IPO Note | Chemicals

October 27, 2015

S H Kelkar and Company

AVOID

Issue Open: October 28, 2015

IPO Note - Valuation expensive

Issue Close: October 30, 2015

S H Kelkar & Company Ltd (SHKCL) is the largest fragrance and flavour company

Issue Details

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

Face Value: `10

The Netherlands, with a total installed manufacturing capacity of over 19,819

Present Eq. Paid up Capital: `133.0cr

tonne annually.

Offer Sale:1.7cr Shares

Established Market Leadership: The company has established brands like SHK,

Cobra and Keva, which enjoy leadership positions in their respective categories

Post Eq. Paid up Capital: `144.6cr

and draw substantial brand equity in India. For the year ended December 31,

Market Lot: 80 Shares

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

Fresh Issue (amount): `210cr

fragrance industry and 2.0% in the flavour industry.

Price Band: `173-180

Comprehensive Product Offering and Diverse Customer Base: SHKCL has a wide

Post-issue implied mkt. cap `2,502cr*-

portfolio of offerings with over 9,700 fragrances, ingredients and flavour products

2,603cr**

and a large library of product formulations created over the past 90 years. The

Note:*at Lower price band and **Upper price band

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

Book Building

multi-national FMCG companies, blenders of fragrances and flavours, and

QIBs

50%

fragrance and flavour producers.

Non-Institutional

15%

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-

Retail

35%

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

Post Issue Shareholding Pattern(%)

not a high growth industry, expected to grow at a subtle rate of 9-10% going forward.

Promoters Group

56.7

The company’s global peers Givaudan S.A. and International Flavors &

MF/Banks/Indian

Fragrances Inc trade at 28.1x and 20.1x their CY2014 earnings, respectively.

FIs/FIIs/Public & Others

43.3

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.

Key Financials

Y/E March (` cr)

FY2013

FY2014

FY2015E

1QFY16E

Net Sales

666

761

837

222

% chg

16.9

14.3

9.9

Net Profit

% chg

31.0

46.6

(18.6)

OPM (%)

17.7

18.0

14.3

17.3

EPS (`)

4.1

6.0

4.8

1.6

P/E (x)

44.3

30.2

37.2

P/BV (x)

5.0

4.7

RoE (%)

12.3

16.4

12.6

Amarjeet S Maurya

EV/Sales (x)

3.7

3.3

3.0

+91 22 3935 7800 Ext: 6831

EV/EBITDA (x)

20.8

18.5

21.2

[email protected]

Source: Company, Angel Research; Note:*EPS and other valuation parameters is based on Pre IPO

outstanding shares at upper price band

Please refer to important disclosures at the end of this report

S H Kelkar and Company | IPO Note

Company background

SHKCL is the largest F&F company in India by revenue, with a market share of

approximately 12.0%. The company initiated business in 1922 as a manufacturer

of industrial perfumes in British India. It now 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.

Last year, the company manufactured and supplied over 6,300 fragrances. The

offerings included fragrance ingredients and flavours for the personal and home

care products industry and the food and beverage industry, either in the form of

compounds or individual ingredients. The company has a large and diverse mix of

over 3,500 customers, including leading national and multi-national FMCG

companies, blenders of F&F, and F&F 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. The company has over 300 customers for its flavour products and a

dedicated research team of 18 scientists. The research team has developed 12

molecules over the last three years, of which, the company has filed patent

applications for three.

Exhibit 1: Global fragrance and flavour industry

Exhibit 2: Geographic revenue break-up for FY13

27.5

26.3

25.2

27%

23.9

22.9

43%

30%

North American

Western European

Rest of the world

CY2012

CY2013

CY2014

CY2015

CY2016

Source: RHP

October 27, 2015

S H Kelkar and Company | IPO Note

Exhibit 3: Market shares of the top 10 players in the

Exhibit 4: Organised and unorganised Indian

global fragrance and flavour industry

fragrance and flavour industry trend.

21.0%

Givaudan

5,000

10.7

11.0

20.0%

4,500

9.5

IFF

9.1

4,000

1,014

Firmenich

967

9.5

3,500

7.3

2.0%

879

Symrise

654

3,000

601

3.0%

Takasago

2,500

672

Wild Flavors

2,000

3.0%

3,548

1,500

3,200

Mane SA

2,775

2,926

12.0%

2,496

4.0%

1,000

2,167

Frutarom

500

5.0%

Sensient Flavors

5.0%

Robertet SA

CY2011

CY2012

CY2013

CY2014

CY2015

CY2016

14.0%

11.0%

Organised

Unorganised

yoy growth (%)

Others

Source: RHP

Exhibit 5: Market share in Indian F&F

industry

Exhibit 6: Market share in Indian Fragrance industry

`34.29bn

`18.8bn

12.3%

23%

29%

26.0%

3.0%

10.0%

14%

7.0%

20.5%

12%

14%

21.2%

Givaudan IFF Firmenich SH Kelkar Symrise Goldfield Others

Source: RHP

Exhibit 7: End user industry for fragrances

Exhibit 8: End user industry for Flavours

21%

15%

41%

32%

15%

12%

10%

11%

23%

Beverages Bakery Oral Confectionery Salty snack Dairy Others

Home care Personal wash Fabric Beauty Hair care

Others

Source: Company, Angel Research

October 27, 2015

S H Kelkar and Company | IPO Note

Issue details

The company’s `210cr IPO comprises of a fresh issue/Offer for Sale of upto

1.66cr shares, in which Blackstone PE Fund is selling ~10% share and the

promoter is selling ~2.5% share of the total pre-IPO outstanding shares. Shares

could be subscribed to in the price band of `173-180 (face value of shares: `10/-

each) via the book building route. The fresh issue of shares will constitute ~8% (at

the upper end of the price band) of the post-issue paid-up equity share capital of

the company.

Exhibit 9: Shareholding pattern

Particulars

Pre-Issue

Post-Issue

No. of shares

(%)

No. of shares

(%)

Promoter group

853,52,000

64.2

820,14,414

56.7

Others

476,02,135

35.8

626,06,388

43.3

Total

1329,54,135

100.0

1446,20,802

100.0

Source: Company, Angel Research Note: calculation is based on upper price band

Objects of the Fresh Issue are as below

 Repayment/pre-payment in full or in part of certain loans availed by the

company - `126cr

 Investment in its subsidiary K.V. Arochem Pvt Ltd (KVA) and for

repayment/prepayment of certain loans availed by KVA in full or in part -

`32cr.

 The balance would be utilized towards general corporate purposes.

October 27, 2015

S H Kelkar and Company | IPO Note

Key investment rational

Established Market Leadership

The company has established brands like SHK, Cobra and Keva which enjoy

leadership positions in their respective categories, and have substantial brand

equity in India. For the year ended December 31, 2013, SHKCL had a market

share of 12.0% in the Indian F&F industry. For the same period, the company had

a market share of 20.5% in the Indian fragrance industry and 2.0% in the Indian

flavour industry. (Source: “Market Study on Fragrances and Flavours” by Nielsen,

March 22, 2015). The company is the largest domestic fragrance producer in

India, while it also exports fragrance products to over 52 countries.

Comprehensive Product Offering and Diverse Customer Base

SHKCL has a wide product portfolio with over 9,700 fragrances, ingredients and

flavour products and a large library of product formulations created over 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. The company enjoys long term relationships with several

customers for its F&F products spanning over 15 years. Its diversified and

comprehensive product portfolio and large customer base, spread across several

countries and customer categories, mitigates concentration risk.

Research and development skills

SHKCL has a strong research & development (R&D) team, which has contributed to

the company’s growth over the past several years. The company currently

employs 18 scientists; over the last three years the R&D team has developed

12 molecules, of which, patent applications have been filed for three

molecules by the company. As in FY2015, the company had 12 perfumers and

2 flavourists in its

5 creation and development centres. The company

developed over 502 new fragrance and flavour compounds during the year,

which it sold commercially.

Experienced Promoters and Management Team

SHKCL is led by a qualified and experienced management team that has the

expertise and vision to manage and grow business. Its Promoters have an

experience of over 50 years in the fragrance industry and of over 15 years in the

flavour industry. Its senior and mid-level management teams are also very

experienced, having worked in large multi-national companies, in the F&F and

FMCG industries, with an average experience of over 20 years. The knowledge

and experience of its Promoters, senior and middle-management, and its team of

R&D personnel and perfumers provides the company a significant competitive

advantage as it seeks to expand in its existing markets and enter new geographic

markets.

October 27, 2015

S H Kelkar and Company | IPO Note

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.