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S H Kelkar and Company Limited IPO Views - 16th Dec 2015

Miscellaneous | Published on Oct 27th 2015


S H Kelkar & Company Ltd (SHKCL) is the largest fragrance and flavour company in India by revenue, with a market share of approximately 12.0%. The company has four manufacturing facilities, three of which are located in India and one in The Netherlands, with a total installed manufacturing capacity of over 19,819 tonne annually. Established Market Leadership: The company has established brands like SHK, Cobra and Keva, which enjoy leadership positions in their respective categories and draw substantial brand equity in India. For the year ended December 31, 2013, SHKCL had a market share of 12.0% in the Indian fragrance and flavour (F&F) industry. On bifurcating, the company’s market share stood at 20.5% in the fragrance industry and 2.0% in the flavour industry. Comprehensive Product Offering and Diverse Customer Base: SHKCL has a wide portfolio of offerings with over 9,700 fragrances, ingredients and flavour products and a large library of product formulations created over the past 90 years. The company enjoys a competitive advantage over its peers on the back of its wide product portfolio. It has a deep understanding of its customers’ requirements and preferences and has over 4,100 customers, including leading national and multi-national FMCG companies, blenders of fragrances and flavours, and fragrance and flavour producers. Outlook and Valuation: SHKCL is valued at a P/E multiple of 40.4x its FY2015 EPS. In terms of P/BV, the company is valued at 5.1x its pre-IPO and 3.2x its post- IPO at the upper end of the price band. In our view, the valuation is expensive, considering its low ROE numbers (around 12-13%) and considering that they are expected to continue to remain in the same range. Further, the domestic F&F industry is not a high growth industry, expected to grow at a subtle rate of 9-10% going forward. The company’s global peers Givaudan S.A. and International Flavors & Fragrances Inc trade at 28.1x and 20.1x their CY2014 earnings, respectively. Givaudan S.A. and International Flavors & Fragrances Inc have strong market shares in the global market of ~21% and ~12%, respectively, and deliver higher RoEs. On the other hand, SHKCL has negligible market share at the global level. Thus, SHKCL’s valuation looks expensive vis-a-vis these companies. Hence, we recommend an “Avoid” on the issue. Investors having conviction in the long term growth prospects of the company and the emerging consumption story in India, and wanting to enter the stock to tap this perceived opportunity, could consider waiting for a possible correction in the stock price post the listing of the IPO.

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