Buy This Small Cap Chemical Stock With A Target Price of Rs. 184: HDFC Securities

The brokerage firm HDFC Securities has suggested buying the shares of S H Kelkar and Company Ltd. The brokerage has set a target price of Rs. 184 for the stock, predicting a 12 percent growth in six months from the current market price of Rs. 163 per share on the NSE.S H Kelkar (SHK) is a small-cap company and has a market share of roughly 10%-12% in the Flavour and Fragrance industry and 20% in the domestic fragrances sector.

Q2 FY22 result of S H Kelkar and Company Ltd

The brokerage in its research report has said that the company's "Revenues declined 13% YoY, adjusted for CFF and Nova acquisitions. Reported revenues grew 1% YoY to Rs 359cr. Fragrance segment grew 1.5% YoY (down 1% QoQ) to Rs 326cr. Fragrances EBIT margin was down 660bps YoY and up 225bps QoQ. Flavors segment grew 6% YoY to Rs 32cr. EBIT margin declined 650 bps YoY. Reported Gross Margin stood at 40.7%, down 330 bps YoY and 150 bps QoQ. It was impacted by significant raw material inflation. Reported EBITDA declined 24% YoY to Rs 54cr. Adjusted EBITDA (ex-CFF, Nova) declined 36% YoY. PAT for the quarter stood at Rs 22cr. Q1FY22 included the reversal of additional tax provisioning aggregating to Rs. 64.5 crore consequent of the ITAT order. Adjusting for this, PAT stood at Rs. 45.2 crore in the first half. Board has approved the buyback of 29 lakh equity shares at Rs 210 per share through the tender offer route. The total amount of buyback size will be a maximum of Rs. 61cr. Promoter/promoter group of the company would participate in the said offer."

Valuation & Recommendation From HDFC Securities

HDFC Securities has said that "We believe SHK would be a major beneficiary of increasing demand from FMCG companies specifically present in personal care, packaged foods & dairy products. Management guided for 12-13% CAGR in revenue over the next 3-4 years. The company said that gross margin would be sustainable at 42-43% area in the medium term. We expect a 12.5% revenue CAGR over FY21-24E largely led by strong volume growth in the end-user industry. We believe the margin should remain around 15-16.5% over the same period largely due to pressure in gross margin and higher expenses. We estimate ~9% PAT CAGR on the back of strong revenue and steady margin."

According to the brokerage "Recently global giant Firmenich Aromatics took 10% stake in the company. This would help SHK in technological & R&D newer product development. Management said that the company will maintain a distribution policy of 30-40% via dividend/buybacks as no major CAPEX is planned in the medium term. At a CMP of Rs 155, the stock trades at 15.5x/12.4x of FY23E/FY24E EPS. We feel that investors' can buy the stock in the band of Rs 155-158 and add on dips at Rs 137 for a base case target price of Rs 172.5 (14.5x Dec-2023E EPS) and a bull case target price of Rs 184 (15.5x Dec2023E EPS) over the next two quarters."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.