S H Kelkar and Co.
BSE SENSEX
28,156
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
8,725
SHKL IN
145
44.7 / 0.7
362 / 201
-6/6/17
39
42.4
15 February 2017
3QFY17 Results Update | Sector: Others
CMP: INR309
TP: INR371 (+20%)
Buy
Results broadly in line; acquires futuristic encapsulation technology
Financials & Valuations (INR b)
Y/E Mar
Net Sales
EBITDA
PAT
EPS (INR)
Gr. (%)
BV/Sh (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2016
9.3
1.5
0.8
5.5
4.2
52.7
12.6
16.9
55.7
5.9
2017E
10.3
1.8
1.1
7.7
38.8
57.9
13.9
20.3
40.1
5.3
2018E
12.3
2.4
1.5
10.3
33.9
64.9
16.8
25.2
30.0
4.8
Estimate change
TP change
Rating change
n
Headwinds in international business and demonetization impact growth:
Consol. revenue grew 1% YoY to INR2,319m (est. of INR2,416m). Flavors
business grew 55.7% YoY, while fragrance business declined 3.2% YoY,
mainly due to headwinds in international business (down ~22% YoY led by
ingredients business). Domestic fragrance business grew 7%, lower than its
normal trajectory, due to the impact of demonetization. EBITDA margin
contracted 60bp YoY to 17.1% despite improvement in gross margin, mainly
due to negative operating leverage. EBITDA declined 3% YoY to INR395m. As
interest cost was lower at INR2m v/s INR44m in 3QFY16, PAT grew 16% YoY
to INR254m.
n
First mover in adopting encapsulation technology in India:
SHK acquired
Fragrance Encapsulation Technology (FET) from Tanishka Products. FET is
expensive in nature and largely prevalent in the US and Europe. SHK will
have its own in-house development program for fragrance through FET.
Through in-house development, SHK aims to produce FET based fragrance at
lower cost, which will enable to drive sales at price points acceptable in India
and Asia.
n
Inventory management – key focus area:
SHK will focus on improving
supply chain efficiencies through sourcing of raw material at a centralized
location. Currently, it follows a plant-wise sourcing model. This is targeted to
improve its inventory management (currently at ~165 days of sales).
n
Valuation and view:
We believe the acquisition of FET is a step in the right
direction, which can open up new avenues for growth for SHK. Additionally,
the impact of demonetization is likely to be temporary, and management
believes that international business will also come back on track. Thus, we
continue maintaining our estimates, and expect revenue CAGR of 16% and
adj. PAT CAGR of 34% over FY16-19E. Maintain
Buy
with a TP of INR371 (28x
FY19E EPS).
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Chintan Modi
(Chintan.Modi@MotilalOswal.com); +91 22 6129 1554
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 6129 1535

S H Kelkar and Co.
Results inline with estimates
n
n
n
n
n
n
SHKs consolidated revenue grew 1% YoY to INR2,319m (est: INR2,416m).
Fragrance business de-grew by 3.2% YoY while Flavor business grew by 55.7%
YoY for 3QFY17.
The key reason for dip in fragrance business was headwinds in international
business which saw a sharp de-growth of ~22% dragged by ingredients business.
The domestic fragrance business grew by 7% lower than its normal trajectory
because of impact of demonetization.
EBITDA margins declined by 60bp to 17.1% mainly due to negative operating
leverage despite gross margin improving. EBITDA de-grew by 3% to INR395m on
YoY basis. As the interest cost was lower at INR2m vs INR44m, PAT grew by 16%
to INR254m on YoY basis.
The company announced that board has considered and approved the proposal
to acquire and develop the Intellectual Property (IP) in Fragrance Encapsulation
Technology held by Tanishka Products. The consideration payable towards
acquisition of perpetual license for FET and capital investment in TP LLP would
be INR30m plus an amount payable at the end of 5 years, equivalent to a
portion of the revenues of KCPL that would be generated in FET sales using the
IP in FET.
Encapsulation technology is the clever process of locking a fragrance within a
protective outer wall, which may be broken later by specific pressure, in order
to release the fragrance aroma at the core.
As per our earlier discussion with
some the global players like Givadaun, this technology is possessed only by the
big players globally through R&D efforts and acts as an high entry barrier.
We believe, acquisition of this technology by SHKL will be break through to
serve high end customers as it enables to offer differentiated fragrance products
and systems.
Exhibit 1:
Revenue trend
Revenue (INR m)
17.2
12.8
Growth YoY %
15.7
17.8
2,319
1,959
2,357
2,211
2,082
2,295
2,658
2,559
2,453
1.1
Source: MOSL, Company
15 February 2017
2

S H Kelkar and Co.
Exhibit 2:
EBITDA and EBITDA margin trend
EBITDA (INR m)
18.3
13.4
8.4
164
315
404
255
407
448
473
416
395
46
209
195
70
218
24.0
12.3
17.7
Growth YoY %
16.9
18.5
17.0
17.1
260
275
41.3
Exhibit 3:
PAT trend
PAT (INR m)
378.3
Growth YoY %
246.0
254
16.5
243
Source: MOSL, Company
Source: MOSL, Company
Exhibit 4:
Fragrance revenue trend
Fragrance revenue (INR m)
2512
2094
2584
1947
13.1
5.1
2840
Growth YoY %
13.5
2502.4
-3.2
Exhibit 5:
Flavor revenue trend
Flavors revenue (INR m)
Growth YoY %
343
211
111
124
-10.0
86.2
55.7
200
190
208.2
230
311
2201
2210
Source: MOSL, Company
Source: MOSL, Company
Exhibit 6:
Fragrance PBIT margin trend
Fragrance PBIT (INR m)
15.4
9.0
9.2
11.7
15.8
margins %
16.3
11.9
Exhibit 7:
Flavor PBIT margin trend
Flavor PBIT (INR m)
margins %
30.3
21.0
13.2
27.9
23.3
17.4
21.1
12.6
25.1
40.0
104.0
13.0
30.0
91.5
29.4
13.4
225.2 322.5 179.0 303.0 380.0 348.0 360.0 297.5
21.5
Source: MOSL, Company
Source: MOSL, Company
Exhibit 8:
Revenue mix
Fragrance
Flavor
8
5
6
7
6
13
94
87
4QFY16
1QFY17
9
11
92
95
94
93
91
89
4QFY15
1QFY16
2QFY16
3QFY16
2QFY17
3QFY17
Source: MOSL, Company
15 February 2017
3

S H Kelkar and Co.
Conference Call Takeaways
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
n
In 3QFY17, Fragrance domestic business grew by 7% while international
business was down by 22%. Within, international business the formulation
business remained flat while major impact was seen in ingredients business.
In Fragrance, 85% of products (excl Netherlands) are unique proprietary
products which brands and FMCG cos. are buying exclusively from SHKL. It
supplies to almost all FMCG cos in India. 13% of revenue derived from new
products launched in last 3 years.
Negotiation of prices – Typically once in a year but not hard and fast as t
depends on RawMat price movement.
Trend towards natural and Ayurveda products, have inhouse offerings and will
further expand.
Margin expansion has been largely driven by operating efficiency and R&D team
has put in efforts.
Flavors – 3QFY17 domestic sales was INR6.5cr (21% up), exports was
INR15.8cr(up 33%), and HTT was INR6cr
In Flavors, it will not look at acquisition which are bigger that SHKL but will
largely focus on Tuck in acquistion like HTT
Believes EBITDA margins can be sustainable at 20% from long term perspective
Working capital despite demon was inline with 160days of sales of which large
part is inventory.
Demon impact - no specific category or specific product mix got impacted but it
was very large and small customers who got impacted
Transfer of ingredients from Netherlands to Vapi – will accelerate in next year
(12-18m). Currently, Netherlands is operating at 80% utilisations while Vapi is
operating at 45%.
Sourcing from Singapore – will combine buying in one location to improve
supply chain efficiencies. Currently, the company follows plant by plant
approach. New strategy will help inventory management.
Frag Encapsulation Technology – technology existing from 15-18yrs, have own
development program which will help improvement in cost and will help enable
to drive to sales at price point acceptable in India and Asia. Have acquired 51%
of company and 100% of technology and its a JV.
Fragrance market is growing at 10-12%.
Products made in SE asia which was exported to Africa saw some impact.
Cautious stance in near term on Fragrance domestic business as some brand
launches have been postponed by FMCG companies
15 February 2017
4

S H Kelkar and Co.
Valuation and view
We expect SHKL to surpass industry revenue growth due to ~40% wallet share in
fast-growing domestic FMCG companies and entry into new categories. It is also
expected to scale up its EBITDA margins to match with global peers (avg. 23%
margins in CY15) on the back of corrective measures in exports and ingredients
business. We expect SHKL to record 16% revenue CAGR, 34% PAT CAGR over FY16–
19E. This will lead to RoCE expanding from 17% in FY16 to 29% in FY19 alongwith
strong FCF CAGR of 20% with a net cash balance sheet. We maintain Buy with a
target price of INR371 (28x FY19E EPS).
Exhibit 9:
Assumptions
Fragrance (INR m)
Growth %
Flavour (INR m)
Growth %
FY13
6285
366
FY14
7204
14.6
410
11.8
FY15
7763
7.8
607
48.2
FY16
8642
11.3
587
-3.3
FY17E
9139
5.8
1180
101.0
FY18E
10670
16.8
1638
38.8
FY19E
12439
16.6
2072
26.5
15 February 2017
5

S H Kelkar and Co.
Story in charts
Exhibit 10: Revenue to post 16% CAGR over FY16-19E
Revenues (INR m)
16.9%
Growth (%)
19.3%
14.3%
9.7%
10.9%
11.4%
17.9%
Exhibit 11:
Contribution of Flavor to increase
Fragrance
24
6
18
11
Flavor
Ingredients
17
13
17
14
70
6,662
FY13
7,614
FY14
8,355
FY15
9,266
FY16
10,319 12,308 14,511
FY17E
FY18E
FY19E
FY16
70
70
69
FY17E
FY18E
FY19E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 12:
EBITDA margins on uptrend
EBITDA (INR m)
17.7%
18.0%
14.1%
Margins (%)
17.7%
19.1%
20.5%
Exhibit 13:
PAT to record a CAGR of 34% over FY16-19E
53%
25%
14%
704
-11%
PAT (INR m)
Growth (%)
39%
34%
16.7%
29%
1,180
FY13
1,370
FY14
1,178
FY15
1,549
FY16
1,821
FY17E
2,351
FY18E
2,975
FY19E
631
FY13
791
FY14
FY15
802
FY16
1,113
FY17E
1,490
FY18E
1,917
FY19E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 14:
Working capital days to gradually improve
Net Working capital (Days)
176
170
172
167
171
167
163
Exhibit 15:
RoCE to improve to 29% by FY19E
RoCE (%)
25.2
16.7
19.2
15.6
16.9
20.3
29.0
FY13
Source: MOSL, Company
FY14
FY15
FY16
FY17E
FY18E
FY19E
Source: MOSL, Company
15 February 2017
6

S H Kelkar and Co.
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2012
5,700
24.0
1,044
18.3
173
871
278
40
0
633
189
29.9
32
412
412
-10.0
2012
52
2,640
2,692
3,328
12
6,031
3,451
2,099
1,352
278
334
4,383
2,316
1,307
237
523
1,024
923
102
3,359
6,031
2013
6,662
16.9
1,180
17.7
173
1,007
218
15
-23
782
243
31.0
-76
616
631
53.3
2013
120
4,600
4,720
1,518
6
6,244
3,655
2,259
1,395
432
410
4,760
2,254
1,719
332
456
1,461
1,349
112
3,299
6,244
2014
7,614
14.3
1,370
18.0
188
1,183
175
78
0
1,085
294
27.1
0
791
791
25.3
2014
132
4,669
4,801
2,120
-19
6,902
4,233
2,548
1,686
503
2
5,573
2,788
1,794
415
576
1,689
1,405
283
3,885
6,902
2015
8,355
9.7
1,178
14.1
293
885
185
246
0
945
241
25.5
0
704
704
-11.0
2015
1,323
3,682
5,005
2,519
-50
7,474
4,573
2,612
1,961
105
0
6,502
3,175
1,945
759
622
1,870
1,530
340
4,632
7,474
2016
9,266
10.9
1,549
16.7
294
1,255
144
96
0
1,206
404
33.5
0
802
802
13.9
2016
1,446
6,182
7,628
855
-91
8,392
4,914
3,026
1,889
181
345
7,285
3,369
2,339
822
754
2,101
1,892
209
5,184
8,392
2017E
10,319
11.4
1,821
17.7
190
1,631
45
100
0
1,687
573
34.0
0
1,113
1,113
38.8
2017E
1,446
6,933
8,379
205
-91
8,493
5,357
3,216
2,141
334
345
7,535
3,841
2,573
281
840
2,655
2,065
590
4,880
8,493
2018E
12,308
19.3
2,351
19.1
205
2,146
(INR Million)
2019E
14,511
17.9
2,975
20.5
214
2,760
9
120
0
2,258
768
34.0
0
1,490
1,490
33.9
2018E
1,446
7,938
9,384
0
-91
9,293
5,699
3,420
2,279
142
345
8,903
4,419
3,069
414
1,002
3,169
2,433
735
5,735
9,293
0
145
0
2,905
988
34.0
0
1,917
1,917
28.6
2019E
1,446
9,231
10,677
0
-91
10,586
5,887
3,634
2,253
103
345
10,829
5,025
3,618
1,005
1,181
3,737
2,836
901
7,092
10,586
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
(INR Million)
15 February 2017
7

S H Kelkar and Co.
Financials and Valuations
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
Ratios
2012
3.1
4.0
28.1
0.0
1.1
2013
4.8
5.9
35.7
0.6
15.6
2014
6.0
7.4
36.4
1.1
22.2
51.7
41.8
8.5
5.6
31.1
0.4
2015
5.3
7.5
38.5
1.1
25.6
58.0
41.0
8.0
5.1
36.1
0.4
14.2
15.6
1.1
80
139
43
0.3
2015
1,178
235
-375
-285
-136
617
-219
399
3
17
-199
-38
322
-183
-176
-75
344
415
759
2016
5.5
7.6
52.7
1.5
32.6
55.7
40.8
5.9
4.8
28.9
0.5
12.6
16.9
1.1
85
133
51
0.0
2016
1,549
82
-374
-394
1
864
-238
626
4
-331
-565
1,956
-1,589
-162
-441
-236
63
759
822
2017E
7.7
9.0
57.9
2.1
32.6
40.1
34.3
5.3
4.3
24.5
0.7
13.9
20.3
1.2
84
136
49
-0.1
2017E
1,821
0
-237
-573
0
1,011
-595
416
0
100
-495
0
-650
-45
-362
-1,057
-541
822
281
2018E
10.3
11.7
64.9
2.8
32.6
30.0
26.4
4.8
3.6
18.8
0.9
16.8
25.2
1.3
84
131
49
-0.1
2018E
2,351
0
-722
-768
0
861
-150
711
0
120
-30
0
-205
-9
-485
-699
133
281
414
2019E
13.3
14.7
73.8
3.6
32.6
23.3
21.0
4.2
3.0
14.7
1.2
19.1
29.0
1.4
84
126
48
-0.1
2019E
2,975
0
-767
-988
0
1,221
-150
1,071
0
145
-5
0
0
0
-624
-624
591
414
1,005
12.6
16.0
0.9
79
148
32
0.5
2012
1,044
6
-122
-204
9
733
-190
543
-187
11
-366
0
-216
-253
-104
-573
-206
443
237
15.0
16.7
1.1
88
123
41
0.2
2013
1,180
-21
103
-259
26
1,031
-344
687
0
14
-330
10
-259
-210
-148
-607
94
237
332
16.6
19.2
1.1
81
134
42
0.4
2014
1,370
51
-729
-343
-29
321
-386
-65
0
-211
-597
0
527
-161
-6
360
84
332
415
Cash Flow Statement
(INR Million)
15 February 2017
8

S H Kelkar and Co.
Corporate profile
Company description
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Dec-16
Promoter
DII
FII
Others
57.6
2.5
17.4
22.4
Sep-16
56.7
1.7
15.2
26.4
Dec-15
56.7
3.2
12.5
27.7
Source: Capitaline
Exhibit 3: Top holders
Holder Name
Blackstone Capital Partners (Singapore) VI
FDI Two Pte. Ltd
T. Rowe Price International Discovery Fund
Mondrian Emerging Markets Small Cap
Equity Fund
Smallcap World Fund, Inc
National Westminster Bank Plc As
Depository of First State Asia Pacific Fund A
Sub Fund of First Sta
% Holding
21.5
2.6
1.8
1.8
1.2
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Ramesh Vinayak Vaze
Kedar Ramesh Vaze
Deepti Chandratre
Designation
Managing Director
Whole Time Director &
CEO
Company Secretary
Exhibit 5: Directors
Name
Amit Dalmia
Prabha Ramesh Vaze
Dalip Sehgal
Nitin Potdar.
Name
Amit Dixit
Alpana Parida
Jairaj Manohar Purandare
Sangeeta Singh
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
B S R & Co LLP
Type
Statutory
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
FY19
Source: Capitaline
MOSL
forecast
7.7
10.3
13.3
Consensus
forecast
7.4
9.9
11.9
Variation (%)
3.5
4.4
11.1
Source: Bloomberg
15 February 2017
9

Disclosures
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and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into
account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their
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SH KELKAR & CO
15 February 2017
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