S H Kelkar & Company Ltd Q1 FY27 Earnings Call Summary

Event Participants

Executives

3 Jagdish Agarwal, Kedar Vaze, Mit Shah

Analysts

13 Abhijit Akella, Advait Chowkar, Amit Kumar, Ankur Agarwal, Ashwin Patel, Bharat Gupta, Bharat Sheth, Jatin Chawla, Pranav Tendulkar, Sajal Kapoor, Shivam Gupta, Tanish Jhaveri, 1 unidentified

Financials & KPIs

Geographic & Segment Commentary

• Fragrance: Healthy growth led by Europe and select international markets; India flat YoY due to conscious exit from low-margin business, price-discipline withholding of advance orders, and strong prior-year base. Segment margins absorbed higher operating expenses from R&D and CDC strengthening — deliberate growth investments weighing near-term margins.
• Flavors: Strong broad-based growth across geographies; ₹112 crores revenue includes ~₹15 crores of preponement from clients stocking up during supply disruptions and price increases. Repeat demand and new product adoption solid; management expects normalized growth trajectory of ₹95–96 crores per quarter, with sequential improvement through FY27.
• Global Ingredients: Softer quarter on lower demand in select export markets and supply-chain gaps from West Asia disruption. Backward integration (away from China) in place; management expects recovery in H2 FY27 but has constrained supply push during the disruption period.

Company-Specific & Strategic Commentary

• R&D & Creative Development Centers: Continued strengthening of global CDC network (Germany, USA, UK). Germany CDC approaching EBITDA break-even between this year and next; USA and UK milestones at year 3. Investing ~₹3 million per year in additional European R&D; targeting $100 million addressable market in UK/USA initially.
• European Expansion: Capex cycle complete — Almere (Netherlands) plant operational since May; Germany center fully deployed. Long-term ROCE target of 17–18% for European business; 3–4 years to return to trend-line returns given full capex cycle.
• Pricing & Supply Security: Passed on cost inflation to 95%+ clients; withheld supply from reluctant customers until negotiation (partly explaining India fragrance softness). Six months of inventory/contracts secure raw material pricing for next 4–6 months; additional 45 days inventory buffer for shock absorption.
• Capacity Expansion: Europe completed in Q1 (₹25 crores); ~₹25 crores Vanavate in Q2, operational Q3; ~₹50 crores remaining for three Indian plants; final ₹25 crores Vashivali upgradation decision deferred based on demand.

Guidance & Outlook

Risks & Constraints

Q&A Highlights

Revenue Growth, FX Contribution, and Flavors Normalization

• Question: Flavors had very strong growth with lumpy orders — what's the full-year budget? India fragrance flat — high base? FX contribution to growth? (Abhijit Akella, Kotak Institutional Equities)
• Answer: Overall revenue in line with budget but mix skewed — flavors over, ingredients below. FX contributed ~5% of growth; 9% like-for-like. India fragrance had strong Q1 last year; consciously exited low-margin business and withheld advance orders during pricing changes — now servicing all clients post inventory buildup. Flavors ₹112 crores includes ~₹15 crores preponement; normalized ~₹95–96 crores. (Kedar Vaze, Jagdish Agarwal)

Margin Trajectory and Sustainability

• Question: What's the FY27 EBITDA margin range? Gross margin sustainability? Flavors sustainable margin? (Jatin Chawla, RTL Investments)
• Answer: Q1 is a baseline normal quarter, not exceptional — similar absolute EBITDA if double-digit growth sustains; margin % may vary ±50–100 bps. Gross margins protected by inventory and contracts — no change in cost profile for next 4–6 months. Flavors performing exceedingly well with repeat demand; will outperform previous year trend. (Kedar Vaze)

Fragrance Market Opportunity (UK/USA)

• Question: Given no similar QoQ growth, what's the 2–3 year opportunity set? (Pranav Tendulkar, Rare Enterprises)
• Answer: UK + USA fragrance market is 35–36% of global demand vs India at 5% — a ~$10 billion market. Initially targeting $100 million addressable portion; platform of patents, processes, and IP supports reaching the full opportunity over ~10 years. (Jagdish Agarwal)

Premiumization and Product Mix

• Question: Faster growth in premium vs mass products? Impact on mix over 2 years? Revenue from product launches in last 3–5 years? (Shivam Gupta, Trinetra Asset Managers)
• Answer: Premiumization is a normal trend tied to disposable income, though inflation may mute it this year. Working in Europe provides product development readiness for Asia's next wave — cross-selling European products still in trend there. ~10–11% of revenue from last 3–5 years' launches. (Jagdish Agarwal)

Raw Material Inventory and Gross Margin Protection

• Question: Strategic inventory benefit on gross margins? Depletion risk? (Jatin Chawla, RTL Investments)
• Answer: Six months inventory/contracts give fixed pricing for next 4–6 months — no cost pressure on raw materials. Additional 45 days inventory allows timely selling-price recalibration with clients. If double-digit growth sustains, margins improve; 2–3 month visibility only due to uncertainty. (Kedar Vaze)

Capex and Depreciation

• Question: FY27 capex split between Europe and India? Depreciation guidance? (Jatin Chawla / Ashwin Patel, Intelligent Prosperity Solutions)
• Answer: Q1: ₹25 crores Europe (completed, plant operational May). Q2: ~₹25 crores Vanavate. ~₹50 crores remaining for three Indian plants; last ₹25 crores (Vashivali) decision deferred based on demand. Depreciation ~₹35 crores/quarter now; ~₹38–39 crores after Vanavate capitalization. (Kedar Vaze)

Europe Ramp-up and Return Targets

• Question: When does European subsidiary ramp up? Revenue stream and incremental ROCE? Group ROCE/ROE targets? (Tanish Jhaveri, Boring AMC)
• Answer: Europe ROCE target 17–18% long-term; full capex cycle just completed (Germany CDC, Almere factory), 3–4 years to return to trend-line. Investing ~₹3 million/year additional R&D; opportunity space $4–5 billion addressable. Group ROCE target: >15% in 3–5 years, 20% long-term post new-initiative ramp. (Kedar Vaze)

Flood Impact (Gujarat/Vapi)

• Question: Any impact on manufacturing or supply chain from flooding in Gujarat, including Vapi? (Advait Chowkar, EquiPoise Capital Management)
• Answer: No impact and no shutdown expected. (Kedar Vaze)

Break-even Milestones and Long-term Constraint

• Question: What must be true in 3 years for investments to be deemed successful? If you could remove one constraint to double earnings in 5 years, what would it be? (Sajal Kapoor, Antifragile Thinking)
• Answer: Three bets — Germany (break-even between this year and next), USA (year 3), UK (year 3); EBITDA break-even on investments signals success. The one constraint: major global macro disruptions — they not only impact the current year but delay subsequent product launches by 1–2 years due to the complex momentum-building nature of the business. A stable environment, even if not strong, supports doubling revenue in 5 years. (Kedar Vaze)

Pricing Actions and Customer Acceptance

• Question: Given raw material disruption March–July, how much pricing has been corrected and accepted by customers? (Amit Kumar, Determined Investments)
• Answer: Passed on cost inflation from geopolitical effects; 95%+ clients accepted price corrections implemented across the board. Where clients were reluctant, supply withheld until negotiation — partly why domestic fragrance sales are lower. Inventory commits to delivery quality and supply certainty. (Kedar Vaze)

Global Ingredients Turnaround and Insurance Claim

• Question: Any anticipated turnaround in global ingredients? Estimate of remaining insurance claim amount? (Bharat Gupta, Fair Value Capital)
• Answer: Ingredients directly hit by supply-chain disruptions; muted Q1 growth expected to recover in H2 — stable business, but not in a strong position to push during disruption. Insurance: ₹30 crores recognized in Q1; ~₹50–60 crores pending; chasing full settlement within FY27. (Kedar Vaze)

Unilever/Global Accounts and US/UK Traction

• Question: Unilever ramp-up, new RFPs? US/UK traction? Flavors run-rate from Q2 onward? (Unidentified Analyst)
• Answer: Unilever and global accounts: continuous project flow, no large breakthrough; clients facing their own pricing pressures, NPD launches slower. Germany traction regular; US expects $1.5–2 million minimum revenue FY27; UK early days — 12–15 months for substantial business. Flavors: Q2 likely better than ₹95–96 crores, Q3 better still; no expectation of repeating ₹112+ crores per quarter. Global nutrition clients started, not yet substantial — flavors product adoption takes 3–4 years. (Kedar Vaze)

Key Takeaway

SH Kelkar reported Q1 FY27 revenue of ₹662 crores (+14% YoY), EBITDA of ₹89 crores (+21%), and margin expansion to 13.4% from 12.6%, with growth led by Flavors (₹112 crores, incl. ~₹15 crores preponement) and European fragrances, while India fragrance stayed flat due to deliberate exits from low-margin business and disciplined pricing. Exceptional insurance income of ₹30 crores was booked, with ~₹50–60 crores pending settlement in FY27. Management guides double-digit revenue growth and improved margins for the full year, with Flavors normalizing to ~₹95–96 crores per quarter, ingredients recovering in H2, and US traction at $1.5–2 million minimum. Capex is largely complete (Almere plant operational, Vanavate in Q3, Vashivali decision deferred), enabling ~₹25 crores per quarter deleveraging from Q3 onward. Strategic investments in Germany/USA/UK CDCs target 15–20% ROCE over 3–5 years with year-3 break-even milestones, while a 6-month inventory buffer and 95%+ price pass-through protect margins. Key watch points: West Asia geopolitics, developed-market demand softness, FX volatility, and global ingredient recovery pace.