The Mumbai-based speciality chemicals company, with a market capitalisation of ₹2,976 crores, is grappling with severe margin compression that has overshadowed its ability to grow topline revenues. Net sales for Q2 FY26 stood at ₹553.89 crores, reflecting a modest 2.10% year-on-year increase from ₹542.50 crores, but declining 4.61% sequentially from ₹580.63 crores in Q1 FY26. The company's shares closed at ₹218.10 on November 7, 2025, down 31.84% from their 52-week high of ₹320.00, reflecting investor concerns about deteriorating fundamentals.
The quarter's performance highlights three critical concerns: collapsing operating margins, significantly elevated interest costs, and a sharp contraction in profitability that has reached multi-quarter lows. Operating profit excluding other income fell to ₹52.67 crores with margins of just 9.55%, the lowest level in recent quarters and down sharply from 14.97% in the year-ago period.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 |
|---|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 553.89 | 580.63 | 567.38 | 543.21 | 542.50 | 470.31 |
| QoQ Growth | -4.61% | +2.34% | +4.45% | +0.13% | +15.35% | -8.38% |
| Net Profit (₹ Cr) | 9.18 | 25.57 | 102.52 | 17.52 | 39.78 | -86.58 |
| YoY Growth | -76.92% | -129.53% | +202.33% | — | — | — |
| Operating Margin | 9.55% | 12.62% | 13.01% | 11.94% | 14.97% | 16.73% |
| PAT Margin | 1.66% | 4.42% | 18.16% | 3.24% | 7.38% | -18.33% |
Financial Performance: Margin Erosion Drives Profit Collapse
The company's financial performance in Q2 FY26 reveals a troubling deterioration across multiple parameters. Operating profit before depreciation, interest, tax, and other income (PBDIT) excluding other income contracted to ₹52.67 crores from ₹80.78 crores in Q2 FY25, representing a 34.81% year-on-year decline. This translated into operating margins of just 9.55%, down a dramatic 542 basis points from 14.97% in the corresponding quarter last year and 307 basis points sequentially from 12.62% in Q1 FY26.
The margin compression appears to stem from multiple sources. Employee costs increased to ₹85.09 crores in Q2 FY26 from ₹70.25 crores in Q2 FY25, a 21.13% year-on-year rise that outpaced revenue growth significantly. Interest expenses also climbed to ₹13.91 crores from ₹12.82 crores, reflecting the company's elevated debt burden. Depreciation charges rose to ₹27.38 crores from ₹24.18 crores, indicating ongoing capital intensity.
Profit before tax (PBT) plummeted to ₹12.16 crores from ₹63.77 crores in Q2 FY25, an 80.93% year-on-year decline. After accounting for taxes of ₹2.99 crores (effective tax rate of 24.59%), net profit stood at just ₹9.45 crores, translating to a PAT margin of merely 1.66% compared to 7.38% in the year-ago period. On a consolidated basis, net profit came in at ₹9.18 crores, down from ₹39.78 crores, marking one of the weakest quarterly performances in recent years.
The quality of earnings has deteriorated significantly, with other income collapsing to just ₹0.32 crores in Q2 FY26 from ₹20.65 crores in Q2 FY25. This exceptional item in the prior year period makes year-on-year comparisons challenging, but the sequential decline from ₹0.81 crores in Q1 FY26 indicates normalised operating conditions without extraordinary gains.
Operational Challenges: Interest Coverage at Multi-Quarter Low
Beyond headline profitability concerns, S H Kelkar's operational metrics reveal structural challenges that demand management attention. The company's operating profit to interest coverage ratio deteriorated to just 3.79 times in Q2 FY26, the lowest level in recent quarters and down from more comfortable levels above 6 times historically. This compression reflects both declining operating profitability and elevated interest costs, raising questions about financial flexibility.
Critical Warning: Profitability Under Severe Pressure
Key Concerns: Operating margins have collapsed to 9.55%, the lowest in seven quarters. Interest coverage has weakened to 3.79x, indicating constrained financial flexibility. PAT margins of just 1.66% represent a multi-quarter low and signal fundamental operational challenges beyond temporary headwinds.
The company's return on equity (ROE) stands at 11.21% on an average basis, which whilst positive, ranks below several specialty chemicals peers and indicates relatively weak capital efficiency. Return on capital employed (ROCE) of 10.66% similarly suggests that the company is generating modest returns on the capital invested in its operations. These profitability metrics, when viewed alongside the current quarter's margin compression, paint a picture of a business struggling to maintain its historical earning power.
From a balance sheet perspective, S H Kelkar carries total debt of ₹174.68 crores as of March 2025, with a debt-to-equity ratio of 0.59 times and net debt-to-equity of similar magnitude. Whilst leverage is not excessive, the combination of elevated interest costs (₹49 crores annually) and weakening operating profitability limits the company's ability to deleverage meaningfully in the near term. The debt-to-EBITDA ratio of 2.61 times suggests moderate financial risk, but deteriorating EBITDA generation could push this metric higher.
Industry Context: Specialty Chemicals Face Headwinds
The specialty chemicals sector in India has faced a challenging environment over the past year, with demand slowdowns, inventory corrections, and pricing pressures affecting most players. S H Kelkar's performance must be viewed within this broader industry context, where raw material volatility and competitive intensity have compressed margins across the board.
The fragrance and flavour segment specifically has experienced softer demand from key end-user industries including personal care, home care, and food & beverages. Multinational competition remains intense, with global players maintaining significant market share in premium segments. S H Kelkar's positioning as the largest Indian-origin player provides some competitive advantages in terms of local market understanding and customer relationships, but these have proven insufficient to offset the broader industry headwinds.
Sector Dynamics: Navigating a Difficult Environment
The specialty chemicals industry has underperformed broader markets over the past year, with the sector delivering flat returns compared to S H Kelkar's 29.19% decline. This underperformance of 29.19 percentage points highlights company-specific challenges beyond sector-wide issues. Margin pressures from raw material inflation, competitive pricing, and demand softness have affected most players, but S H Kelkar's magnitude of profit decline suggests execution issues that go beyond external factors.
Peer Comparison: Valuation Discount Reflects Weak Fundamentals
When compared to specialty chemicals peers, S H Kelkar trades at a significant discount on most valuation parameters, reflecting market concerns about its operational performance and growth outlook. The company's price-to-earnings ratio of 24.23 times compares favourably to the sector average of approximately 61 times, but this apparent valuation attractiveness is offset by materially weaker profitability metrics.
| Company | P/E (TTM) | P/BV | ROE (%) | Debt/Equity | Div Yield (%) |
|---|---|---|---|---|---|
| S H Kelkar | 24.23 | 2.37 | 11.21 | 0.59 | 0.46 |
| Foseco India | 42.75 | 9.55 | 19.68 | -0.78 | 0.45 |
| Rossari Biotech | 25.46 | 0.28 | 9.91 | 0.12 | — |
| Tatva Chintan | 198.69 | 4.77 | 5.84 | 0.03 | 0.07 |
| Vishnu Chemicals | 24.09 | 0.44 | 17.64 | 0.14 | 0.06 |
| DDev Plastiks | 15.27 | 3.57 | 21.20 | -0.07 | 0.61 |
S H Kelkar's ROE of 11.21% lags most peers significantly, with companies like Foseco India (19.68%), Vishnu Chemicals (17.64%), and DDev Plastiks (21.20%) demonstrating superior capital efficiency. This profitability gap justifies a valuation discount, as investors are willing to pay premium multiples for companies that generate higher returns on equity. The company's price-to-book ratio of 2.37 times sits in the middle of the peer range, neither particularly expensive nor cheap on this metric.
From a leverage perspective, S H Kelkar's debt-to-equity ratio of 0.59 times is higher than most specialty chemicals peers, who typically operate with minimal leverage or net cash positions. This higher debt burden, combined with weaker profitability, constrains financial flexibility and increases vulnerability to operational challenges. The dividend yield of 0.46% is modest but in line with sector averages, with the company maintaining a conservative payout ratio of 8.48%.
Valuation Analysis: Discount Justified by Deteriorating Fundamentals
Despite trading at a P/E multiple of 24.23 times that appears reasonable relative to the sector average of 42 times, S H Kelkar's valuation discount is justified by its significantly weaker operational performance and deteriorating financial trends. The company's enterprise value to EBITDA multiple of 12.90 times and EV/EBIT of 19.49 times reflect market scepticism about near-term earnings recovery.
The stock currently trades at ₹218.10, approximately 31.84% below its 52-week high of ₹320.00 reached earlier in the year. This correction reflects the market's reassessment of the company's earnings trajectory following several quarters of disappointing results. The price-to-book value of 2.37 times suggests the market values the company at a moderate premium to its net asset value, but this premium has compressed from higher levels as profitability concerns have mounted.
The company's valuation grade has been assessed as "Attractive" by proprietary metrics, but this assessment must be weighed against the negative financial trend and bearish technical indicators. A stock can appear statistically cheap whilst still representing poor value if underlying fundamentals continue to deteriorate. The current valuation multiples price in expectations of margin recovery and earnings stabilisation, but recent quarterly results suggest these expectations may prove optimistic.
Shareholding Pattern: Institutional Confidence Mixed
An analysis of S H Kelkar's shareholding pattern reveals mixed signals about institutional confidence. Promoter holding stands at just 5.66% as of September 2025, one of the lowest promoter stakes amongst listed Indian companies. This minimal promoter ownership reflects the company's history and ownership structure, but provides limited alignment between management and minority shareholders.
| Shareholder Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 5.66% | 5.65% | 5.60% | +0.01% |
| FII | 7.36% | 6.96% | 7.22% | +0.40% |
| Mutual Funds | 4.50% | 2.88% | 2.76% | +1.62% |
| Insurance | 0.13% | 0.13% | 0.13% | 0.00% |
| Other DII | 1.06% | 0.36% | 0.55% | +0.70% |
| Non-Institutional | 32.08% | 34.64% | 33.87% | -2.56% |
Foreign institutional investor (FII) holding increased marginally to 7.36% in Q2 FY26 from 6.96% in the previous quarter, suggesting some international investor interest despite operational challenges. More notably, mutual fund holding jumped to 4.50% from 2.88%, a sequential increase of 162 basis points that indicates domestic institutional buying during the quarter. This accumulation by mutual funds may reflect value-seeking behaviour at depressed price levels.
However, non-institutional holdings declined by 256 basis points to 32.08%, suggesting retail investor selling during the quarter. The overall institutional holding of 13.05% remains relatively modest for a company of this market capitalisation, indicating limited institutional conviction in the stock. The increase in domestic institutional ownership provides some support, but the low absolute level of institutional participation suggests the stock remains off most large investors' radar.
Stock Performance: Significant Underperformance Across Timeframes
S H Kelkar's stock price performance has been decidedly weak across most relevant timeframes, with the shares delivering negative returns over the past year and significantly underperforming benchmark indices. The stock declined 29.19% over the past 12 months compared to the Sensex's 4.62% gain, resulting in negative alpha of 33.81 percentage points.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -1.33% | -0.86% | -0.47% |
| 1 Month | -6.79% | +1.57% | -8.36% |
| 3 Months | -10.80% | +3.22% | -14.02% |
| 6 Months | +11.25% | +3.06% | +8.19% |
| YTD | -11.45% | +6.50% | -17.95% |
| 1 Year | -29.19% | +4.62% | -33.81% |
| 2 Years | +42.55% | +28.14% | +14.41% |
| 3 Years | +59.14% | +36.01% | +23.13% |
The stock's underperformance has accelerated in recent months, with a 10.80% decline over the past three months compared to the Sensex's 3.22% gain. Year-to-date performance shows an 11.45% loss versus the benchmark's 6.50% gain. Only the six-month timeframe shows positive alpha of 8.19 percentage points, but this outperformance has been entirely erased by subsequent weakness.
On a longer-term basis, the stock has delivered superior returns, with two-year gains of 42.55% (alpha of 14.41 percentage points) and three-year returns of 59.14% (alpha of 23.13 percentage points). However, these historical gains provide little comfort to recent investors, and the sharp reversal in momentum suggests the stock's previous outperformance may have been excessive given underlying fundamental trends.
From a technical perspective, the stock currently trades below all key moving averages, with the price at ₹218.10 below the 5-day (₹220.74), 20-day (₹222.22), 50-day (₹236.34), 100-day (₹237.79), and 200-day (₹219.82) moving averages. The technical trend has been classified as "Mildly Bearish" as of November 6, 2025, with multiple technical indicators including MACD, Bollinger Bands, and on-balance volume all signalling bearish conditions.
Investment Thesis: Negative Fundamentals Outweigh Valuation Appeal
The investment case for S H Kelkar presents a challenging picture where apparent valuation attractiveness is overshadowed by deteriorating operational performance and negative momentum across financial, technical, and sentiment indicators. The company's proprietary Mojo score of 48 out of 100 reflects this mixed assessment, resulting in a "SELL" rating that suggests investors should consider reducing exposure or avoiding fresh positions.
The valuation appears attractive on a relative basis, with the P/E multiple of 24.23 times trading at a discount to both the specialty chemicals sector average and the broader market. However, this valuation discount exists for valid reasons: materially weaker profitability metrics, deteriorating margins, and negative earnings momentum that shows no signs of stabilising. The company's quality grade of "Average" reflects adequate but unexceptional long-term financial performance, with 5-year sales growth of 16.68% and EBIT growth of 15.71% representing solid but not outstanding historical expansion.
The critical concerns centre on the negative financial trend, with Q2 FY26 results showing the lowest operating margins in seven quarters, profit before tax at multi-quarter lows, and earnings per share at the weakest level in recent periods. The operating profit to interest coverage ratio of 3.79 times has fallen to concerning levels, indicating limited financial cushion should operational performance deteriorate further. These negative trends, combined with mildly bearish technical indicators and year-long underperformance versus the market, suggest the path of least resistance for the stock remains downward in the near term.
KEY STRENGTHS
- Market Leadership: Largest Indian-origin fragrance and flavour company with established market position and customer relationships
- Valuation Discount: P/E multiple of 24.23x trades at significant discount to specialty chemicals sector average of 42x
- Modest Leverage: Debt-to-equity ratio of 0.59x represents manageable financial leverage compared to highly leveraged peers
- Long-term Growth: 5-year sales CAGR of 16.68% demonstrates historical ability to grow topline revenues consistently
- Institutional Interest: Mutual fund holdings increased 162 basis points in Q2 FY26, indicating some domestic institutional accumulation
- Diversified Operations: Presence across fragrances and flavours provides some business diversification and reduces concentration risk
KEY CONCERNS
- Collapsing Profitability: Net profit declined 76.92% YoY to ₹9.18 crores, with PAT margin of just 1.66% marking multi-quarter low
- Severe Margin Compression: Operating margin fell to 9.55%, down 542 basis points YoY, indicating fundamental operational challenges
- Weak Interest Coverage: Operating profit to interest ratio of 3.79x at lowest level in recent quarters, constraining financial flexibility
- Poor Capital Efficiency: ROE of 11.21% and ROCE of 10.66% significantly lag specialty chemicals peers, indicating weak returns on capital
- Negative Momentum: Stock down 29.19% over past year, underperforming Sensex by 33.81 percentage points with no signs of stabilisation
- Technical Weakness: Price trading below all key moving averages with bearish technical indicators across multiple timeframes
- Minimal Promoter Stake: Promoter holding of just 5.66% provides limited alignment between management and minority shareholders
Outlook: Key Monitoring Points for Recovery
For investors considering S H Kelkar, the path forward requires close monitoring of several critical parameters that will determine whether the company can stabilise operations and return to profitable growth. The immediate priorities centre on margin recovery, cost management, and demonstrating that Q2 FY26's weak performance represents a trough rather than the beginning of sustained deterioration.
POSITIVE CATALYSTS
- Margin Stabilisation: Operating margins returning to 12-14% range would signal cost pressures easing and pricing power improving
- Revenue Acceleration: Topline growth accelerating beyond low single digits would indicate market share gains and demand recovery
- Interest Coverage Improvement: Operating profit to interest rising above 5x would restore financial flexibility and reduce refinancing risk
- Institutional Accumulation: Continued increase in mutual fund and FII holdings would signal improving institutional confidence
RED FLAGS TO WATCH
- Further Margin Erosion: Operating margins falling below 9% would indicate structural profitability challenges requiring business model reassessment
- Declining Revenue: Sequential revenue decline continuing for multiple quarters would signal market share loss and competitive pressures
- Deteriorating Coverage: Interest coverage falling below 3x would raise concerns about debt servicing ability and refinancing risk
- Institutional Exodus: Sustained FII or mutual fund selling would indicate loss of institutional confidence in turnaround prospects
"With operating margins at seven-quarter lows and profitability down 77% year-on-year, S H Kelkar faces a critical juncture where management must demonstrate concrete margin recovery and operational stabilisation before investors can regain confidence in the business model."
The Verdict: Avoid Until Operational Turnaround Materialises
Score: 48/100
For Fresh Investors: Avoid initiating positions at current levels. Despite apparent valuation attractiveness, the combination of collapsing margins, deteriorating profitability, and negative momentum across financial and technical indicators suggests downside risks remain significant. Wait for concrete evidence of margin stabilisation and earnings recovery over 2-3 quarters before considering entry.
For Existing Holders: Consider reducing exposure or exiting positions, particularly for those sitting on gains from the 2-3 year timeframe. The sharp deterioration in quarterly performance, combined with operating margins at multi-quarter lows and interest coverage at concerning levels, suggests fundamental challenges that may take several quarters to resolve. The 31.84% decline from 52-week highs may not represent a bottom given ongoing operational pressures.
Fair Value Estimate: ₹190-200 per share (13% downside from current levels), based on sustainable earnings normalisation at 11-12% operating margins and P/E multiple of 20-22x reflecting average quality and growth profile.
Rationale: The SELL rating reflects the convergence of multiple negative factors: severe margin compression to 9.55%, profitability collapse of 77% year-on-year, weakening interest coverage, and persistent underperformance versus markets. Whilst valuation appears statistically cheap, deteriorating fundamentals suggest the discount is justified. Recovery requires demonstrable margin improvement and earnings stabilisation over multiple quarters before the risk-reward becomes favourable for investors.
Note– ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
