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.
|SALES (₹ Crs)||761.40||837.00||937.50||1,064.00|
|NET PROFIT (₹ Cr)||79.10||64.40||79.60||104.50|