Initiating Coverage

S H Kelkar & Company

Niche player with scalable operation ….
 Personal Care/Consumer Initiating Coverage

S H Kelkar & Company BUY

Niche player with scalable operation ….

Institutional Research S H Kelkar & Company (SHK) is one of the leading players in fragrance and flavour
(F&F) industry in India. The company started its operation in 1922. It is the largest
domestic F&F player with the market share of ~12%.
CMP (Rs) 213 Strong domestic player in niche Indian F&F industry
Target (Rs) 256 Over the past 90 years, SHK has created a strong position in the niche Indian F&F industry
(~Rs 45bn in size). With its innovative offerings, strong R&D capabilities and well developed
Nifty: 8,204; Sensex: 26,740 client relationship, SHK created a strong position in Indian F&F industry despite the presence
of leading MNCs. It enjoys market share of ~12% (21% in fragrance & 2% in flavours).Over
Key Stock Data the past five years, the F&F industry witnessed CAGR of 8% whereas SHK grew at CAGR of
13%. The key factors for SHK‟s better performance were market share gain and new
BSE Code 539450 products launch. We believe, SHK will continue to outperform the Indian F&F industry
NSE Code SHK mainly on account of large product portfolio, strong library of product formulations and
Bloomberg SHKL IN
strategic acquisition in domestic market.
Shares O/s mn (FV Rs10) 144.6 Diversified product portfolio and broad client base
Market cap (Rs bn) 30.9 Over the years, SHK created diversify product portfolio which is comparable to most MNC
players operating out of India. SHK is a full service supplier with over 9,700 F&F products
52-week high/low 276/200 and ingredients and a large library of product formulations. Its brands SHK, Cobra (small
3-m daily avg vol. 1,15,788 pack products) and Keva enjoy leadership positions in their respective categories and enjoy
strong brand equity in India. SHK‟s customer base is very wide and it currently caters to
more than 4,100 customers (3,700 in fragrance and 400 in flavours) which also includes
MNCs and large domestic consumer companies. The largest client accounts for not more
Rel. Performance than ~3% of sales.
(%) 1m 3m 12m
Strong research & development skills along with scalable manufacturing facilities
SHK (2.0) (8.0) 2.5 SHK with its long presence in F&F industry developed strong research and development
NIFTY 0.2 7.6 (1.7) skills which is a critical success factor in F&F industry. Its focus on research and development
SENSEX (0.5) 6.5 (4.1) is evident from the number of new, innovative products it has introduced over the years.
Revenue from the products launched in last three years is now contributing ~14% to the
consolidated revenues. SHK has 4 manufacturing facilities, 3 of which are located in India
and 1 in Netherland. Collectively it has installed production capacity of 19,820tons (FY15
Shareholding Pattern Utilization was 45%). Its fragrance manufacturing plants at Mulund (Mumbai) and Raigad
(%) Sep15 Dec15 Mar16 (Maharashtra) comply with IFRA requirements and also the audit and rigorous requirements
Promoter 56.7 56.7 56.7 of several of its global customers. Its flavour manufacturing facility at Raigad is USFDA
compliant, certified by FSSC and licensed by FSSAI.
FII 6.0 12.5 14.0
DII 3.6 3.2 2.5 Growth to accelerate further; revenue CAGR of 17.6% over FY16-18E
Others 33.7 27.6 26.8
We expect SHK to see revenue CAGR of 17.6% over FY16-18E as compared to 13% CAGR
over the past five years. Acceleration in growth will be on account of higher growth in
flavour segment (35% CAGR) which will be backed by acquisition of HTT. Fragrance
segment will see revenue CAGR of 16.6% (11% volume CAGR). Increasing contribution from
on demand service income will also support growth in fragrance division. Strong revenues
Jignesh Makwana
traction, margin expansion along with substantial reduction in interest
Jignesh.makwana@amsec.in cost will drive higher earnings growth. We expect SHK will see earning CAGR of 36% over
+91 22 4343 5113 FY16-18E.
Outlook & Valuation
Strong business model, sound management and healthy market share are key strengths for
SHK. Customer centric business model, innovative offerings, strong R&D skill set will help in
achieving superior growth trajectory over the coming years. Strong balance sheet position
will support it in any future acquisition target. At CMP, SHK trades at 27x and 21x on FY17E
and FY18E earnings respectively. We initiate coverage on SHK with a BUY rating and a
target price of Rs 256 based on 25X FY18E EPS.
Exhibit 1 : Key Financials (Consolidated) Exhibit 2: Key Indicators
Y/E Mar (Rs mn) FY15 FY16 FY17E FY18E Y/E Mar FY15 FY16 FY17E FY18E
Sales 8355 9266 11213 12807 EBITDAM (%) 14.1 16.7 17.5 18.2
yoy (%) 9.7 10.9 21.0 14.2 NPM (%) 8.4 8.7 10.2 11.6
EBITDA 1178 1549 1967 2327 PER (x) 40.2 38.6 27.0 20.9
yoy (%) -10.4 31.5 27.0 18.3 P/BV (x) 5.5 4.1 3.7 3.3
Reported PAT 704 802 1147 1483 EV/Sales (x) 3.6 3.3 2.8 2.4
yoy (%) -11.0 13.9 42.9 29.4 EV/EBITDA (x) 25.2 19.9 15.9 13.1
Equity 1323 1446 1446 1446 RoACE (%) 14.2 16.0 18.6 22.5
EPS 5.3 5.5 7.9 10.3 RoANW (%) 13.8 10.5 13.8 16.0
Source: Company, AMSEC Research

Refer Disclosures & Disclaimer at the end of the report. Our reports are available on Bloomberg ASNM <GO>, ThomsonReuters, Factset and Capital IQ June 30, 2016
S H Kelkar & Company - Initiating Coverage
Investment Positives

Strong domestic player in niche Indian F&F industry

The global F&F industry is ~US$ 28bn in size and has been growing at CAGR of 4.7%
over the last five years whereas the Indian F&F industry is ~Rs 45b (~US$ 700mn) in
size and has witnessed a CAGR of 8% over the similar period. The reasons for better
performance of Indian F&F over global industry were relatively strong domestic
demand and growing export market for Indian players.

Exhibit 3: Global F&F market Exhibit 4: India F&F market

(US$ bn) (%) (Rs bn) (%)
30 25 28 6% 50 20%
26 45
24 45 18%
25 23 5% 38
40 16%
34
20 4% 35 31 14%
28
30 12%
15 3% 25 10%
20 8%
10 2% 15 6%
10 4%
5 1%
5 2%
0 0% 0 0%

FY12

FY13

FY14

FY15

FY16
FY12

FY13

FY14

FY15

FY16

Global F&F market y-o-y grwoth Indian F&F market y-o-y grwoth

Source: Company, AMSEC Research

The Indian F&F industry is comprises of more than 1,000 players which also includes
large number of small and regional players. The industry is largely dominated by MNC
players which occupies ~60% of the total industry pie. The key MNCs operating out of
India are Givaudan, IFF and Firmenich. Large Indian players operating in this space
are SHK and Goldfield.

Exhibit 5: Global F&F market share Exhibit 6: India F&F market share

Others, 28%

Others, 20% Givaudan,

Givaudan, 23%
Robertet SA, 21%
2%
Sensient
Flavors, 3%
Firmenich,
Frutarom, 3%
14% IFF, 14%
Goldfield , 1%
Mane SA, 4% Symrise,
7%

Wild Flavors, IFF, 12% SH Kelkar,

5% 12% Firmenich,
Symrise, 11% 14%
Takasago, 5%

Source: Company, AMSEC Research

Most of the small and regional players in the Indian market cater to small consumer
players whereas most F&F MNCs supplies to large MNC consumer companies and few
domestic large consumer players. Organised & large Indian players like SHK cater to
most domestic large consumer players and few MNCs. Beside they also caters to
regional consumer companies where they face limited competition from F&F MNCs.

June 30, 2016 2

S H Kelkar & Company - Initiating Coverage

Exhibit 7: India F&F Market structure

Segment Key Players Market Share Key Cliental

MNC F&F players Givaudan, IFF, Symrise and Firmenich. 60% FMCG MNCs and few Indian large players

Large Indian F&F players SHK & Goldfield 15% Indian large players and few MNCs

Small/regional firms NA 25% Unorganized and small players

Source: Company, AMSEC Research

Over the past 90 years, SHK has created a strong position in the niche Indian F&F
industry. With its innovative offerings and strong R&D capabilities along with well
developed client relationship, SHK created its strong position in the Indian F&F
SHK outperformed the industry. Over the past five years, the F&F industry witnessed CAGR of 8% whereas
broader F&F market by SHK grew at CAGR of 13%. The key factors for SHK‟s better performance were market
achieving CAGR of 13% v/s share gain and new products launch.
industry CAGR of 8% over
the last five years. Besides, SHK has a strong research team, state of the art five creation centers and
strong manufacturing infrastructure in both fragrances (IFRA compliant) and flavours
(USFDA/FSSAI compliant) which complies with strict regulatory norms also helped in
delivering relatively better performance.
SHK currently holds a market share of 21% in fragrance market and 2% in flavour
market. Lower market share in flavour industry was on account of higher number of
small players and relatively late foray by SHK.

Market share
Exhibit 8: Indian fragrance market (~Rs 25bn market) Exhibit 9: Indian flavour market (~Rs 21bn market)

Goldfield Others
3% 12% IFF
21%
Givaudan
IFF 26%
7% Others
42%

Symrise
10%
Givaudan
19%
Firmenich
21%
SH Kelkar SH Kelkar
21% 2% Symrise
Firmenich 10%
6%

Source: Company, AMSEC Research

The F&F industry is niche and enjoys high entry barriers like high customer acquisition
time, requirement of high level of innovations, high R&D spends presence of large
MNC players, long product development period, high compliance costs etc.
High entry barriers provide relatively stable market to existing market
players and limited competitions. Besides, large number of small players
provides enough rooms to large players to gain the market share from these
small players.

June 30, 2016 3

S H Kelkar & Company - Initiating Coverage
Exhibit 10: Strong Entry Barriers
Presence of
large MNCs
Long product
development
period
Source: Industry, AMSEC
SHK’s client base includes
~4,100 customers (3,700 in
fragrance and 400 in
flavour).
Exhibit 11: Key customers
Source: Company
June 30, 2016
High customer
acquistion time
High
compliance
cost &
stringent
norms
High
Entry
Barriers
Sustained R&D
Investments &
continoues
innovation
We believe, SHK will continue to outperform the Indian F&F industry mainly on account
of large product portfolio, strong library of product formulations and strategic
acquisition in domestic market. We expect it will continue to gain market share in both
fragrance and flavour category. Though the market share gain in fragrance will be
modest on account of large presence of MNC players and SHK‟s current sizable market
position. However, flavour segment will see healthy market share gain which will be
aided by recent acquisition and large presence of small players.
Diversify product portfolio and broad client base
Over the years, SHK created diversify product portfolio which is comparable to most
MNC players operating out of India. SHK is a full service supplier with over 9,700 F&F
products and ingredients and a large library of product formulations. Its brands SHK,
Cobra (small pack products) and Keva enjoy leadership positions in their respective
categories and enjoy strong brand equity in India. Branded small pack products (25-
500gm packs) contributes ~24% of its domestic sales and in this category, MNC
players don‟t have any presence. Every year it comes out with ~500 new F&F offerings
which enable SHK in outperforming the industry.
Its customer base is very wide and it currently caters to more than 4,100 customers
(3,700 in fragrance and 400 in flavours) which also includes MNC and large domestic
consumer companies. Large customer base mitigate the risk of dependency on any
particular client. The largest client accounts not more than ~3% of total sales.
Fragrance Flavour
HUL Britannia
Godrej Consumer Vicco
Marico Vadilal Industries
Vini Cosmetics Dukes (Ravi Foods)
Wipro Consumer
SHK client mix is more tilted more towards domestic large FMCG companies.
Over the last decade, domestic FMCG companies witnessed rapid growth and
clearly outperformed most MNC counterparts. Since the bulk of its domestic
revenue is coming from rapidly growing domestic FMCG companies and
overseas revenues from the developing market, SHK is in better position to
outperform the broader F&F industry.
4
S H Kelkar & Company - Initiating Coverage
Exhibit 12: Domestic client mix
MNC Players,
5%
Domestic
Players, 95%
Source: Company, AMSEC Research
Revenue from the products
launched in last three years
is now contributing ~14% to
the consolidated revenues.
Current capacity utilization
of blended capacity is less
than 50%.
June 30, 2016
Exhibit 13: Overseas client mix
Europe &
Others, 48%
South East
Asia, 24%
Asia Pacific
(Ex SEA), 5%
MENA, 24%
Strong Research & Development Skills...
The F&F industry requires high level innovation and it has very stringent compliance
requirements. To succeed in F&F industry, continued product innovation and regular
compliance with various authorities are the key factors. To achieve this, one requires
strong research & development skills. SHK with its long presence in F&F industry
developed strong research and development skills. Its focus on research and
development is evident from the number of new, innovative products it has introduced
over the years. Revenue from the products launched in last three years is now
contributing ~14% to the consolidated revenues.
Its research team of 18 scientists has developed 12 molecules over the last three years
of which it has filed patent applications for three molecules. Besides 18 scientists, its
R&D infrastructures also include 12 perfumers, 2 flavourists and 5 creations &
development centres. For R&D, SHK spends ~3% of its sales every year.
Based on strong R&D skills, SHK has created a niche for itself as the manufacturer of
consumer-centric quality products. In order to cater to the changing needs of
customers, SHK has set up five creation and development centres in Mumbai,
Bangalore, The Netherlands and Indonesia, where it works with the customers to
create the products. These creation and development centres house perfumers and
flavourists, and a team of evaluators and application executives.
SHK’s R&D programs have been recognized by the Department of Science and
Industrial Research of Government of India as an in-house research and
development unit. We believe that with its strong R&D and creative
capabilities, SHK will be able to expand its product portfolio which will
eventually result in market share gain and new contracts.
... Along with scalable manufacturing facilities.
SHK has 4 manufacturing facilities, 3 of which are located in India and 1 in
Netherland. Collectively it has installed production capacity of 19,820tons (FY15
Utilization was 45%). Its fragrance manufacturing plants at Mulund and Raigad comply
with IFRA requirements and also the audit and rigorous requirements of several of its
global customers. Its flavour manufacturing facility at Raigad is USFDA compliant,
certified by FSSC and licensed by FSSAI.
5
S H Kelkar & Company - Initiating Coverage

Exhibit 14: Manufacturing Facilities

Location Segment Land (acres) Installed capacity (Ton)

Raigad Fragrance & Flavour 37.2 11,506

Mumbai Fragrance 10.9 4,599

Vapi Fragrance 18.0 2,064

Barneveld, The Netherlands Fragrance NA 1,650

Source: Company, AMSEC Research
With its large manufacturing capacity, SHK is in better position to handle the future
growth trajectory without incurring any major capex. Besides, all its facilities are state
of the art and comply with all relevant authorities which makes it future ready for any
big contract from the international market in the coming period.
Taping inorganic route to accelerate the growth
With a view to accelerate its growth trajectory, SHK will go for strategic acquisitions
and partnerships which will help it enhancing product portfolio, broadening its flavour
business and in consolidating its market share in fragrance segment especially in the
domestic market. In 2011, SHK acquired PFW Aroma Ingredients B.V. (PFW) in The
Netherlands, which added one manufacturing facility with two production plants and a
research centre to its global operations. Through this acquisition, SHK made its foray
in the European market and gained experience in the international market. Over the
years, this acquisition has integrated well with SHK and now contributing ~22% of
consolidated revenues.
In the recent time SHK made two acquisitions in the domestic market though small in
size. In 2016, SHK acquired Hi-tech Technology (HTT) and Rasiklal Hemani Agencies
(RHA). Total consideration paid for these two acquisitions was Rs 583mn which was
funded entirely through IPO money.

Exhibit 15: SHK’s acquisitions

Acquired Company Year Segment Location Consideration (Rs mn)

PFW Aroma Ingredients B.V Nov'10 Ingredients & F&F The Netherlands NA

Hi-Tech Technology April'16 Flavour India 251.1

Rasiklal Hemani Agencies April'16 Fragrance India 331.7

Source: Company, AMSEC Research
Hi-tech Technology
HTT was a Mumbai based flavour manufacturer owned by Mrs Kanchan Mahatre. The
company is in manufacturing of flavours since 2000 and it has manufacturing plant at
Daman, near Vapi. This facility is holding FSSA license and has presence throughout
India. SHK acquired this business in slump sale for a consideration of Rs 251mn. It is
expected to generate revenues of Rs 220mn in FY16.
With this acquisition, SHK is now able to double its market share in flavour
segment. SHK is planning to integrate manufacturing process of HTT with its
existing flavour manufacturing plant at Raigad. This will result in better
integration and cost management.

June 30, 2016 6

S H Kelkar & Company - Initiating Coverage

Exhibit 16: HTT sales trend

(Rs mn)
250 220.0

200 179.8
161.4

150

96.9
100

50

0
FY13 FY14 FY15 FY16E

Source: Company, AMSEC Research

Rasiklal Hemani Agencies Pvt. Ltd.

RHA was the indenting agent for SHK in the northern region over the last 50 years for
its fragrance division. SHK took direct control of RHA and paid total consideration of Rs
331.7mn (including goodwill of Rs 50mn).
The rationale behind acquiring direct distributor was to strengthen the direct
distribution network of the company which will help in market share gain in fragrance
segment. RHA has deep industry knowledge and wide trade network in northern India.
SHK paid ~Rs 60mn as a trade commission to RHA in FY16. Apart from distribution
synergies, this acquisition will result in annual saving of ~Rs 35mn in
commission payment.

Exhibit 17: RHA commission income from SHK

(Rs mn)
70
60.0
60 55.3
50.5
50
41.8
40

30

20

10

0
FY13 FY14 FY15 FY16E

Source: Company, AMSEC Research

June 30, 2016 7

S H Kelkar & Company - Initiating Coverage
The management is targeting
incremental business growth
2-3% every year from
inorganic route.
Strong growth potential for
export market especially in
developing markets like South
East Asia and MENA.
No presence of MNC F&F
players in small branded
format.
June 30, 2016
The management said that they will continue to evaluate any business opportunities
that arise in the Indian and overseas markets and aim to harness its experience of
acquiring and integrating new markets with its current operations. The management is
targeting incremental business growth of 2-3% every year from inorganic route.
We believe that strategic acquisitions may act as an enabler to growing SHK business.
New acquisitions will provide access to new markets and help increase market share in
Indian and global fragrance and flavour industry. With the strong balance sheet (debt
free on net level) and generation of free cash flow over the next two years, we believe
SHK can go for sizable acquisitions without much stretching its balance sheet.
F&F Export: Strong growth potential
Apart from its Netherland operations, SHK derives ~2% of its consolidating revenues
from the export of F&F products. SHK currently exports its fragrance products to more
than 52 countries (South East Asia, Europe, and America) and flavour products to 15
countries (mainly in MENA market). Given the size of SHK, the current export business
is very minuscule. However, it has strong growth potential for both fragrance and
flavour market especially in developing markets like South East Asia and MENA.
To tap the huge export market, SHK is looking to invest in sales & distribution network
to expand its presence in developing markets like South East Asia, MENA and Africa.
SHK is also developing dedicated creation centres to cater these markets. With a series
of these overseas activation over the past one year, SHK created a material traction in
the target markets and is expected to gain some sizable contracts over the near future.
With its persistent efforts in the export market, SHK emerged as frontrunner with
L‟Oreal, Indonesia for providing fragrance for one of its shampoo brand which is
expected to relaunch in the near future.
Though we expect the size of this contract will not be so significant but what was really
commendable about this is, SHK emerged as frontrunner where all global F&F players
were there to compete. We believe getting this contract may help SHK in gaining big
MNC contracts in the export markets.
Expanding presence in the branded small pack portfolio
SHK‟s branded small pack business includes sales of fragrance products in package
sizes ranging from 25-500gms to several hundred traders and re-sellers spread
country-wide. Its branded small pack products are sold under the “Cobra” brand
name. For FY15, branded small packs contributed ~11% of total domestic revenues.
The company also sells larger branded package sizes of up to 25 kg. Our channel
check suggests superior brand recall of small pack under the „Cobra‟ brand among the
small consumers especially in perfumes and agarbatti manufacturing. Overall branded
portfolio contributes ~24% of the total domestic sales of the company.
Selling smaller branded portfolio in F&F industry is unique to SHK as no MNCs have a
presence in this format which results in absence of a major competition in this
channel. We believe, this particular segment will help SHK in consolidating market
share and provides better consumer insight. Further we are also of the opinion
that this segment is very much scalable and can see better grow traction as
compared to general bulk segment.
8
S H Kelkar & Company - Initiating Coverage

Exhibit 18: ‘Cobra’ brand sales trend Exhibit 19: Overall branded sales trend
(Rs mn) (%) (Rs mn) (%)
800 13% 14% 1,400 25% 28%
24% 24% 26%
700 11% 12% 1,200 24%
22%
600 9% 1,000 20%
10%
18%
500 800 16%
8%
400 14%
6% 600 12%
300 10%
4% 400 8%
200 6%
200 4%
100 2%
2%
0 0%
0 0%

FY16E
FY14

FY15
FY16E
FY14

FY15

Cobra sales % of domestic sales Total branded sales % of domestic sales

Source: Company, AMSEC Research

Procures ~250 ingredients
from in-house manufacturing
facilities
The company is aiming to increase its number of branded small pack customers by
expanding its sales and distribution network which would also include a sales team led
by a senior manager dedicated to branded small pack sales. Further, the company is
also planning new products to branded small pack customers. SHK‟s prior experience
in this category and strong market position will result in relatively higher growth
branded sales portfolio. The company is also exploring opportunities to introduce
different application methods for fragrance products such as roll on dispensers.
Efficient Raw Material Sourcing & Supply Chain supported by sizable
backward integration
Given the nature of the F&F industry, the quality and specifications of raw materials
used in products is of high importance and therefore ensuring availability of raw
materials is one of the critical success factors. The key raw materials in fragrance
manufacturing are various aromatic chemicals and essential oils. The complexity and
character of F&F manufacturing requires several hundred raw materials and timely
availability is very essential as the manufacturing process involves multiple
blending/mixing. Hence we believe sound raw material procurement practice is must
for competitive edge.
SHK has library of over 1,200 raw materials of which it sources ~57% from India and
43% from the international market like Brazil, Indonesia, China, Germany and USA.
SHK source ~250 ingredients from its manufacturing plants located at Vapi and
Barneveld, The Netherland. In India, SHK sources its required ingredients from 262
domestic suppliers.

Exhibit 20: Raw material sourcing – Geographical mix Exhibit 21: Raw material Sourcing mix
Inhouse
Sourcing, 21%

Domestic
Suppliers,
Overseas 57%
Suppliers,
43%

Outside
sourcing, 79%

Source: Company, AMSEC Research

June 30, 2016 9

S H Kelkar & Company - Initiating Coverage

Over the years, SHK has developed long standing relationships with its raw material
suppliers which provide the competitive advantage of effective and timely sourcing of
raw materials. For some key suppliers, SHK enjoys relationship of more than 20 years.
SHK sources ~35% of its total raw material requirements from the top 10 suppliers.
We believe that given the scale and size of SHK‟s operations along with multiple
decades of experience in sourcing raw materials, SHK is able to source its raw
materials cost-effectively, which gives it a competitive advantage in the industry
SHK is working towards further improvement in supply chain and its future strategy for
optimizing its supply chain includes effective forecast of customers demand,
implementing effective process to strengthen the sales and operations planning, etc.
Future Strategy for Supply Chain optimization

 Dynamic finished product forecasting to anticipate customer orders

 Strengthening sales and operations planning by implementing new processes and

tools

 Product portfolio rationalization

 Effective Raw material management

June 30, 2016 10

S H Kelkar & Company - Initiating Coverage

Financial Overview
Growth to accelerate further; CAGR of 17.6% over FY16-18E v/s CAGR of 13%
over the last five years
We expect SHK to see revenue CAGR of 17.6% over FY16-18E as compared to 13%
CAGR over the past five years. Acceleration in growth will be on account of higher
growth in flavour segment (35% CAGR) which will be backed by acquisition of HTT.
Fragrance segment will see revenue CAGR of 16.6% which will be 11% volume driven.
Increasing contribution from on demand service income will also support the growth in
fragrance division.

Exhibit 22: Fragrance revenue trend Exhibit 23: Flavour revenue trend
(Rs mn) (%) (Rs mn) (%)
Higher service income
16,000 30% 1,400 Higher grwoth 115%
will drive higher
14,000 1,200
backed by HTT 100%
grwoth in FY17 25% Acquistion
12,000 85%
1,000
20%
10,000 70%
800
8,000 15% 55%
6,000 600
10% 40%
4,000 400
5% 25%
2,000
200 10%
0 0%
0 -5%
FY17E

FY18E

FY19E
FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
FY12

FY13

FY14

FY15

FY16
Fragrance y-o-y grwoth Flavour y-o-y grwoth
Source: Company, AMSEC Research

Overall we expect SHK to see a CAGR of 14% organic growth which will be ~11%
volume driven. Market share gain on the back of innovative offerings along with large
pool of product portfolio will help SHK in delivering better growth than the F&F
industry in general.

Exhibit 24: Revenue growth trend

(Rs mn) (%)
16,000 30%
14,000
25%
12,000
20%
10,000
8,000 15%
6,000
10%
4,000
5%
2,000
0 0%
FY17E

FY18E

FY19E
FY12

FY13

FY14

FY15

FY16

Total y-o-y grwoth

Source: Company, AMSEC Research

June 30, 2016 11

S H Kelkar & Company - Initiating Coverage

Margin expansion will boost higher earning traction

We expect SHK to see 150-200bps margin expansion over the next two years. Strong
revenue traction, stable RM prices and steady growth in operational opex will result in
margin expansion. Beside the current blended capacity utilization is ~50% which we
expect to improve to ~72% by FY18E. Higher capacity utilization will provide better
operating leverage which will also support the margin expansion. Backed by margin
expansion and substantial reduction in interest cost, SHK will see higher earnings
growth. We expect SHK will see earning CAGR of 36% over FY16-18E.

Exhibit 25: EBITDA trend Exhibit 26: Earnings trend

(Rs mn) (%) (Rs mn) (%)
3,000 20% 2,000 14%
18% 1,800
2,500 12%
16% 1,600
14% 1,400 10%
2,000
12% 1,200
8%
1,500 10% 1,000
8% 6%
800
1,000
6% 600 4%
4% 400
500
2% 2%
200
0 0%
0 0%
FY17E

FY18E

FY19E
FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
FY12

FY13

FY14

FY15

FY16
EBITDA EBITDA Margin Net Profit Net Margin

Source: Company, AMSEC Research

Strong earning traction along with sound balance sheet will improve the
return ratio
The company raised Rs 2.1bn though IPO which resulted in dip in return ratio in FY16.
However, strong earnings momentum, sound balance sheet (debt free at net level) and
no major capex requirements will improve the overall return ratio here onwards. We
expect ROCE and ROE of 22% and 15.9% in FY18E as against 16% and 10.5%
respectively in FY16.

Exhibit 27: Return Ratio

(%)
30%
24.7%
25% 22.3%

18.2% 18.6%
20%
16.2% 16.0%
14.6% 14.2%
15% 17.6%
16.4% 15.9%
13.8% 13.8%
10% 12.6%
10.7% 10.5%
5%

0%
FY17E

FY18E

FY19E
FY12

FY13

FY14

FY15

FY16

ROE ROCE

Source: Company, AMSEC Research

June 30, 2016 12

S H Kelkar & Company - Initiating Coverage

Raised Rs 2.1bn through equity public issue

SHK raised Rs 2.1bn through equity public issue in Nov‟2015. The Blackstone group
which invested Rs 2.4bn in SHK in Sept‟12 for 33% stake in the company, made partial
exit though OFS and post this it is holding 21% stake in SHK. The key objects of the
public issue were partial exit to Blackstone through OFS and borrowing repayment.
With the equity fund raising, the company is now debt free at net level.
Outlook & Valuation
Strong business model, sound management and healthy market share position are key
strengths for SHK. Customer centric business model, innovative offerings, strong R&D
skill set will help in achieving superior growth trajectory over the coming years. Strong
balance sheet position will support it in any future acquisition target. We find SHK‟s
business model very unique backed by growth sustainability, diverse customer base,
key market player in highly concentrated industry, etc.
We expect, SHK to see a CAGR of 17.6% in revenues and 35.6% in earnings over the
next two years. Steady organic growth, HTT acquisition and higher contribution from
service income in fragrance segment will drive the overall sales growth. Business
model with lower capacity utilization gives better operating leverage which will
eventually result in margin expansion and relatively higher earnings growth.
Initiating Coverage with ‘BUY’; Target Price: Rs 256
At CMP, SHK trades at 27x and 21x on FY17E and FY18E earnings respectively. We
initiate our coverage on SHK with a BUY rating with a target price of Rs 256
which is based P/E multiple of 25X FY18E consolidated earnings which is ~30%
discount to Indian FMCG sector. Our target multiple is ~15% premium to the
valuation of global F&F companies. However we believe strong growth trajectory and
healthy balance sheet justifies the premium valuation over the global peers.

Exhibit 28: Peer set valuation comparison

Particular Mkt CAGR (FY16-18E) EBITDA Margin ROE PE EV/EBITDA
(US$ bn) Cap Sales EBITDA PAT FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E
Givaudan S.A. 18.5 4.7% 4.8% 8.9% 24.2 24.1 24.3 18.2 19.6 20.1 28.4 24.3 22.7 16.0 16.1 15.3
IFF 10.3 3.0% 6.9% 5.7% 22.2 23.5 23.9 27.9 26.3 25.9 22.4 23.8 22.1 16.8 15.6 14.7
Symrise A.G. 8.4 10.4% 9.7% 15.7% 22.2 21.4 21.9 16.7 17.3 17.5 32.3 24.7 22.7 15.5 14.4 13.3
Frutarom 2.8 17.4% 25.5% 28.4% 18.4 19.5 21.0 17.8 28.6 31.6 26.3 19.9 17.7 16.5 14.2 12.6
T Hasegawa 0.8 9.2% 2.5% 13.0% 16.2 14.7 14.3 4.2 4.0 4.0 21.2 25.6 23.4 7.6 8.0 8.1
Average NA 8.9% 9.9% 14.4% 20.6 20.6 21.1 17.0 19.2 19.8 26.1 23.7 21.7 14.5 13.7 12.8

SHK 0.5 17.6% 22.0% 36.0% 16.7 17.5 18.0 10.5 13.8 15.9 38.6 27.0 20.9 19.9 15.9 13.1
Source: Bloomberg, AMSEC Research

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S H Kelkar & Company - Initiating Coverage

Key Risks
Limited pricing power
The company mainly involved in B2B segment which offers limited pricing power.
Beside the Indian F&F industry is dominated by MNCs which also restrict the pricing
power of the company to some extent especially in the bulk segment. However, SHK
enjoys relatively good pricing power in the branded product portfolio (~24% of
domestic sales) which mitigates the pricing power risk to some extent.

Strong MNC presence

The Indian F&F industry is highly dominated by MNCs which collectively commands
~60% of the total F&F market in India. Strong MNC presence restricts the business
horizon especially in the MNC consumer companies. Moreover, a growing trend
towards consolidation has been evident in the F&F industry due to an increasing
preference by major MNC customers for suppliers with global operations.
Foreign currency risk and overseas exposure
Since the company derives ~36% of its consolidated revenues from the overseas
market and major portion of its raw materials (~43%) is being procured from outside
India, SHK is vulnerable to foreign currency volatility. Beside any adverse development
in the global F&F market can impact SHK‟s financials and business.

Protection of IPR of products

Protection of IPR of products is one of the key success factors for any F&F company.
Furthermore, non-patentable trade secrets and confidential know-how are important
for business success. Any breach of critical know-how or trade secrets can adversely
impact its reputation and ability to service its customers, which can affect its market
share.

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S H Kelkar & Company - Initiating Coverage

Exhibit 29: Quarterly Financial Highlights (Consolidated)

y-o-y q-o-q y-o-y
Particulars (Rs mn) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 FY15
change change change
Net Sales 2,357.1 2,221.7 2,085.9 2,300.5 2,660.2 13% 16% 9,268.3 8,355.3 10.9%
Less:
Raw Material 1,336.5 1,249.2 1,188.8 1,202.5 1,489.0 11% 24% 5,129.5 4,600.3 11.5%
Staff expenses 277.5 258.3 282.1 291.2 297.7 7% 2% 1,129.3 1,122.0 0.6%
Operating expenses 421.8 329.1 332.8 392.8 406.8 -4% 4% 1,461.5 1,455.1 0.4%
EBITDA 321.3 385.2 282.2 414.0 466.7 45% 13% 1,548.1 1,177.9 31.4%
Other Income 17.5 18.0 15.3 15.5 37.5 114% 142% 86.3 138.4 -37.6%
Dep 88.0 72.8 73.3 71.4 76.6 -13% 7% 294.1 293.0 0.4%
EBIT 250.8 330.3 224.2 358.1 427.6 70% 19% 1,340.2 1,023.3 31.0%
Int 56.2 48.3 50.0 32.3 13.5 -76% -58% 144.1 185.2 -22.2%
PBT 194.6 282.0 174.2 325.8 414.1 113% 27% 1,196.1 838.1 42.7%
Tax 18.9 75.4 74.7 100.0 153.6 713% 54% 403.7 241.0 67.5%
PAT 175.7 206.6 99.5 225.8 260.5 48% 15% 792.4 597.1 32.7%
Extra items 33.6 - - 15.5 0.2 -99% -99% 15.7 107.1 -85.3%
Minority Interest - - - - - NA NA - 0.2 NA
Net Profit 209.3 206.6 99.5 241.3 260.7 25% 8% 808.1 704.4 15%
Operating matrix BPS BPS BPS
Raw Material/Sales 56.7% 56.2% 57.0% 52.3% 56.0% -73 370 55.3% 55.1% -29
Staff expenses/Sales 11.8% 11.6% 13.5% 12.7% 11.2% -58 -147 12.2% 13.4% 124
Operating expenses/Sales 17.9% 14.8% 16.0% 17.1% 15.3% -260 -178 15.8% 17.4% 165
EBITDA Margin 13.6% 17.3% 13.5% 18.0% 17.5% 391 -45 16.7% 14.1% -260
Gross Margin 43.3% 43.8% 43.0% 47.7% 44.0% 73 -370 44.7% 44.9% 29

Exhibit 30: Segmental Snapshot

y-o-y q-o-q y-o-y
Particulars (Rs mn) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 FY15
change change change
Revenues
Fragrance 2,414.8 2,306.3 2,175.0 2,414.8 2,836.9 17% 17% 9,733.0 8,717.0 11.7%
Flavours 193.4 124.4 137.9 193.4 195.6 1% 1% 651.3 660.7 -1.4%
Less Inter Segment -317.9 -217.4 -235.4 -317.9 -385.2 21% 21% -1,155.9 -1,046.5 10.5%
Net Sales 2,290.3 2,213.3 2,077.5 2,290.3 2,647.3 16% 16% 9,228.4 8,331.2 10.8%
EBIT
Fragrance 321.6 302.0 191.0 321.6 379.4 18% 18% 1,194.0 832.1 43.5%
Flavours 25.4 23.4 24.6 25.4 37.0 46% 46% 110.4 97.0 13.8%
Total EBIT 347.0 325.4 215.6 347.0 416.4 20% 20% 1,304.4 929.1 40.4%
Source: Company, AMSEC Research

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S H Kelkar & Company - Initiating Coverage

Company Overview
S H Kelkar & Company (SHK) is one of the leading players in fragrance and flavour
(F&F) industry in India. It is the largest domestic F&F player with the market share of
~12% (~21% in fragrance and ~2% in flavour). The company started its operation in
1922. Currently, promoters hold 56.7% followed by Blackstone which holds 21.6%
stake in the company. It derives ~94% of its revenues from fragrance offerings and 6%
from flavour products. In terms of geography, it derives 64% of its revenues from
domestic market and balance from overseas markets.

Revenue mix
Exhibit 31: Segmental revenue mix Exhibit 32: Geographical revenue mix

100%

4% 3%
98%
6% 5%
6%
96% 7%
8% 8%

94%
Overseas,
92% 36%
96% 97%
90% 94% 95%
94%
93%
92% 92% India, 64%
88%

86%
FY17E

FY18E
FY11

FY12

FY13

FY14

FY15

FY16

Flavour Fragrance

Source: Company, AMSEC Research

SHK has 4 manufacturing plants, out of which 3 plants are located in India and 1 plant
is at The Netherlands. All its plants are state of the art and have complied with most of
the authorities like FSSAI, FDA, etc. In terms of product offerings, SHK has over 9,700
F&F products and ingredients and a large library of product formulations.
It also has retail branded fragrance portfolio which contributes 24% of the total
domestic category sales. Its key brands are SHK, Cobra and Keva. Besides strong
product library, its strong R&D activities enable SHK in coming out with ~500 new F&F
offerings every year.
Despite the fact that it derives most of its revenues from the FMCG industry, SHK‟s
client base is very wide as it caters to variety of clients which includes FMCG MNCs,
large domestic players and also the small & regional players. Currently it has over
4,100 customers (3,700 in fragrance and 400 in flavour). Due to large client base, it
has very low dependency on any single client.

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S H Kelkar & Company - Initiating Coverage

Company management
Board of Directors
Name Designation
Ramesh Vaze Managing Director
Prabha Vaze Director
Amit Dixit Director - Blackstone representative
Amit Dalmia Director - Blackstone representative
Nitin Ram Potdar Independent Director
Dalip Sehgal Independent Director
Sangeeta Kapiljit Singh Independent Director
Jairaj Manohar Purandare Independent Director

Senior Management
Name Designation Experience in years
Kedar Ramesh Vaze Whole time Director & Group CEO 19
Tapas Majumdar Executive VP & CFO 32
Poul Spierings Executive VP – Aroma Ingredients 27
Pramod Davray Executive VP – Fragrance India 38
Mohan Sapre Senior VP – International Fragrances 30
Makarand Patwardhan VP- Operations & SCM 29
Indrajit Chatterjee Group CHRO 20
Anurag Yadava General Manager – Flavours 22
Source: Company

Auditor: BSR & Co. LLP (KPMG affiliate)

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S H Kelkar & Company - Initiating Coverage

Financials (Consolidated) (Rsmn)

Profit and Loss Statement
Y/E March FY15 FY16 FY17E FY18E Cash Flow Statement
Y/E March FY15 FY16 FY17E FY18E
Net sales 8355 9266 11213 12807
PBT 947 1176 1592 2060
Raw Material 4600 5112 6167 7005 Non-cash adjustments 338 438 446 346
Staff expenses 1122 1120 1402 1575 Changes in working capital -384 -655 -677 -348
Operating expenses 1455 1485 1678 1899 Tax & Interest Paid -284 -404 -446 -577
Cashflow from operations 617 555 916 1481
Total Expenditure 7177 7717 9247 10480
Capital expenditure -218 -311 -1083 -300
EBITDA 1178 1549 1967 2327 Change in investments 3 -345 345 0
Depreciation 293 294 372 346 Other investing cashflow 42 0 0 0
Operating profit 885 1255 1594 1981 Cashflow from investing -173 -656 -738 -300
Issue of equity 0 2100 0 0
Other income 138 65 71 78
Issue/repay debt 0 0 0 0
EBIT 1023 1319 1666 2060 Interest Paid -183 -144 -73 0
Interest 185 144 73 0 Increase / (Decrease) in Loan Funds -252 -1404 0 -732
Exceptional items 0 0 0 0 Dividends paid -175 0 -443 -573
Other financing cashflow 536 156 0 0
Profit before tax 838 1176 1592 2060
Cashflow from financing -75 708 -516 -1304
Tax 241 404 446 577
Change in cash & cash eq 369 606 -338 -123
Share in profit of associate cos 0 0 0 0 Opening cash & cash eq 349 724 1330 992
Minority interest 0 0 0 0 Closing cash & cash eq 724 1330 992 869
Reported net profit 597 771 1147 1483 Free cash flow to firm 399 244 -167 1181

EO Items 107 31 0 0
Ratios
Adjusted net profit 704 802 1147 1483 Y/E March FY15 FY16 FY17E FY18E
Share O/s mn 132 145 145 145 PER SHARE
EPS Rs 5.3 5.5 7.9 10.3 EPS Rs 5.3 5.5 7.9 10.3
CEPS Rs 7.5 7.6 10.5 12.6
Balance Sheet Book Value Rs 38.6 52.7 57.6 63.9
Y/E March FY15 FY16 FY17E FY18E VALUATION
EV / Net Sales 3.6 3.3 2.8 2.4
SOURCES OF FUNDS :
EV / EBITDA 25.2 19.9 15.9 13.1
Share Capital 1323 1446 1446 1446 P / E Ratio 40.2 38.6 27.0 20.9
Reserves 3688 6182 6886 7796 P / BV Ratio 5.5 4.1 3.7 3.3
Total Shareholders Funds 5103 7628 8332 9243 GROWTH YOY%
Sales Growth 9.7 10.9 21.0 14.2
Minority interest - - - -
EBITDA Growth -10.4 31.5 27.0 18.3
Non-Current Liabilities
Net Profit Growth -11.0 13.9 42.9 29.4
Long term borrowings 391 296 296 - Gross Fixed Asset Growth -9.6 8.7 20.8 5.0
Deferred tax liability -50 -91 -91 -91 PROFITABILITY
Current Liabilities & Provisions Gross Profit/ Net sales ( (%) 44.9 45.5 45.0 45.3
EBITDA / Net Sales (%) 14.1 16.7 17.5 18.2
Short term borrowings 1745 436 436 0
EBIT / Net sales (%) 12.2 14.2 14.9 16.1
Current Liabilities & Provisions 2155 2224 2765 3158 NPM / Total income (%) 8.4 8.7 10.2 11.6
Total Equity & Liabilities 9344 10493 11738 12309 ROE (%) 13.8 10.5 13.8 16.0
APPLICATION OF FUNDS : ROCE (%) 14.2 16.0 18.6 22.5
Non Current Assets Tax / PBT % 28.8 34.4 28.0 28.0
TURNOVER
Fixed Assets 1965 2070 2731 2685
Debtors Velocity (Days) 85.0 92.2 90.0 90.0
Capital work in progress 105 - - - Inventory (Days) 138.7 132.7 130.0 120.0
Goodwill 776 793 843 843 Current Ratio 3.0 3.3 3.1 2.9
Current Assets LIQUIDITY
Gross Asset Ratio 1.7 1.9 2.0 2.1
Current investment - 345 - -
Total Asset Ratio 1.2 1.2 1.3 1.3
Inventories 3175 3369 3994 4210
Net Debt-Equity Ratio -0.1 -0.1 -0.1 -0.1
Sundry debtors 1947 2339 2765 3158 Interest Coverage 4.8 8.7 21.8 -
Cash and bank 759 822 484 361 PAYOUT
617 754 922 1053 Payout % - 33.0 33.0 33.0
Short loans and advances
Dividend % - 15.0 26.0 34.0
Others current assets - - - -
Yield % - 0.7 1.2 1.9
Total Assets 9344 10493 11738 12309 Source: Company, AMSEC Research

June 30, 2016 18

Note :
Note :
S H Kelkar & Company - Initiating Coverage

Recommendation rationale Sector rating

Buy: Potential upside of >+15% (absolute returns) Overweight: The sector is expected to outperform relative
Accumulate: >+5 to +15% to the Sensex.
Reduce: +5 to -5% Underweight: The sector is expected to underperform
Sell: < -5% relative to the Sensex.
Not Rated (NR): No investment opinion on the Neutral: The sector is expected to perform in line with
stock the Sensex.

Disclosures
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AMSEC or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in
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Analyst Certification:I, Jignesh Makwana, the research analysts and authors of this report, hereby certify that the views
expressed in this research report accurately reflects my personal views about the subject securities, issuers, products, sectors or
industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the
inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of
this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any
recommendations.

1. Name of the analyst: Jignesh Makwana

2. Analysts‟ ownership of any stock related to the information contained: Nil
3. AMSEC ownership of any stock related to the information contained: None
4. Broking relationship with company covered: None
5. Investment Banking relationship with company covered: None

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S H Kelkar & Company - Initiating Coverage

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