demand structure or demand situation for the full year. As of now, things look quite in normal range. And as we grow double-digit plus, our margins will improve. But for the full year, we are not confident to predict beyond 2, 3 months' time. So, it's a bit early. It's too uncertain what is happening. So, we don't want to put out a number which we really don't know. And if the growth remains as it is, yes, your comment is absolutely right. If we do double-digit growth, our margins will be better than the first quarter in the full year. But if we -- at some point with the currency, with exchange rates and/or growth faltering in any part of the world, then if it has a significant effect on the overall number, then we will have a little bit muted result as a basis.

My second question is on the capacity expansion. So, the CapEx plan for this full year, how much was done in 1Q? And if you could kind of split it between Europe and India, that would be useful.

About INR 25 crores was done in Europe in the quarter 1. European CapEx is now completed. The plant is operational since May. Our quarter 2 CapEx will continue on the [ Wanavate ] and Vashivli India Fragrance projects. We expect bulk of this investment CapEx to happen in basically before end of quarter 2 and the Wanavate factory to be operational in quarter 3. And then we have an opportunity based on how things are running and demand scenario to either put out the last INR 25 crores of CapEx in the quarter 4 or defer it to quarter 1 next year for the Vashivli plant upgradation.

And in 2Q in Wanavate how much do you plan to spend?

In Q2 in Wanavate is about INR 25 crores.

Okay. So, INR 25 crores was spent in 1Q, INR 25 crores in 2Q and remaining INR 25 crores, you will decide whether to do it this year or next year?

No. remaining around INR 50 crores, we will -- this is the 3 plants in India.

We take the next question from the line of Tanish Jhaveri from Boring AMC.

Yes. So, I just wanted to ask more on the CDC front. By when can we expect a ramp-up in the European subsidiary? And what kind of a revenue stream can we expect from it and an incremental ROIC, what are you expecting the return ratios for our investment in Europe to be?

So, on the longer term, we see [ ROCE ] of around 17% to 18% in the European business. We have just invested in a large center in Germany and with the new factory in Almere. So, we are at the sort of full CapEx cycle. It will take 3 to 4 years of growth to come back to the normal trend line. Opportunity space, we are investing roughly $3 million a year additionally in R&D. And as I said earlier, the markets which we are addressing are quite large. We have more than $4 billion to $5 billion of new areas where we are operating in Europe. It's not that $4 billion, $5 billion will happen tomorrow morning, but effectively, opportunity space for us is quite large. So, we are confident of growing extremely fast in these markets because we have a very small base.

Okay. And on a group level, what kind of ROE and ROCE do we have in mind in the longer term, like 2, 3 years down the line?

So, I think we should have excess of 15% ROCE as our target. Our long-term target is 20%. But at the moment, we will see 3 to 5 years of slow traction towards the 15%. And then as the sales ramp up in the new initiative areas post breakeven and EBITDA plus and then we will reach that 20% ROCE level.

We take the next question from the line of [ Advait Takar ] from [ Equipoise Capital Management ].

Have some question about the recent flooding in the parts of Gujarat, including the Vapi region. Have any of our manufacturing facility or supply chain operations been impacted because of this?