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SH Kelkar and Company is a Mumbai-based company in the business of fragrances and flavours. The company is one of the largest domestic fragrance and flavour companies by revenue with a market share of 12% in CY13. With exports of fragrance products to 52 countries, it is the largest domestic fragrance producer with a market share of 20.5% in CY13. The estimated size of the Indian fragrance industry and Indian flavour industry was Rs 1880 crore and Rs 1550 crore, respectively in CY13. The company is an emerging player in the flavour segment (2% market share in CY13) in India with exports to 15 countries.
Investment Rationale
Sustained growth momentum in recent past
The company posted healthy net sales CAGR of 16.2% in FY11-15 while maintaining good operating margins. The topline growth of the company has been accompanied by an expansion in the bottomline as well. Earnings of SH Kelkar have grown at 19.6% CAGR in FY11-15.
The company posted healthy net sales CAGR of 16.2% in FY11-15 while maintaining good operating margins. The topline growth of the company has been accompanied by an expansion in the bottomline as well. Earnings of SH Kelkar have grown at 19.6% CAGR in FY11-15.
Presence of strong in-house research and development (R&D)
The company has a dedicated team of 18 scientists operating at its facilities in Mumbai and Barneveld, the Netherlands. This research team has developed 12 molecules over the last three years. The company has filed patent applications for three of these molecules. SH Kelkar has five creation and development centres in Mumbai, Bengaluru, the Netherlands and Indonesia. The company also has a team of 12 perfumers, two flavourists along with a panel of evaluators and application executives at its creation and development centres that helped the company develop 502 new fragrance and flavour compounds in FY15.
The company has a dedicated team of 18 scientists operating at its facilities in Mumbai and Barneveld, the Netherlands. This research team has developed 12 molecules over the last three years. The company has filed patent applications for three of these molecules. SH Kelkar has five creation and development centres in Mumbai, Bengaluru, the Netherlands and Indonesia. The company also has a team of 12 perfumers, two flavourists along with a panel of evaluators and application executives at its creation and development centres that helped the company develop 502 new fragrance and flavour compounds in FY15.
No major capex visibility in near term
Currently, the company has a capacity utilisation of 38.4% as of FY15. Given the lower capacity utilisation, we believe the company has ample room for scalability of its business. Hence, we do not envisage SH Kelkar incurring any major capex cost in the next three to five years. A debt-free balance sheet post issue and absence of capex in the medium term bode well for the company’s financial health, going forward.
Currently, the company has a capacity utilisation of 38.4% as of FY15. Given the lower capacity utilisation, we believe the company has ample room for scalability of its business. Hence, we do not envisage SH Kelkar incurring any major capex cost in the next three to five years. A debt-free balance sheet post issue and absence of capex in the medium term bode well for the company’s financial health, going forward.
Recommend SUBSCRIBE
We believe SH Kelkar would be a major beneficiary of increasing demand from FMCG companies specifically present in personal care, packaged foods & dairy products. At the price band of Rs 173-180, the stock is available at 31.1x FY16E earnings and 23.5x FY17E earnings while it is available at 2.6x FY16E EV/sales and 2.3x FY17E EV/sales. On an EV/EBITDA basis, it is available at 15.5x FY16E EV/EBITDA and 13.8x FY17E EV/EBITDA. With major global peers trading at similar valuation multiples on a trailing EV/sales basis, we believe the IPO at this price band is available at reasonable multiples. We recommend that investors SUBSCRIBE to the issue.
We believe SH Kelkar would be a major beneficiary of increasing demand from FMCG companies specifically present in personal care, packaged foods & dairy products. At the price band of Rs 173-180, the stock is available at 31.1x FY16E earnings and 23.5x FY17E earnings while it is available at 2.6x FY16E EV/sales and 2.3x FY17E EV/sales. On an EV/EBITDA basis, it is available at 15.5x FY16E EV/EBITDA and 13.8x FY17E EV/EBITDA. With major global peers trading at similar valuation multiples on a trailing EV/sales basis, we believe the IPO at this price band is available at reasonable multiples. We recommend that investors SUBSCRIBE to the issue.
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