CMP:
Rs. 246.60; Market Cap: Rs. 3,566.34 Cr; 52 Week High/Low: Rs. 275.80 /
Rs. 180.00
Total
Shares: 14,46,20,801 shares; Promoters : 8,20,14,414 shares – 56.71 %; Total Public
holding : 6,26,06,387 shares – 43.29 %; Book
Value: Rs. 37.88; Face Value: Rs. 10.00; EPS: Rs. 4.87; Dividend: 11.30 %; P/E: 50.63 times; Ind. P/E: 47.70; EV/EBITDA: 26.17x ; Total
Debt: Rs. 242.64 Cr; Enterprise Value: Rs. 3,732.98 Cr.
S H KELKAR AND
COMPANY LIMITED: The Company was founded on July 1, 1955 and is headquartered
in Mumbai, India. S H Kelkar & Company Ltd (Keva) is one of
the largest fragrance and flavour companies in India. The journey of the
company begins in 1922 as a manufacturer of industrial perfumes in British
India regime. Company has a large and diverse mix of over 3,500 customers,
including leading national and multi-national FMCG companies, blenders of
fragrances and flavours and fragrance and flavour producers. The flavour
products produced by the company are used as a raw material by producers of
baked goods, dairy products, beverages and pharmaceutical products. S H Kelkar has
dedicated research team of 21 scientists
operating out of their facilities located in Mumbai and
Barneveld. It also has a team of 12 perfumers, 2 flavorists, evaluators and
application executives at their 5 creation and development centers in Mumbai,
Bengaluru, Netherlands and Indonesia. The company provides Fragrances for Personal care, Hair Care, Skincare & Cosmetics, Fabric Care, Household Products, Fine Fragrances. It provides Flavours for Dairy Products, Beverages, Confectionery, Bakery Products, Pharmaceuticals. Provides services like Bio Technology Research services, cosmetic Research service, Cosmetic Testing Laboratory, Custom Synthesis Services. It also provides Ingredients. The company has expertise in manufacturing plant, quality control and R&D centre. The company sells its products under
brands like SHK, Keva and Cobra brands which enjoys substantial brand equity in
India. Company's research team has developed 12 molecules
over the last three years of which company has filed patent applications for three.
The Company has four manufacturing facilities, three of which are located in
India and one in Netherlands, with a total installed manufacturing capacity of
over 19,819 tons annually. Last year company manufactured and supplied over
6,300 fragrances, including fragrance ingredients and flavours for the personal
and home care products, food and beverage industries, either in the form of
compounds or individual ingredients. The company came out with an IPO on Oct 28, 2015 offering
1,65,65,161 equity shares of Rs. 10 each for Rs. 180 per share raising Rs. 298
Cr. The shares of the company got listed on November 16, 2015 at Rs. 223.70
making a high of Rs. 225.05 on listing day. The object of offer for sale was to
achieve the benefits of listing and for repayment and pre-payment in full or in
part of certain loans availed by the company and Investment in its subsidiary
K.V. Arochem Pvt Ltd and for repayment and pre-payment in full or part of
certain loans availed by KVA and for general corporate puroses. Company's subsidiaries includes: Keva Fragrances Pvt Ltd, Keva Flavours
Pvt Ltd, Saiba Industries Pvt ltd, Keva Chemicals Pvt Ltd, Keva UK Ltd, Keva
Fragrance Industries Pte. Ltd, PT SHKKeva Indonesia, PFW Aroma Ingredients B.V.
S H KELKAR Ltd is
locally compared to Panama Petrochem Ltd, Manali Petrochemicals Ltd, Vinati
Organics Ltd, Adi Finechem ltd, Camphor and Allied Products Ltd, Resonance
Specialties Ltd, Camlin Fine Sciences Ltd, Diamines And Chemicals Ltd, and
globally with Elizabeth Arden of USA, Atlas Pearls and perfumes Ltd of
Australia, ID Perfumes Inc of Athens, Chanel from France, L’Oreal
& LVMH ,Givaudan, IFF, Firmenich, Symrise, Goldfield.
Investment
Rationale:
Incorporated
in 1955, the company has over the years built strong relationships with its
FMCG clients and they now understand the requirement of the end customer. SHK has
3,700 customers in the FMCG industry, which includes biggies like Godrej
Consumer Products, Marico, Wipro Consumer Care, Hindustan Unilever and around
400 customers for their flavors products. SHK is the largest domestic fragrance
producer commanding 20.5 % market share in the Indian fragrance industry with
over 9,700 fragrances, fragrance ingredients and flavors created, manufactured
and supplied as on FY15. It has a long standing reputation developed over the year’s
history as a supplier of quality fragrances for use by FMCG companies in
personal and home care products, food and beverage industries with exports to
over 52 countries. It is also an emerging flavor producer in India with exports
of its flavor products reaching 15 countries. SHK has a large and diverse mix
of over 4,100 customers which include leading national and MNC FMCG companies,
blenders as well as producers of fragrances and flavors. The fragrance and flavour business is a consolidated
industry globally with 12 players controlling 83 % of the market and the top
four players accounting for 53 % of the market share. The sector has been
growing at around 4.2 % over the last five years and has a global market size
of around $26.3 billion. Since the demand for fragrance and flavours is
influenced by factors like urbanisation, rise of modern retail and high
consumption of FMCG products, the biggest growth is expected to happen in
emerging markets. India’s FMCG sector itself may touch $37 billion by 2020,
which is a growth rate of 14 % (2012-20), annually. It is this growth rate and
the size of the FMCG business that SHKCL plans to cash in on. In general, the
Indian market has grown at twice the rate of the global market in the last five
years and this growth is expected to continue for a long time. The top five
companies in the Indian fragrance industry account for 70 % of the entire
market, despite the presence of 1,000 odd players. Overall, SHKCL has a market
share of 35 % in the Indian market. The company has 3,700 customers but it
never allows one customer to account for more than 4 % of the total turnover,
to maintain diversification. The management feels that this is like a mutual
fund approach to risk management where they do not have to depend on one
particular customer for solid returns. The global fragrance and
flavour industry is estimated to be worth US$ 23.90 billion with an almost
equal split between the fragrance and flavour markets. The global fragrance and
flavour industry is expected to grow at a CAGR of 4.7 % by 2017 to reach an
estimated value of US$ 27.5 billion. There are top 12 companies in this market
and can be further broken down into the top four companies, consisting of
Givaudan SA, Firmenich, International Flavors and Fragrances, Inc. and Symrise
AG, that individually hold a market share of above 10.0 %, and collectively
hold 57.0 % of the overall global fragrance and flavour industry among them.
The remaining eight companies individually have a market share of between 1.0 %
to 10.0 %, and collectively hold 26.0 % of the global Fragrance and flavour
industry. Regional companies make up the balance of companies in the global fragrance
and Flavour industry. The global flavour market accounts for approximately 49.0 % of the total
global fragrance and flavour industry in terms of value at US$ 11.7 billion.
Over the last six years, from calendar year 2007 to Calendar year 2013, the global
flavour market has increased its share of revenues from 44.0 % to 49.0 %. The
main product categories in the global flavour market for the calendar year 2013
were beverages contributing 34 %, savory 16 % and convenience foods and dairy
accounting for 34 % of the global flavour market. Many top fragrance and
flavour companies are placing greater focus on the emerging markets of Asia
Pacific like India due to urbanization and changing lifestyles that are
expected to benefit FMCG companies and their Fragrance and flavour suppliers.
In particular, higher consumer credit coupled with rising incomes will lead to
a sustained period of above average consumer spending, including the
consumption of FMCG products. Fragrance and flavour companies with exposure to
emerging markets also have a significant competitive advantage with respect to
their customer base. SHK has always pushed its boundaries with new unique
offerings to help enhance user experience of FMCG products containing these
fragrances. In FY15 itself, SHK developed over 502 new fragrance and flavour
compounds which have been sold commercially. Its research team developed 12
molecules over the last 3 years, out of which it has filed patent applications
for 3. It combines its innovation efforts with a strong quality control system
which enables traceability and repeatability for each batch of its products.
This has led to a contribution of 14.3 % of revenues in FY15 from product
launches of the last 3 financial years. SHK has built a Very strong reputation
through delivery of quality products and customer satisfaction in the 90 years
of its existence. With a solid business model, an 8,000 wide fragrance product
range and strong sales & marketing Capabilities as demonstrated by its
robust sales team of 95 people from 9 centres in India and overseas, SHK would
be able to sustain its market share in this Rs. 20 billion Indian fragrance
industry which in itself has witnessed a CAGR of 10.1 % over the last 4 years.
The fragrance industry is primarily a niche market. Customers majorly include
FMCG players who mainly use these fragrances in the manufacture of demand
inelastic daily utilities like home and personal care products. With demand
inelasticity is expected to drive demand in the Indian fragrance industry, S H Kelkar and company Ltd is expected to do better.
Outlook and Valuation:
S H Kelkar & Company Ltd famously known as Keva is one of the largest
fragrance and flavour companies in India. Company has a large and diverse mix
of over 3,500 customers, including leading national and multi-national FMCG
companies, blenders of fragrances and flavours and fragrance and flavour
producers. The flavour products produced by the company are used as a raw material
by producers of baked goods, dairy products, beverages and pharmaceutical products.
Company has over 300 customers for its flavour products. S H Kelkar has a small 2 % share in the
Indian flavor industry which is dominated by global leaders. With the capacity
of 19,819 tons available with SHK will help company to take advantage of an
industry which is growing at a stable CAGR of 10.4 % over the last 4 years. SHK
has established brand equity with its fragrance and flavor products and a
growing clientele of over 400, SHK is all set to increase its market share in
an expanding industry thereby further augmenting its growth. Fragrance
manufacturers are highly involved from an early stage of product development
and there is a requirement for consistency in its smell and quality. Most FMCG
companies depend on the reliability & quality of service of fragrance
producers and their knowledge & understanding of their products and needs.
In addition to this, fragrance procurement has a relatively small share in
overall production costs for FMCG goods. Thus, there is an element of customer
stickiness on account of these factors which helps fragrance producers in long
term client retention. SHK enjoys a competitive edge, and has its own Economic
Moat (A competitive advantage is, that one company has over the other companies
in the same industry – by Warren Buffett) and is expanding its moats which is a
very strong sign of SHK commanding better market share in future also. The global fragrance and flavour industry is
characterized worldwide by high barriers to market entry. Some of these
barriers to entry’s are like an establishing long term relationships between
fragrance and flavour companies and their customers, especially FMCG manufacturers,
which are an entry barrier for new players to the global fragrance and Flavour
industry. Most FMCG companies greatly depend on the reliability, quality of
service and fragrance and flavour company’s knowledge and understanding of
their products and needs. Fragrance and flavour companies typically have to enter at an early stage
of product development and such timely opportunities may not always be
available to new entrants. Most FMCG manufacturers usually avoid replacing their fragrance and
flavour supplier as the overall cost of fragrance or flavour products in the
context of the final FMCG product is relatively small. This sector faces compliance
with strict quality and regulatory standards, particularly in relation to FMCG
products, such makes it difficult and costly for new entrants to enter the
global fragrance and flavour industry. The global fragrance and flavour industry is characterized by an
abundance of new and innovative products due to the dynamic nature of consumer
preferences. Large fragrance and flavour companies spend approximately 6.5 % to
10.0 % of their sales proceeds on research and development, while global FMCG
companies spend less than 4.0 % of their sales proceeds on research and
development. In order to stay competitive, fragrance and flavour companies have
to invest significantly on research and development to continue offering a wide
range of innovative products. However, smaller fragrance and flavour companies
or new entrants may not be in a position to spend such significant amounts on
research and development. SHK plans to deepen its distribution network and
plans to introduce new products and new application methods for its Fragrance
such as small packs business. SHK also has a small pack fragrance
business which it operates through its Cobra brand. This business
includes sales of its fragrance products in package sizes ranging from 25 gm to
25 kg to several hundred traders and resellers spread country-wide. Thus the Cobra brand will
grow and support SHK’s top-line growth. SHK also advantages from its low
customer concentration. Out of the net revenue from
operations of Rs. 840 Cr and Rs. 220 Cr in FY15 and Q1FY16E, revenue from SHKs
largest customer was just Rs. 24 Cr and Rs. 8.80 Cr respectively. This amounts
to only just 2.9 % and 3.9 % of revenues from SHKs biggest customer in FY15 and
Q1FY16E. Thus, with a low concentration risk, SHK has managed to effectively
mitigate the adverse effect of client loss on its top-line and bottom-line. Revenues
from exports form a significant part of SHKs top-line. With negligible debt and
consequent low interest burden, SHK would enjoy the benefits of reduced
financial risks and low leverage. This would help the company sustain its high
growth phase where its bottom-line has grown at a CAGR of 15.4% from FY11 to
FY15. Revenues of
SHK have grown at a healthy CAGR of 13.0 % from Rs. 470 Cr in FY11 to Rs. 860
Cr in FY15 driven by consistent demand for its fragrances from FMCG companies
in India and overseas where it has a significant exposure in A & MENA. The fortunes of SHK depend of the level of FMCG
consumption in India and overseas. With average household incomes of SHKs
target market expected to significantly expand with an increasing share of
disposable income, a favorable population composition and expansion of modern
retail formats, consumption of FMCG products is all set to follow a healthy
growth trajectory. Also, in order to keep up with changing preferences of the
ultimate consumer, SHK consistently invests in research and development. It
spent Rs. 26.4 Cr and Rs. 6.2 Cr in FY15 and Q1FY16E which comes to 3.1 % and 2.8
% of revenues respectively. With capacity available in its flavour manufacturing facility,
established brand equity and a growing clientele, SHK can increase its market
share in the flavour industry which has grown at a CAGR of 10.4 % over the last
4 years. SHK has raise money through IPO and will use part of its proceeds to
repay some of its debts. SHK has already completed its capex cycle for the next
3-5 years with its Indian plants working at 35 % to 45 % capacity. Thus the
repayment of significant debt post issue combined with an absence of material
capex plans would ensure that financial risk is contained over the medium term.
With a growing FMCG sector in Asia, North Africa and Middle East which
constitutes 83.7 % of SHKs revenues, favourable demographics in place &
customer diversity both in terms of low client concentration and 43.5 % of
revenues coming from exports, SHK is surely to be an effective FMCG proxy. At the current market price of Rs. 246.60, the stock is trading at a PE of 44.83 x FY16E and 34.25 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 5.50 in FY16E and Rs. 7.20 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
| KEY FINANCIALS | FY14 | FY15 | FY16E | FY17E |
|---|
| SALES (₹ Crs) | 761.40 | 837.00 | 937.50 | 1,064.00 |
| NET PROFIT (₹ Cr) | 79.10 | 64.40 | 79.60 | 104.50 |
| EPS (₹) | 5.50 | 4.50 | 5.50 | 7.20 |
| PE (x) | 36.70 | 45.20 | 36.50 | 27.80 |
| P/BV (x) | 6.00 | 5.70 | 3.70 | 3.40 |
| EV/EBITDA (x) | 22.30 | 25.50 | 19.90 | 17.60 |
| ROE (%) | 16.40 | 12.60 | 10.10 | 12.20 |
| ROCE (%) | 22.90 | 20.60 | 16.30 | 17.40 |
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*As the author of this blog I disclose that I do not hold S H KELKAR & COMPANY Ltd in my any of the portfolios.
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