S H Kelkar & Company Ltd. - Flavour of the season likely to smell success

10th October 2017 By Edelweiss

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.

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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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.
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
Cons
  • 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

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