IPO

Monday, October 26, 2015 Click here for Rating Reckoner
S H Kelkar and Company
Catering to FMCG industry
CM RATING45/100
S H Kelkar and Company, promoted by Ramesh Vaze, Prabha Vaze and Kedar Vaze, is one of the largest fragrance and flavor companies in India by revenue, with a market share of approximately 12% for the year ended December 31, 2013 (Source: Nielsen Report, RHP). The company is the largest domestic fragrance producer in India, with exports of fragrance products to 52 countries. SHK, Cobra and Keva brands enjoy leadership positions in their respective categories and have established substantial brand equity in India. The company has a long standing reputation in the fragrance industry developed in its 90 years of experience. The company is an emerging flavor producer in India with exports to 15 countries. The company has a diverse range of products backed by strong research and development capabilities.

For the year ended December 31, 2013 (Source: Nielsen Report, RHP), the company had the third largest market share of 20.5% in Indian fragrance industry and the fifth largest market share of 2% in Indian flavor industry.

In FY 2015, the company created, manufactured and supplied over 8000 fragrances, including fragrance ingredients and flavors for the personal and home care products, food and beverage industries, either in the form of compounds or individual ingredients. The company has a large and diverse mix of over 4100 customers, including leading national and multi-national FMCG companies, blenders of fragrances and flavors and fragrance and flavor producers.

The fragrance products and ingredients are used as a raw material in personal wash, fabric care, skin and hair care, fine fragrances and household products. The company has over 3,700 customers for fragrance and fragrance ingredients products, including, among others, Godrej Consumer Products, Marico, Wipro Consumer Care and Lighting, Hindustan Unilever, VINI Cosmetics Private Limited and J.K. Helen Curtis.

The flavor products are used as a raw material by producers of baked goods, dairy products, beverages and pharmaceutical products. The company has over 400 customers for flavor products, including, among others, Britannia India, VICCO Laboratories, Vadilal Industries Limited and Ravi Foods.

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 tons annually. The company produced approximately 7,170 tons and 1,867 tons of fragrance and 434 tons and 102 tons of flavor in FY 2015 and the three months ended June 30, 2015, respectively.

The company's fragrance manufacturing plants in Mumbai and Raigad in Maharashtra comply with the regulations of the International Fragrance Association (IFRA) and flavor manufacturing plant in Raigad in Maharashtra is registered with the United States Food and Drug Administration (US FDA).

The company has a strong and dedicated research team of 18 scientists operating in its facilities in Mumbai and Barneveld. Its research team has developed 12 molecules over the last three years, of which it has filed patent applications for three. The company also has a team of 12 perfumers, 2 flavorists, evaluators and application executives at five creation and development centers in Mumbai, Bengaluru, The Netherlands and Indonesia for the development of fragrance and flavour products. During FY 2015, the company has developed over 502 new fragrance and flavors compounds which it sold commercially.

Issues Size and Purpose

The company is coming out with an initial public offering (IPO) with total issue size in the range of Rs 497 - 508 crore at a price band of Rs 173 - 180 per share of face value Rs 10 each. The company is raising amount Rs 210 crore through fresh issue of shares. The object of the issue: Amount Rs 126 crore will be used to repay/pre-pay in full or part of certain loans; Rs 32 crore will be used to invest in K.V. Arochem Private Limited, a wholly owned subsidiary (KVA) for repayment/pre-payment in full or in part of certain loans availed by KVA.; and other general corporate purpose.

Beside the fresh issue of shares, there is also offer for sale: up to 1.31 crore shares by Blackstone Capital Partners (Singapore) VI FDI TWO Pte Ltd, up to 86575 shares by Blackstone Family Investment Partnership (Singapore) VI-ESC FDI TWO Pte Ltd and up to 33.37 lakh shares by Prabha Vaze.

Strengths

  • The company has an established market leadership and brand name. The company is the largest domestic fragrance producer in India.
  • The company has a comprehensive product offering and diverse customer base. The company has a diverse portfolio of over 8,800 fragrance products including branded small packs and fragrance ingredients. The company has over 4,100 customers, including leading national and multi-national FMCG companies,
  • The Indian fragrance market in terms of value is at Rs 2090 crore. Over the last four years, it has grown at a CAGR of 10%.
  • The Indian flavor market in terms of value is at Rs 1715 crore. Over the last four years, it has grown at a CAGR of 10%.

Weaknesses

  • Increasingly stringent regulatory environment with regard to food, cosmetic ingredients and FMCG could result in stricter standards being applied to products, which could cause to incur substantial costs and may have an adverse effect on business and results of operations.
  • The increasing competition and growing trend towards consolidation in the fragrance and flavor industry can result in declining prices and weaken the market share.
  • Success in the fragrance and flavor business depends on a limited number of highly specialized employees. Significant shortfalls in recruitment or retention could adversely affect ability to compete and achieve strategic goals.
  • Some of the group companies is in the same line of business.
  • The company is present in a highly competitive industry. In 2014, there were more than 1,000 companies in the Indian fragrance and flavor industry, ranging from multinational companies and large Indian industrial houses to small-scale units and local manufacturers.
  • Multinational companies like Givaudan SA, Firmenich, International Flavors and Fragrances, Inc. and Symrise SA can be in an advantageous position in dealing with multinational FMCG companies due to their global connections.
  • Disproportionate increases in raw materials prices and significant dependence on a limited number of suppliers for unique raw materials could adversely affect business, results of operations and cash flows.

Financial Highlights

The company's consolidated net sales for the June quarter 2015 stood at Rs 222.17 crore. The revenue from domestic sales was Rs 143.05 crore (64% of total revenue) and overseas sales was Rs 79.12 crore (36% of total revenue). The revenue from fragrance business was Rs 210.39 crore (95% of total revenue) and flavor business was Rs 11.14 crore. The company's OPM stood at 17.3%. The OPM of fragrance business was 14% and flavor business was 21%. The company's net profit stood at Rs 20.66 crore.

The company's consolidated net sales for the year ended March 2015 grew 10% to Rs 837.01 crore. The revenue from domestic sales grew 13% to Rs 475.81 crore (57% of total revenue) and overseas sales grew 6% to Rs 361.20 crore (43% of total revenue). The revenue from the fragrance business grew 8% to Rs 773.31 crore (92% of total revenue) and flavor business grew 48% to Rs 60.66 crore. The company's OPM declined by 370 bps to 14.3%. The OPM of the fragrance business was 11% and the flavor business was 16%. The company's net profit declined by 19% to Rs 64.38 crore due to fall in the OPM and rise in deprecation provision.

The company's branded small pack business include sales of fragrance products in package sizes ranging from 25 grams to 500 grams to several hundred traders and re-sellers spread country-wide. The branded small pack products are sold under the Cobra brand name, which contributed Rs 18.31 crore for June quarter 2015 and Rs 51.18 crore for FY 2015. The additional sales in higher package sizes to these customers contributed Rs 15 crore for June quarter 2015 and Rs 63 crore for FY 2015. The total sales from customers in branded small pack business was Rs 33.2 crore for June quarter 2015 and Rs 114.1 crore for FY2015

Valuation

At the lower price band of Rs 173 per equity share of Rs 10 face value, the P/E works out to 30.4 times the annualized EPS of Rs 5.7 for the quarter ended June 2015 and 39 times the EPS of Rs 4.4 (on post-IPO equity) for FY 2015. At the upper band of Rs 180, the P/E works out to 31.5 times the annualized EPS of Rs 5.7 for the quarter ended June 2015 and 40.4 times the EPS of Rs 4.5 (on post-IPO equity) for FY 2015. There are no comparable listed companies. The issue has been priced as if the company is an FMCG player. However, the company supplies to FMCG companies and is itself not an FMCG company.

S H Kelkar and Company: IPO Highlights 

SectorInorganic Chemicals
Fresh shares offer size (in Rs crore)210
No. of fresh shares on offer at Rs 173 per share (crore)1.21
No. of fresh shares on offer at Rs 180 per share (crore)1.17
Price Band (Rs)173-180
Offer for share sales (in crore)1.66
Offer for share sales size at Rs 173 per share (in Rs crore)286.58
Offer for share sales size at Rs 180 per share (in Rs crore)298.17
Total issue size (Rs crore)497-508
Post issue equity at Rs 173 per share(Rs crore)145.09
Post issue equity at Rs 180 per share(Rs crore)144.62
Post-issue promoter and promoter group stake at Rs 173 per share (%)56.53%
Post-issue promoter and promoter group stake at Rs 180 per share (%)56.71%
Issue open date28th October 2015
Issue close date30th October2015
ListingNSE & BSE
Rating45/100

S H Kelkar and Company: Consolidated Financials

Particulars1203(12)1303(12)1403(12)1503(12)1506(03)
Net Sales570.00666.18761.35837.01222.17
OPM (%)18.317.718.014.317.3
OP104.40118.04137.03119.3238.52
Other Income3.971.527.8223.321.80
PBDIT108.37119.56144.84142.6440.32
Interest27.7521.7417.5418.604.83
PBDT80.6297.82127.31124.0435.49
Depreciation and Amortization17.3217.3318.7729.307.28
PBT before EO63.3080.49108.5494.7428.20
EO0.00-2.260.000.000.00
PBT after EO63.3078.23108.5494.7428.20
Tax18.9424.2629.4330.377.54
PAT before MI and share from associates44.3653.9779.1264.3620.66
MI-3.170.000.000.020.00
Share from associates0.007.600.000.000.00
Net Profit41.1961.5779.1264.3820.66
EPS (Rs)*2.84.25.54.45.7
EPS (Rs)**2.84.35.54.55.7
* Annualised on post-issue Equity of Rs 145.09 crore; Face value Rs 10 (issue price Rs 173)
* *Annualised on post-issue Equity of Rs144.62 crore; Face value Rs 10 (issue price Rs 180)
Figures in crore
Source-Capitaline corporate database

S H Kelkar and Company: Consolidated Segmental Financials

Particulars1203(12)1303(12)1403(12)1503(12)1506(03)
Sales (Rs crore)
Fragrances549.54627.16718.50773.31210.39
Flavours17.5966.6440.9360.6611.14
Operating Profit (Rs crore)
Fragrances78.4193.76112.3184.6730.20
Flavours10.368.157.449.802.34
Operating Profit Margin
Fragrances14%15%16%11%14%
Flavours59%12%18%16%21%
Sales (Rs crore)
Domestic 319.07354.84419.75475.81143.05
Overseas250.92311.35341.61361.2079.12
Total570.00666.18761.35837.01222.17
% of sales
Domestic 56%53%55%57%64%
Overseas44%47%45%43%36%
Source-Capitaline corporate database

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