S H Kelkar IPO Review- A safe long term bet (Apply)

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Review By Dilip Davda on October 20, 2015

SH Kelkar and Company Ltd. (SHK) is  one of the largest fragrance and flavour companies in India by revenue, with a market share of approximately 12% for the year ended December 31, 2013 (Source: “Market Study on Fragrances and Flavours” by Nielsen, March 22, 2015) and the largest domestic fragrance producer in India with a market share of approximately 20.5% for the year ended December 31, 2013 (Source: “Market Study on Fragrances and Flavours” by Nielsen, March 22, 2015), with exports of fragrance products to 52 countries.

SHK is an emerging flavour producer in India with exports to 15 countries. Its fragrance manufacturing plants in Mumbai and Raigad in Maharashtra comply with the regulations of the International Fragrance Association (“IFRA”) and flavour manufacturing plant in Raigad in Maharashtra is registered with the United States Food and Drug Administration (“US FDA”). The company enjoys a long standing reputation in the fragrance industry developed with its 90 years of legacy. It has a diverse range of products backed by strong research and development capabilities. The Indian fragrance and flavour industry includes more than 1,000 companies, ranging from multinational companies, large Indian industrial houses to small-scale units and local manufacturers. The top five fragrance and flavours companies in India, Givaudan SA, Firmenich, SHK, International Flavors and Fragrances, Inc. and Symrise SA, contributed approximately 70.0% of the Indian fragrance and flavour industry for the year ended December 31, 2013. (Source: “Market Study on Fragrances and Flavours” by Nielsen, March 22, 2015) These multinational companies have a significant presence in India and have established customer relationships with fast moving consumer goods (“FMCG”) multinational companies and Indian corporate.

In the financial year 2015 SHK created, manufactured and supplied over 9,000 fragrances, including fragrance ingredients and flavours for the personal and home care products, food and beverage industries, either in the form of compounds or individual ingredients. Its fragrance and flavour products are usually a blend of a number of ingredients and are created by company’s perfumers and flavourists to produce proprietary formulas. Fragrances and flavours are considered to be one of the important factors for consumers in deciding whether to repurchase a product and these factors often influence their decisions, thereby making them one of the key components of FMCG and integral part of product attributes. Utilizing our capabilities in consumer insight, research and product development and creative expertise, SHK collaborate with its customers to understand consumer preference and enhance value for their brands. The company has a large and diverse mix of over 4,100 customers, including leading national and multi-national FMCG companies, blenders of fragrances and flavours and fragrance and flavour producers. SHK’s fragrance products and ingredients are used as a raw material in personal wash, fabric care, skin and hair care, fine fragrances and household products. Its client list includes Wipro, HUL, Godrej Consumer, JK Helen Curtis, Vini Cosmetics, Britannia, Vicco, Vadilal Industries etc. No customer contributes over 5% of the revenue despite repeat orders, thus company has no dependency on any single customer. Its turnover consists of 57% domestic sales and the rest from exports.

To meet repayment in full or part certain loans of the company and its subsidiary, investment in K V Arochem Pvt Ltd (subsidiary) and meeting other general funding requirements the company is coming out with its maiden IPO of approx 1.17 crore equity share of Rs. 10 each at a price band of Rs. 173-180 to mobilize Rs. 210.00 crore and also having offer for sale of 16565161 equity shares by existing stakeholders. Thus the overall size of the issue is Rs. 508 crore at the upper price band. Minimum application is to be made for 80 shares and in multiples thereon, thereafter. Issue opens for subscription on 28.10.15 and will close on 30.10.15. It has made seven bonus issues in the history so far in December 1978, March 1988, May 1990, November 1997, June 2012 and September 2014 for equity and in October 2014 for CCPs before conversion in equity. Its current paid up equity capital of Rs. 132.95 crore will stand enhanced to approx. Rs. 144.62 crore post IPO.  Issue is lead managed by JM Financial Institutional Securities Ltd and Kotak Mahindra Capital Co. Ltd. Keynote Corporate Services Ltd is the advisor to the issue and Link Intime India Pvt Ltd is the registrar to the issue. Post allotment, Shares will be listed on BSE and NSE.

On performance front, on consolidated basis the company has posted an average EPs of Rs. 5.17 (on diluted basis) and RONW of 15.6% for last three fiscals and Rs. 1.55 (not annualized) with RONW of 4.1% for Q1 of current fiscal. From FY 2011 to FY 2015 its top lines (on consolidated basis) were at Rs. 466.95 cr., Rs. 573.97 cr., Rs. 667.71 cr., Rs. 769.17 cr. and Rs. 860.33 cr. and the bottom lines were at Rs. 34.18 cr., Rs. 44.36 cr., Rs. 53.97 cr., Rs. 79.12 cr. and Rs. 64.36 cr. For Q1 of current fiscal, it has posted net profit of Rs. 20.66 cr. on a turnover of Rs. 223.97 cr. As claimed in RHP by the company, there is no listed peer to compare with. It suffered a setback for the fiscal 2015. If we attribute latest annualized earnings then the asking price is at a P/E of around 31+ on fully diluted equity post IPO. Thus asking price is appearing higher, but considering its status as FMCG sector Company and the prospects ahead, it is a safe bet for long term.

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