Naveen Kumar Saini/Mint
Naveen Kumar Saini/Mint

SH Kelkar’s buyback should be backed up by revenue growth

  • The stock had delivered good returns in the first year, but gains fizzled out soon as revenues began to sputter
  • This is expected to accelerate growth in the current fiscal year

SH. Kelkar and Co. Ltd’s buyback announcement has failed to do the trick for its stock. When the firm announced a buyback about two weeks ago, its stock was lower by 23% than its buyback price. Now the stock is 29% lower. The company manufactures and supplies fragrances, flavours and aroma ingredients.

The S.H. Kelkar stock had delivered handsome returns in the first year of its listing. But the gains fizzled out soon, as revenue growth began to sputter.

Demonetization impacted its domestic business, while the international business, too, weakened. Besides, the goods and services tax (GST) imposed liquidity constraints on its smaller customers.

Revenues in the last three fiscal years grew at an annual average pace of 4.2%, and profits at 6.6%. Back in FY16, when the stock had listed, revenues and profits growth stood in double-digits.

However, a shift towards the formal market is expected to eventually benefit the firm. It is adding mid- and large-sized clients, and is targeting a greater share in customer spends.

This is expected to accelerate growth in the current fiscal year.

“We believe our revenue base has already been reset in FY19. We are witnessing healthy traction in mid- and large-customers with a stronger focus on enhancing the company’s business share in these accounts," Kedar Vaze, chief executive officer, S.H. Kelkar, said in a statement.

Kotak Institutional Equities and Motilal Oswal Financial Services Ltd estimate the company’s revenues and profits to grow in double digits. This is being aided by a consolidation of a recent acquisition and expansion in profitability as it increases raw material production.

But the question, however, is how strong and durable this recovery is going to be? The slowdown in the FMCG sector, to which the company supplies its products, can weigh on its recovery. Also, smaller customers still constitute 15% of its customer base, according to Motilal Oswal.

“Buoyed by the improved operating environment, management expects revenue growth of 15% in FY20. However, at this point, we await clearer signs of a demand revival and, thus, conservatively build in a revenue growth estimate of 10% (like-to like)," analysts at Motilal Oswal said in a note.

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