Investments In Europe, UK, And USA Will Enhance Product Development And Global Engagement

Key Takeaways

• Strategic investments in Europe, the UK, and the USA are expected to drive revenue growth and enhance S H Kelkar's market presence.
  
• Operational efficiency improvements and inventory reduction efforts should boost cash flows, potentially reducing net debt and bolstering financial stability.
  
• Rising raw material prices, European expansion costs, GST delays, and competitive pressures impact S H Kelkar's margins, cash flow, and near-term revenue growth.

Catalysts

Manufactures and supplies fragrances, flavors, and aroma ingredients in India.

• S H Kelkar is expected to benefit from strategic investments in Europe, the UK, and the USA, enhancing product development capabilities and engaging with global MNCs, which could drive revenue growth and increase their market presence in these key geographies.
  
• The company’s performance is anticipated to improve as they normalize gross margins through price corrections, addressing increased raw material costs, which should positively impact net margins.
  
• The growing segment of industrial-use ambient fragrances presents a new revenue stream, likely increasing overall revenue and diversifying their product portfolio, potentially leading to higher earnings.
  
• The recovery of the Global Ingredients segment, driven by structural initiatives and favorable conditions for exports from India, is expected to further accelerate growth, contributing to higher revenue and improved profitability.
  
• S H Kelkar's operational efficiency improvements and sustained dedication to inventory reduction are expected to enhance cash flows and strengthen the balance sheet, potentially lowering net debt and improving financial stability.

S H Kelkar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S H Kelkar's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 11.4% in 3 years time.
• Analysts expect earnings to reach ₹3.3 billion (and earnings per share of ₹22.81) by about April 2028, up from ₹69.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, down from 412.7x today. This future PE is lower than the current PE for the IN Chemicals industry at 25.8x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.15%, as per the Simply Wall St company report.

S H Kelkar Future Earnings Per Share Growth

Risks

• The increase in raw material prices, particularly due to geopolitical uncertainties and environmental factors like droughts in key supply regions, has impacted gross margins and could continue to do so if conditions persist, affecting short-term net earnings.
  
• The company's European segment faces growth challenges, with the need for significant investment to expand capacity, which could strain cash flows and impact future net margins and revenue.
  
• Delays in collecting GST refunds and ongoing high inventory levels are contributing to elevated net debt levels, impacting cash flow and increasing financial risk.
  
• A slowdown in demand from large accounts within the domestic market, and potential deferment of new product launches can lead to reduced revenue growth in the near term.
  
• The competitive intensity within the industry poses a risk to market share retention, potentially affecting long-term revenue and profitability growth.

Valuation

• The analysts have a consensus price target of ₹360.0 for S H Kelkar based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹29.0 billion, earnings will come to ₹3.3 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 14.1%.
• Given the current share price of ₹208.43, the analyst price target of ₹360.0 is 42.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.