Shares of SH Kelkar & Company experienced a sharp decline of 7.5% on January 7, 2025, amid growing concerns over the company’s gross margins. The significant drop in the company’s stock price was triggered by announcements regarding supply chain disruptions and rising raw material costs, which affected their profitability in the third quarter of FY2025.
This sudden plunge serves as a reminder of the volatility present in the stock market, particularly for investors looking to invest in stocks within the consumer goods sector, where margins are heavily influenced by external factors. The company attributed the margin pressure to constraints in acquiring essential raw materials despite efforts to mitigate these cost increases through price adjustments.
Impact of supply chain disruptions on gross margins
During the October to December period, SH Kelkar reported considerable strain on its gross margins, largely driven by issues related to supply chain disruptions. These disruptions have impacted the availability of key strategic raw materials, forcing the company to pass on some of the cost increases to its customers. Despite these adjustments, the company expects margin pressures to continue through Q4 of FY2025.
For investors considering whether to invest in stocks like SH Kelkar, this prolonged period of reduced margins signals a potential short-term risk. Though the company has experienced consistent demand across its markets, particularly in Europe, the ongoing pressure on margins could hinder profitability for the time being.
Investments and debt increases weigh on investor sentiment
The company’s increased net debt, which stood at ₹700 crore as of December 31, 2024, has further dampened investor sentiment. The rise in debt is attributed to capital expenditures related to SH Kelkar's new Vanavate facility and the replenishment of inventory following an incident in Q1.
While SH Kelkar is working closely with its insurers to settle claims and reduce the debt, the growing liabilities have become an additional concern for those considering whether to invest in stocks in the fragrance industry. Analysts have raised red flags regarding the company’s increased debt load, which could impact its financial flexibility in the future.
Long-term outlook: Growth despite challenges
Despite the current challenges, SH Kelkar remains optimistic about its long-term growth prospects. The company’s strategic investments in development centres in Europe and the US are expected to fuel future revenue growth. These investments, while contributing to margin pressure and impacting EBITDA in the short term, are intended to open up new geographies and customer segments.
For those looking to invest in stocks with a long-term growth perspective, SH Kelkar offers potential opportunities. However, the company's current struggles with gross margin pressures and debt should be carefully considered. Analysts believe that once the current financial pressures ease, the company will be better positioned to leverage its new global footprint and strong market presence.
SH Kelkar stock price performance: Volatile market conditions
At 12:26 PM on January 7, SH Kelkar's share price stood at ₹236, reflecting a loss of 4.73% from the previous day. The stock’s performance is a direct reflection of the broader market volatility and the specific pressures on the fragrance maker’s financials. It highlights the importance for investors to stay updated on company performance and consider factors such as margin stability and debt management before making investment decisions.
As market conditions continue to shift, those who wish to invest in stocks like SH Kelkar should weigh both the potential for future growth and the current financial pressures. While the company’s growth in key markets and its strategic investments offer hope, near-term challenges present an element of risk that should not be overlooked.
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