BSE SENSEX
33,307
S&P CNX
10,227
S H Kelkar and Co.
CMP: INR275
TP: INR318(+16%)
Buy
Structurally secure; but near-term headwinds
We met SHKL’s management to understand recent business developments and
growth opportunities. Key takeaways:
9 March 2018
Update
| Sector:
Consumer Product
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Supply-side disruptions from Germany, US and China to pressurize margins
SHKL IN
145
333 / 237
0/-1/-22
39.8
0.6
58.0
42.4
Financials Snapshot (INR b)
FY18E FY19E FY20E
Y/E Mar
10.6
12.3
14.1
Net Sales
1.9
2.3
2.9
EBITDA
1.1
1.4
1.8
PAT
7.9
9.7
12.2
EPS (INR)
9.1
22.4
26.6
Gr. (%)
61.4
68.3
77.0
BV/Sh (INR)
13.4
14.9
16.9
RoE (%)
19.8
21.8
24.8
RoCE (%)
34.8
28.4
22.5
P/E (x)
4.5
4.0
3.6
P/BV (x)
Shareholding pattern (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
57.6
57.6
57.6
DII
2.0
2.0
2.5
FII
20.6
20.9
17.4
Others
19.8
19.5
22.4
FII Includes depository receipts
Stock Performance (1-year)
S H Kelkar & Co.
Sensex - Rebased
370
320
270
220
Fire in BASF’s German chemical plant, China resorting to factory shutdowns in a
move to regulate environmental laws, and floods in the US have caused several
supply-side disruptions for flavors and fragrances (F&F) players like S H Kelkar
(SHKL), with sourcing of raw materials like orange oil, citral and Isoprenol being
severely affected. BASF alone accounts for 20-25% of SHKL’s RM requirements.
While SHKL maintains a large stock of inventory, severe supply constraints
could exert pressure on margins over the next 2-3 quarters.
We, however, believe that margin compression will be partly offset by the
shifting of production from the Netherlands facility to Vapi (likely to be
completed by July/August 2018). We revise down our FY19 margin estimate by
700bp to 18.4% at the operating level and by 800bp to 11.4% at the PAT level.
CFF acquisition brings in cross-selling opportunities
SHKL acquired a 51% stake (for EUR12m) in Creative Flavors and Fragrances
SpA (CFF), an Italian F&F player headquartered in Milan, Italy with significant
presence in fine fragrances and fabric care. CFF acquisition will help SHKL to
bridge the gaps in its existing portfolio.
CFF acquisition will provide a gamut of premium Italian products that SHKL
intends to introduce in emerging markets like India, Indonesia and Middle East.
In Italy, the company will use CFF as a front-ended platform to sell fabric care
products based on SHKL-developed encapsulation technology.
New launches in FMCG to pave way for improved growth
There has been continued focus on new launches and widening of portfolio in
the FMCG space to tap new segments and categories. This will continue
benefiting SHKL, which has a 23% market share in fragrances and 3-4% market
share in flavors.
Changing consumer preferences necessitate strong R&D capabilities to develop
new F&F formulations. SHKL continues to reinvest any expansion in margins
beyond 20% into R&D activities in order to drive revenues further.
Maintain revenue estimates, cut EBIDTA for FY19E; Maintain Buy
We maintain our revenue estimates, led by a rebound in FMCG demand and
available cross-selling opportunities post CFF acquisition. However, we cut
EBIDTA estimates for FY19 owing to raw material supply disruptions post
Germany-BASF blast, Florida storms and Chinese plant shutdowns in 2HFY17.
We value the stock at 26x FY20E consol. earnings of INR12.2/share and
reiterate our
Buy
rating with a revised price target of INR318/share.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Chintan Modi
–
Research Analyst
(Chintan.Modi@MotilalOswal.com); +91 22 6129 1554
Lopa Thakkar
–
Research Analyst(Lopa.Thakkar@motilaloswal.com);
+91 22 3010 8029

S H Kelkar and Co.
Macro headwinds, supply disruptions put margins under pressure
Blast in BASF’s German chemical plant, Chinese plant shutdowns (on
environmental grounds) and floods in the US caused several supply-side
disruptions for F&F players. While SHKL maintains a large stock of inventory,
supply constraints are likely to exert pressure on margins over the next 2-3
quarters.
Margin compression, however, is expected to be partly offset by the shift of the
Netherlands facility to Vapi (to be completed by July/August 2018). We revise
down our FY19 margin estimate by 700bp to 18.4% at the operating level and by
800bp to 11.4% at the PAT level.
BASF, Germany alone caters to 20-25% of SHKL’s raw material requirements.
BASF declared force majeure for certain citral and isoprenol-based aroma
ingredients after a fire forced it to shut down its Ludwigshafen facility.
Storms in Florida (US) resulted in shutdown of plants, affecting SHK’s sourcing of
raw materials like orange oil.
In October 2017, China shut down tens of thousands of factories in widespread
pollution crackdown. Media articles indicate that an estimated 40% of all China's
factories were shut down at some point in order to be inspected by
environmental bureau officials.
Stake acquisition in CFF to provide cross-selling opportunities
SHK acquired a 51% stake in CFF for a consideration of EUR12m; the balance
49% will be acquired in three years based on CFF’s performance. The acquisition
will help SHKL fill the gaps in its existing portfolio with fine fragrances and fabric
care products.
CFF generates 13-14m revenues from the fragrances division and another
INR13m from blending-related work undertaken for MNCs such as Reckitt
Benckiser.
CFF’s customer profile includes SME players in Middle East and Italy. It has one
master perfumer and six perfumers, which are experts in fabric care, specialty
fragrances.
Management control remains with CFF till the rest of the stake is bought by
SHKL (SHKL will treat the acquisition as an investment and part of profit will
come to the company in 4QFY18).
In addition to cost synergies on procurement, purchasing, quality systems and
regulatory costs - which can be apportioned to both the businesses together as
a result of the acquisition – there are three key benefits/synergies:
1.
CFF’s fabric softener and detergent range of products will provide a ready
library of premium products that SHK intends to introduce in emerging
markets such as India, Indonesia and Middle East.
2.
In addition, SHKL has built a technology for encapsulation of some
fragrances (for fabric use) in India. The company will use CFF as a front-
ended platform to sell this technology. Although the encapsulation
technology has already been explored in the European markets, SHKL will
have ready access to new markets and customers through CFF.
3.
The company is at the cutting edge of premium fine fragrances
development through the Italian acquisition and its own investments in
Amsterdam. SHKL now has access to key ingredients for success in fine
2
9 March 2018

S H Kelkar and Co.
fragrances: (a) premium ingredients and (b) resources in terms of people.
Also, CFF has a manufacturing facility in Italy, which will help respond to
market demand quickly.
New launches in FMCG to drive revenue market share
Changing consumer preferences necessitate higher level of innovation and
product launches in the FMCG industry. Post demonetization, new launches and
widening of portfolio in the FMCG space to get into new segments and
categories have continued to gain momentum, driving growth in the F&F
industry. SHKL currently has a 23% market share in fragrances and 3-4% market
share in flavors.
Strong R&D capabilities are needed to introduce products that meet dynamic
consumer preferences. SHKL continues to reinvest any expansion in margins
beyond 20% into R&D activities in order to gain further market share.
Lower exposure to REACH-like regulations compared to global peers
Personal products industry is highly sensitive to chemical safety issues. Cosmetics
and personal care product manufacturers are typically exposed to regulatory risks
and reformulation costs associated with product chemical content.
EU's Registration, Evaluation, Authorization and Restriction of Chemicals
(REACH) Regulations and China’s MEP, among others, are regulatory bodies
aiming to protect of human health and environment through better and earlier
identification of intrinsic properties of chemical substances. Currently, India
does not have any such regulations; however, the National Chemical policy is
underway.
SHKL faces lower risk than peers that derive a majority of their revenues from
highly regulated markets such as Europe, North America and Japan. For
example, in EU, the REACH authorities have issued a May 31, 2018 chemical
registration deadline for all manufacturers and importers of chemicals. Without
registration, substances cannot be manufactured or imported into the EU. The
deadline is a challenge for the companies and regulators alike as it concerns
many SMEs with limited resources and many niche chemicals with less existing
data. SHKL’s management clarified that it is aware of the developments and is
confident of being fully complaint by May 2018.
Given the rising importance of central chemical inventories, such regulations are
a key monitorable. The Indian Ministry of Chemicals and Fertilizers is in the
process of issuing a National Chemical Policy with the intention of creating
REACH-like regulation in India. This includes creating a chemicals inventory and
a centralized body to monitor regulatory implementation. Currently, there is no
umbrella regulation that seeks to create an inventory of all chemicals and have a
coordinated chemical management.
9 March 2018
3

S H Kelkar and Co.
Story in charts
Exhibit 1: Rising trend of revenues
Revenues (INR m)
12.0%
6.7%
0.3%
Growth (%)
15.7%
17.0%
15.1%
Exhibit 2: EBIDTA to sustain at 18% level
EBITDA (INR m)
18.1%
Margins (%)
18.4%
20.2%
15.6%
9,936
FY16
10,598
FY17
10,627
FY18E
12,298
FY19E
14,123
FY20E
1,498
FY16
1,658
FY17
1,922
FY18E
2,263
FY19E
2,853
FY20E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 3: Positive PAT growth trend
PAT (INR m)
43%
Growth (%)
Exhibit 4: Rising RoCE trend
RoCE (%)
19.8
21.8
24.8
22%
4%
731
FY16
1,048
FY17
9%
1,143
FY18E
1,399
FY19E
27%
16.9
19.0
1,771
FY20E
FY16
FY17
FY18E
FY19E
FY20E
Source: : MOSL, Company
Source: : MOSL, Company
Exhibit 5: Stable ROE over 5 years
RoE (%)
13.7
13.4
14.9
16.9
Exhibit 6: Improving net working capital days
Net Working capital (Days)
161
157
158
155
11.9
147
FY16
FY17
FY18E
FY19E
FY20E
FY16
FY17
FY18E
FY19E
FY20E
Source: : MOSL, Company
Source: : MOSL, Company
9 March 2018
4

S H Kelkar and Co.
Financials and Valuations
Consolidated - Income Statement
Y/E March
Total Income from Operations
Change (%)
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT bef. EO Exp.
EO Items
PBT after EO Exp.
Current Tax
Deferred Tax
Tax Rate (%)
Less: Minority Interest
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY13
7,113
17.7
1,180
16.6
173
1,007
218
15
805
-23
782
250
-7
31.0
-76
616
631
-16.6
8.9
FY14
8,114
14.1
1,370
16.9
188
1,183
175
78
1,085
0
1,085
328
-33
27.1
0
791
791
25.3
9.8
FY15
8,868
9.3
1,178
13.3
293
885
185
246
945
0
945
286
-45
25.5
0
704
704
-11.0
7.9
FY16
9,936
12.0
1,498
15.1
297
1,201
202
105
1,103
0
1,103
446
-74
33.8
0
731
731
3.7
7.4
FY17
10,598
6.7
1,658
15.6
194
1,464
52
116
1,528
0
1,528
459
20
31.4
0
1,048
1,048
43.5
9.9
FY18E
10,627
0.3
1,922
18.1
248
1,674
26
69
1,717
-101
1,616
549
0
34.0
-10
1,077
1,143
9.1
10.8
(INR Million)
FY19E
12,298
15.7
2,263
18.4
300
1,963
0
83
2,046
0
2,046
696
0
34.0
-49
1,399
1,399
22.4
11.4
FY20E
14,123
14.8
2,853
20.2
349
2,504
0
100
2,604
0
2,604
885
0
34.0
-53
1,771
1,771
26.6
12.5
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Deferred Tax Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Goodwill on Consolidation
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
FY13
120
4,077
4,720
6
1,518
6,244
3,655
2,259
1,395
707
432
410
4,760
2,254
1,719
332
456
1,461
757
592
112
3,299
6,244
FY14
132
4,669
4,810
-19
2,111
6,902
4,233
2,548
1,686
828
503
2
5,573
2,788
1,794
415
576
1,689
879
527
283
3,885
6,902
FY15
1,323
3,682
5,097
-50
2,427
7,474
4,573
2,612
1,961
776
105
0
6,502
3,175
1,945
759
622
1,870
977
553
340
4,632
7,474
FY16
1,446
5,714
7,161
57
732
7,949
2,494
427
2,067
206
181
354
7,220
3,352
2,288
822
758
2,126
1,633
400
93
5,094
7,949
FY17
1,446
6,671
8,117
73
624
8,814
3,252
495
2,757
206
75
497
7,213
3,502
2,170
555
987
1,975
1,107
757
111
5,238
8,814
FY18E
1,446
7,436
8,883
73
0
8,955
4,037
743
3,294
206
740
0
7,211
3,721
2,176
325
989
2,536
1,216
759
561
4,675
8,956
(INR Million)
FY19E
1,446
8,431
9,878
73
0
9,951
4,904
1,042
3,861
206
423
0
8,408
4,234
2,518
511
1,145
2,989
1,430
878
681
5,419
9,951
FY20E
1,446
9,691
11,137
73
0
11,210
5,517
1,392
4,126
206
360
0
9,913
4,693
2,892
1,012
1,315
3,435
1,606
1,008
821
6,478
11,210
0
9 March 2018
5

S H Kelkar and Co.
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
FCF per share
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Leverage Ratio (x)
Debt/Equity
FY13
4.8
5.9
35.7
0.6
15.6
FY14
6.0
7.4
36.4
1.1
22.2
46.0
37.2
7.6
4.7
27.8
0.4
-0.5
16.6
19.2
1.2
125
81
40
0.4
FY15
5.3
7.5
38.5
1.1
25.6
51.7
36.5
7.1
4.3
32.3
0.4
3.0
14.2
15.6
1.2
131
80
40
0.5
FY16
5.1
7.1
49.5
1.5
35.7
54.4
38.7
5.6
4.0
26.5
0.5
4.3
11.9
16.9
1.2
123
84
60
0.1
FY17
7.2
8.6
56.1
1.7
28.9
37.9
32.0
4.9
3.8
24.0
0.6
1.5
13.7
19.0
1.2
121
75
38
0.1
FY18E
7.9
9.6
61.4
1.8
28.9
34.8
28.6
4.5
3.7
20.5
0.6
1.8
13.4
19.8
1.2
128
75
42
0.0
FY19E
9.7
11.7
68.3
2.3
28.9
28.4
23.4
4.0
3.2
17.3
0.8
3.2
14.9
21.8
1.2
126
75
42
0.0
FY20E
12.2
14.7
77.0
2.9
28.9
22.5
18.8
3.6
2.7
13.6
1.1
5.9
16.9
24.8
1.3
121
75
41
0.0
0.2
5.2
15.0
16.7
1.1
116
88
39
0.3
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
E: MOSL Estimates
FY13
785
173
201
-259
103
1,005
26
1,031
-344
687
0
14
-330
10
-259
-210
-114
-34
-607
94
237
332
FY14
1,088
188
146
-343
-729
350
-29
321
-386
-65
0
-211
-597
0
527
-161
0
-6
360
84
332
415
FY15
945
293
175
-285
-375
753
-136
617
-219
399
3
17
-199
-38
322
-183
-176
0
-75
344
415
759
FY16
1,206
294
130
-394
-374
863
1
864
-238
626
4
-331
-565
1,956
-1,589
-162
-441
0
-236
63
759
822
FY17
1,528
194
-64
-480
-412
767
108
875
-652
222
-143
116
-680
0
-108
-52
-303
0
-463
-268
822
555
FY18E
1,717
248
-43
-549
334
1,706
0
1,706
-1,450
256
497
69
-884
0
-624
-26
-311
-91
-1,053
-230
555
325
(INR Million)
FY19E
2,046
300
-83
-696
-558
1,009
0
1,009
-550
459
0
83
-467
0
0
0
-404
49
-355
186
325
511
FY20E
2,604
349
-100
-885
-557
1,410
0
1,410
-550
860
0
100
-450
0
0
0
-512
53
-459
501
511
1,012
9 March 2018
6

S H Kelkar and Co.
NOTES
9 March 2018
7

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
S H Kelkar and Co.
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
Motilal Oswal Securities Ltd. (MOSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services,
Investment Advisory Services, Depository participant services & distribution of various financial products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed public company, the details in respect of
which are available on
www.motilaloswal.com.
MOSL is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited
(BSE), Metropolitan Stock Exchange Of India Ltd. (MSE) for its stock broking activities & is Depository participant with Central Depository Services Limited (CDSL) & National Securities Depository Limited (NSDL) and is member of Association of
Mutual Funds of India (AMFI) for distribution of financial products. Details of associate entities of Motilal Oswal Securities Limited are available on the website at
http://onlinereports.motilaloswal.com/Dormant/documents/Associate%20Details.pdf
Regulatory Enquiries against Motilal Oswal Securities Limited by SEBI:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry and
adjudge violation of SEBI Regulations; MOSL requested SEBI to provide all documents, records, investigation report relied upon by SEBI which were referred in Show Cause Notice. The matter is closed and MOSL had to pay Rs. 2
lakhs towards penalty for misplacement of original POA of client.
MOSL, it’s associates, Research Analyst or their relative may have any financial interest in the subject company. MOSL and/or its associates and/or Research Analyst may have beneficial ownership of 1% or more securities in the subject company at
the end of the month immediately preceding the date of publication of the Research Report.
MOSL and its associate company(ies), their directors and Research Analyst and their relatives may; (a) from time to time, have a long or short position in, act
as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial
instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.;
however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOSL even though there
might exist an inherent conflict of interest in some of the stocks mentioned in the research report.
Research Analyst may have served as director/officer, etc. in the subject company in the last 12 month period. MOSL and/or its associates may have
received any compensation from the subject company in the past 12 months.
In the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report, MOSL or any of its associates may have:
a)
managed or co-managed public offering of securities from subject company of this research report,
b)
received compensation for investment banking or merchant banking or brokerage services from subject company of this research report,
c)
received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report.
d)
Subject Company may have been a client of MOSL or its associates during twelve months preceding the date of distribution of the research report.
MOSL and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. To enhance transparency, MOSL has incorporated a Disclosure of Interest Statement in
this document. This should, however, not be treated as endorsement of the views expressed in the report. MOSL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result,
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Disclosure of Interest Statement
Analyst ownership of the stock
S H Kelkar and Co.
No
A graph of daily closing prices of securities is available at
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Research Analyst views on Subject Company may vary based on Fundamental research and Technical Research. Proprietary trading desk of MOSL or
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completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform
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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
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Registration details of group entities.: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MSE); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.
Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth
management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities Products. * Motilal Oswal Real
Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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