Kotak Institutional Equities maintains a robust BUY recommendation for S H Kelkar and Company (SHKL), raising the fair value target to Rs 430 from Rs 400. The specialty chemicals manufacturer demonstrated resilient growth with Q1FY26 revenues hitting Rs 5.81 billion, marking 23% year-over-year expansion despite operational headwinds. While margin compression occurred due to currency volatility and strategic investments, management projects substantial recovery with EBITDA margins expected to reach 18-20% by FY2027. The brokerage firm emphasizes SHKL's exceptional valuation discount compared to global peers despite superior growth prospects, positioning it as a compelling investment opportunity in the specialty chemicals sector.

Kotak Maintains Bullish Stance Despite Quarterly Margin Pressures

Kotak Institutional Equities has reiterated its BUY rating on S H Kelkar and Company Limited (SHKL), elevating the fair value assessment to Rs 430 per share from the previous Rs 400 target. The specialty chemicals manufacturer, trading at Rs 226 as of August 25, 2025, presents significant upside potential according to the research house's comprehensive analysis.

The Mumbai-based brokerage firm's confidence stems from the company's sustained revenue momentum, with Q1FY26 revenues reaching Rs 5.81 billion, marginally exceeding pre-announced figures and demonstrating robust 23% year-over-year growth. This performance becomes particularly impressive when contextualized against the fire incident that severely impacted Q1FY25 operations, making sequential comparisons more meaningful than traditional year-over-year metrics.

Operational Dynamics Reveal Mixed Performance Indicators

The quarterly results unveiled a complex operational landscape characterized by encouraging revenue trends juxtaposed against margin compression challenges. Gross margins expanded by 84 basis points quarter-over-quarter to 42.6%, signaling positive underlying business momentum. However, overhead expenses emerged as the primary concern, with employee costs rising 5.4% sequentially and other operational expenses climbing 7.7%.

Management attributed these cost escalations primarily to Indian Rupee depreciation against the Euro, creating temporary margin pressure. The corresponding revenue benefits from EUR-denominated sales are anticipated to materialize more comprehensively starting Q2FY26, suggesting a natural hedge mechanism will restore equilibrium.

Notably, management emphasized that EBITDA margins, when adjusted for upfront investments in new creative centers, would approximate 16% compared to the reported 13%. Additionally, fire-related expenses impacted margins by an additional 60 basis points, highlighting the extraordinary nature of current margin levels.

Strategic Investment Phase Positions Company for Long-term Expansion

SHKL's current investment cycle reflects management's strategic commitment to building sustainable competitive advantages and operational capabilities. The company continues investing in creative centers and expansion projects, with ongoing capital expenditure programs worth Rs 2 billion designed to enhance long-term growth prospects.

Management maintains guidance for gross margin expansion to 43-45% range, supported by stabilizing raw material availability, selective pricing actions, and optimized product mix strategies. The trajectory toward 18-20% EBITDA margins by FY2027 remains intact, contingent upon input cost stabilization and operational leverage realization.

Financial Position Demonstrates Resilience Amid Growth Investments

The company's balance sheet reveals strategic debt management capabilities despite ongoing expansion activities. Net debt stood at Rs 6.63 billion as of June 2025, with management projecting reduction below March 2024 levels of Rs 5.04 billion by FY2026-end, despite concurrent execution of substantial capital projects.

Insurance claim recoveries provide additional financial cushioning, with Rs 950 million already received and approximately Rs 2 billion expected over the next two years. This recovery timeline supports the company's cash flow projections and reduces financial stress from the previous fire incident.

Valuation Discrepancy Creates Compelling Investment Opportunity

Kotak's analysis reveals SHKL trading at significant discounts compared to international peers despite superior growth prospects. The company trades at 20X FY2026E P/E ratio, substantially below global competitors including Givaudan (27.2X), DSM Firmenich (21.7X), and Symrise (21.9X).

This valuation gap represents what Kotak characterizes as a rare instance of an Indian specialty chemicals company trading cheaper than European and American counterparts while offering superior growth dynamics.

Investment Recommendation and Price Targets

Kotak Institutional Equities recommends aggressive accumulation of SHKL shares at current levels, projecting the fair value at Rs 430 based on 24X September 2027E EPS multiples. This target represents approximately 90% upside potential from current market prices of Rs 226.

The investment thesis rests on several key pillars: sustainable double-digit revenue growth, margin recovery trajectory beginning in H2FY26, operational leverage benefits from current investments, and significant valuation discount relative to global peers. Additionally, the company's strong market position in fragrances and flavors, combined with strategic geographic diversification, provides multiple growth avenues.

Risk factors include currency volatility impacts, raw material cost fluctuations, and execution risks associated with ongoing capacity expansion projects. However, management's track record and strategic vision provide confidence in successful navigation of these challenges.

For investors seeking exposure to India's specialty chemicals sector, SHKL presents a compelling combination of growth potential, operational excellence, and attractive valuation metrics, making it a cornerstone holding for medium to long-term investment horizons.