S H Kelkar:India's Largest Fragrances maker

Overview :
S H Kelkar & Company Ltd., incorporated in the year 1955, is a Mid Cap company (having a market cap of Rs 4337.90 Crore) operating in Chemicals sector.

S H Kelkar & Company Ltd. key Products/Revenue Segments include Chemicals which contributed Rs 686.37 Crore to Sales Value (99.87 % of Total Sales) and Scrap which contributed Rs .89 Crore to Sales Value (0.12 % of Total Sales)for the year ending 31-Mar-2017.
For the quarter ended 30-09-2017, the company has reported a Consolidated sales of Rs 220.83 Crore, down -5.60 % from last quarter Sales of Rs 233.92 Crore and down -9.41 % from last year same quarter Sales of Rs 243.78 Crore Company has reported net profit after tax of Rs 18.87 Crore in latest quarter.

The company’s top management includes Mr.Amit Dalmia, Mr.Amit Dixit, Mr.Dalip Sehgal, Mr.Jairaj Purandare, Mr.Kedar Vaze, Mr.Nitin Potdar, Mr.Ramesh Vaze, Mrs.Alpana Parida, Mrs.Prabha Vaze, Mrs.Sangeeta Singh. Company has BSR & Co. LLP as its auditoRs As on 30-09-2017, the company has a total of 144,620,801 shares outstanding.

S H Kelkar & Company Ltd. (SHK) is the largest Indian-origin Fragrances & Flavours (F&F) company in India. Its fragrance products and ingredients are used as a raw material in personal wash, fabric care, skin & hair care, fine fragrances and household products. Its flavour products are used as a raw material by producers of baked goods, dairy products, beverages and pharmaceutical products.

The company has a diverse client base of over 4,100 customers including leading national and multi-national FMCG companies, blenders of F&F ingredients while it also offers products under SHK, Cobra and Keva brands in the small pack segment.

Looking at 12-15% revenue growth in long-term

Expected Growth FY17-19E

·  Sales : 9.4% CAGR

·  EBITDA Margin Improvement: 267 bps

·  PAT: 20.6% CAGR

The Company reported a subdued set of Q2 numbers. In an interview with CNBC-TV18, Kedar Vaze, CEO of the company discussed the numbers in detail.Our guidance for H2 of FY18 remains the same, we will continue to grow 12-15 percent year on year in second half, he said.
According to him, sales in domestic market were down during July-August months due to goods and services tax (GST) but the momentum in the business is back to normal and the second half will be in-line with what is expected.
In a few months down the line, the management will be able to analyse whether they will recover the loss of sales in first half.
Good projects are coming in line which were held behind because of the GST and demonetisation. “We would see a flurry of product launches in second half,” he further mentioned

Pros

· Strong presence in the Fragrances & Flavours (F&F) sector characterized by high knowledge moat and significant customer stickiness

· 14% domestic market share in an oligopolistic market with an diversified customer base

· Robust growth in flavours segment and shift of mix towards more value added products in fragrances coupled with cost efficiency measures to boost bottomline growth. Additional upside could accrue from tuck-in acquisitions

· Indian FMCG markets (key end market for the F&F sector) poised for ~20% CAGR over the next four years driven by rapid increase in per Capita FMCG spending

· Presence in the small pack and tier-2 segment provides added edge over MNC competitors

Risks

· Sharp slowdown in domestic or global FMCG markets

· Inorganic acquisitions may not integrate or scale up as anticipated

·  Significant appreciation of EUR against the USD or INR against the USD

·  Volatility in raw material prices

Key Highlights

·  SHK is the largest domestic Fragrances & Flavours (F&F) player in India with ~14% market share in an oligopolistic industry

· Robust spurt in the flavours segment coupled with recovery in volume growth in the fragrances segment, mix shift in favour of more value-added products in the fragrances business and significant cost efficiency measures are envisaged to lead to revenue and PAT CAGR of ~9% and ~21% over FY17-19E, respectively

·  The company is trading at significant discount to growth adjusted valuation multiples of global peers, while additional upside could accrue from tuck-in acquisitions.

We initiate coverage with ‘BUY’ and a target price of INR 348 valuing the company at 33x FY19E EPS of INR 10.5

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