SH Kelkar: Adding flavor to fragrance

SH Kelkar

Initiating Coverage | Sector: Consumer Products

SH Kelkar

BSE Sensex

26,308

S&P CNX

8,082

CMP: INR282

TP: INR338 (20%)

Buy

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)/ (USD b)

AvgVal. (INR m)

SH Kelkar (SHKL) is one of India’s largest fragrance & flavor (F&F) companies with a

market share of ~14% as of 2016. Its fragrance products are used as raw materials in

personal & fabric care, skin & hair care, fine fragrance and household products, while

flavor products are used in baked & dairy products, beverages and pharmaceuticals.

In October 2015, it raised INR2,100m via an IPO to repay its own debt (INR1,260m)

and subsidiary company debt (INR320m). The company derived 63% of its FY16

revenues from India and 37% from exports.

SHKL IN

144.6

354 / 201

-2/32/13

41.8/0.6

208

Adding flavor to fragrance

Market share and profitability improving; initiating with Buy



Financial Snapshot (INR b)

2016

2017E 2018E

Y/E Mar

Sales

9.3

10.4 12.3

EBITDA

1.5

1.8

2.3

0.8

1.1

1.5

EPS (INR)

5.5

7.5

10.1

EPS Gr. (%)

4.2

34.8 35.7

BV/Sh. (INR)

52.7 57.8 64.6

RoE (%)

12.6 13.5 16.6

RoCE (%)

16.9 19.5 24.4

P/E (x)

50.8 37.7 27.8

P/BV (x)

5.3

4.9

4.4

Shareholding Pattern (%)

As on

Sep-16

Promoter

56.7

DII

1.7

Jun-16

56.7

2.2



FII

15.2

14.1

Others

26.4

27.0

FII Includes depository receipts

SH Kelkar

Adding flavor to fragrance

SHKL has established a strong presence in India’s fragrance market (share of ~24%

as of 2016), backed by its strong consumer insights, access to key raw materials,

R&D prowess and compliance to regulatory norms. It intends to tap opportunities

in new and nascent categories in India, such as men's grooming, fine fragrance,

fabric softener and deodorants.

SHKL is an emerging player in India’s INR18.8b flavor market (share of ~1.5% as of

2016). The market is dominated by small unorganized players, which provides a

huge opportunity for players like SHKL to grow via inorganic route. In line with

this, the company recently acquired two new companies. This not only helped

SHKL to increase its market share, but also provided access to a new client.

Strong relationships with fast-growing FMCG companies, high exposure to

emerging geographies (including India) and product innovation are the key for

the company’s growth going forward.

We expect EBITDA margin to improve from 16.7% in FY16 to 20.5% in FY19,

driven by (a) shift in composition of exports in favor of high-value-added items

and (b) shift in production base of the ingredients business from the high-cost

region of the Netherlands to the low-cost region of India. Over FY16-19E, we

expect revenue/PAT CAGR of 16%/33% and RoCE improvement from 17% to 28%.

We thus initiate coverage with a Buy rating and value the stock at 26x FY19E EPS.

Our price target of INR338 implies a 20% upside.

Established leadership in fragrance; targeting new categories

SHKL is India’s largest domestic fragrance producer with a market share of

~24%. SHKL has been operating in the country for more than 90 years, which

gives it an edge over MNC peers in terms of understanding and meeting

consumer needs. We believe (a) access to key raw materials and in-house

ingredient manufacturing, (b) strong R&D team of 80 people, (c) portfolio of

9,700 products and (d) compliance with regulatory norms will help the company

to maintain its leadership position in the industry. Besides this, SHKL is looking

to tap opportunities in new and nascent categories in India, like men’s

grooming, fine fragrance, fabric softener and deodorants.

91 22 3982 5422

Chintan.Modi@motilaloswal.com

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20 December 2016

SH Kelkar

Stock Performance (1-year)

Emerging player in flavor business; acquisitions to aid growth

SHKL is an emerging player in the flavor market (entered this space in 2000) with

a share of ~1.5%. The Indian flavor market – estimated at ~INR18.8b (as of 2015)

– is dominated by many small players (which together account for ~42% share,

as against just 12% in case of fragrance). We view this as a huge opportunity for

SHKL as it intends to grow via the inorganic route. As the F&F industry is

characterized by high level of customer stickiness, we believe growing

inorganically is the quickest way to not only increase market share, but also gain

access to new clients. In line with this, SHKL recently acquired Hi-Tech

Technologies (HTT), thereby gaining access to one of the largest bakery and

confectionary players (Parle) in India and doubling its market share. It also

recently announced the acquisition of Gujarat Flavors Pvt. Ltd.

Relationship with fast-growing FMCG companies, product innovation

and entry into new categories are the key to growth

SHKL’s wallet share in domestic FMCG companies (such as GCPL, Dabur,

Britannia, Marico, Vadilal and Vinni) has been quite sizeable at ~40%. Listed

domestic FMCG names have exhibited robust growth over FY11-16 (average

CAGR of 16%), and are expected to continue performing well, especially with

demonetization and GST likely to adversely impact unorganized players. In view

of intensifying competition among FMCG companies, product innovation is

expected to gain traction. The company’s products, which are used as raw

materials by many FMCG companies, thus will be a critical component of

product success. SHKL derived 15-20% of its revenue from products launched in

past three years. This, along with its foray into new F&F categories, should help

the company record revenue CAGR FY16-19E of 16%, in our view.

Strategy shift in ingredients and exports businesses to drive margins

SHKL also sells ingredients, where it enjoys gross margin of 35-40%. However,

EBITDA margin of this business is subdued (below 5%) as it operates from a high-

cost facility in the Netherlands. The company thus intends to shift production to

its low-cost Vapi facility in India and also outsource production of low-value

items. This should drive EBITDA margin improvement to 15-20% in ingredients

over next three years. In exports, SHKL is focusing on replacing low-value items

with high-value items to reduce volatility in sales and margins. With ~15% of

low-value items already replaced and low capacity utilization levels of ~45%, we

expect SHKL’s EBITDA margin to expand from 16.7% in FY16 to 20.5% in FY19.

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, 33% PAT CAGR over

FY16–19E. This will lead to RoCE expanding from 17% in FY16 to 28% in FY19

alongwith strong FCF CAGR of 21% with a net cash balance sheet. The stock is

currently trading at a PE of 22x FY19EPS which is at premium of ~30% to MNC

peers and ~20% discount to leading front end domestic FMCG companies in

India. We ascribe a similar discount to target PE of domestic FMCG companies

and arrive at a multiple of 26x on FY19E EPS for SHKL. We initiate coverage with

a Buy rating and a price target of INR338, implying 20% upside.

20 December 2016

SH Kelkar

Company overview

Among the largest F&F entities

Established nearly 90 years ago by Mr S. H. Kelkar and Mr V. G. Vaze, SHKL is one of

India’s largest F&F companies (by revenue) with ~14% market share. It is the largest

domestic fragrance producer with ~24% market share, exporting products to 52

countries. In the flavor space, it is an emerging producer in India with ~1.5% market

share, exporting products to 15 countries. The company has four production

facilities – three in India and one in the Netherlands.

Exhibit 1: SHKL is an established player in fragrance

Fragrance

Flavours

Exhibit 2: SHKL has stronghold in domestic market

Exports

Domestic

53%

55%

57%

63%

94%

FY13

95%

FY14

93%

FY15

94%

FY16

47%

FY13

45%

FY14

43%

FY15

37%

FY16

Source: Company, MOSL

Exhibit 3: SHKL’s market share in India improving

2013

2016 (est)

24.0%

20.5%

12.0%

14.0%

2.0%

Fragrance & Flavour

Fragrance

Flavour

1.5%

*Market share for 2016 are based on our estimates

Source: Company, MOSL

Fragrance business

SHKL’s products are used by leading companies engaged in personal care, hair care,

skin care & cosmetics, household products, fine fragrances and F&F blends. A

portion of the company’s ingredients is used by other F&F companies. SHKL caters

to more than 3,700 customers, including Godrej Consumer Products, Marico, Wipro,

HUL, VINI Cosmetics and J.K. Helen Curtis. The fragrance business contributed 94%

of SHKL’s revenues in FY16. The company’s manufacturing plants are located at

Raigad, Mumbai, Vapi and Barneveld (the Netherlands).

20 December 2016

SH Kelkar

Exhibit 4: Fragrances enhance value of several FMCG products

Source: Company, MOSL

Flavor business

The flavor business contributed ~6% of revenues in FY16. Its products are used as

raw materials in baked goods, dairy products, beverages, pharma and confectionary.

SHKL has over 400 customers under this segment, including Britannia, Vicco

Laboratories, Vadilal Industries and Ravi Foods. The company’s manufacturing plant

for flavors is located at Raigad, Maharashtra.

Exhibit 5: Flavors used in diverse products

Source: Company, MOSL

20 December 2016

SH Kelkar

Enjoys leadership in fragrance market with ~24% share

Tapping opportunities in new categories



SHKL is the largest domestic fragrance producer in India with a market share of ~24%.

Consumer insight and strong R&D capabilities are the key differentiating factors in the

F&F industry. SHKL's rich experience of over 90 years in India has provided it good

understanding of consumer insight and behavior, giving it an edge over MNC peers.

(a) Access to key raw materials, (b) strong R&D team of 80 people, (c) portfolio of

9,700 products and (d) compliance with regulatory norms are the additional strengths.

SHKL is also looking at tapping opportunities in new and nascent categories in India,

like men's grooming, fine fragrance, fabric softener and deodorants.

Largest domestic player in fragrance market

SHKL is the largest domestic fragrance producer in India with ~24% market share

and exporting products to 52 countries. The company’s stronghold in the fragrance

market is backed by its strong consumer insight, R&D prowess, access to key raw

materials, in-house manufacturing of ingredients and compliance to stringent

regulatory norms.

Exhibit 6: Fragrance market growing at 10% CAGR

Market size (INR b)

Growth (%)

11.0%

11.2%

9.5%

8.1%

Exhibit 7: Share of players in India fragrance market (2013)

Givaudan

26.0

IFF

Firmenich

SHKL

7.0

Symrise

Goldfield

Others

Source: Company, MOSL

20.5

21.2

9.5%

12.0

3.0

10.0

15.7

2011

16.9

2012

18.8

2013

20.9

2014

22.9

2015E

25.1

2016E

Source: Company, MOSL

Scores well on consumer insight v/s large MNC peers

R&D is the key driving force behind an F&F company. We believe consumer insight,

art and science are the pillars of the R&D function. SHKL has been operating in India

for more than 90 years and thus has relatively good understanding of consumer

insights/behavior when compared to MNCs. In case of art, it scores more or less in

line with multi-national firms. On the science part, MNCs have an upper hand with

their new cutting-edge technologies. To bridge this gap, SHKL has tied up with some

companies to benefit from new technology and be prepared to launch new products

depending on demand/market conditions. This has allowed SHKL to enjoy 40%

wallet share in domestic FMCG companies.

Strong R&D team to support product innovation

Changing consumer preferences necessitate higher level of innovations and product

launches in the FMCG industry. This, in turn, requires new and unique fragrances

from F&F players. According to a Nielsen report, new product launches by FMCG

entities in India and worldwide are generally in the range of ~10,000–20,000 per

year, signifying continued growth potential for F&F companies. Strong R&D

20 December 2016

SH Kelkar

capabilities are needed to introduce innovative products that meet dynamic

consumer preferences. In line with this, SHKL operates five creation and

development centers in India (Mumbai and Bangalore), Indonesia and the

Netherlands. The company has a dedicated team of 18 scientists, who have

developed 12 molecules over past three years and filed for three patents. Also, it

has a team of 12 perfumers, 2 flavorists, evaluators and application executives at

the creation and development centers. SHKL is the only company of Indian origin to

file patents under fragrance and novel aroma molecules. SHKL earmarked 3% of

revenues for R&D in FY15. SHKL continues to own the formulations and know-how

of developed products. These products, in addition to customer-centric projects, aid

in the continual enlargement and evolution of the company’s portfolio. Such

products and ingredients can be accessed for the development of newer products,

thereby optimizing the company’s future R&D expenses.

Exhibit 8: R&D center, Mumbai

Exhibit 9: Manufacturing center, Mulund, Mumbai

Source: Company, MOSL

Enjoys access to key and rare raw materials

Given the nature of the F&F industry, quality and specifications of raw materials are

of prime importance, and ensuring availability is the key in the business. SHKL

utilizes more than 1,200 raw materials sourced from 52 countries. Due to the size

and scale of operations, coupled with several decades of experience, SHKL is able to

source raw materials in cost effective manner and thus ensure timely delivery. The

company sources 43% of the requirement from global suppliers. Moreover, SHKL

obtains 250 ingredients from its manufacturing plants at Vapi and Barneveld. For

some raw materials, the company maintains inventory of over a year, subject to

favorable pricing terms. The top 10 raw material suppliers account for 35% of its

requirements. Essential oils, synthetic products, essences, fruits, flower and wood

extracts, other plant substances, organic materials and aroma ingredients are

commonly used as raw materials in the manufacturing process. In the F&F industry,

there are no contractual/long-term agreements. Thus, the company has been

maintaining good relationships with its suppliers.

20 December 2016

SH Kelkar

Exhibit 10: SHKL to work on optimizing inventory

Inventory (INR m)

139

134

133

Inventory days

136

131

126

123

2,254

FY13

2,788

FY14

3,175

FY15

3,369

FY16

3,883

FY17E

4,401

FY18E

4,950

FY19E

Source: Company, MOSL

Compliance to stringent regulatory norms

High level of regulatory compliances, sensitive nature of final products and high

costs act as entry barriers for new entities in the fragrance space. Also, setting up of

manufacturing facilities requires various approvals, and regulatory agencies (India

and abroad) and clients regularly conduct checks to ensure compliance.

SHKL’s fragrance manufacturing plants in Mumbai and Raigad comply with the

International Fragrance Association (IFRA) regulations, while the flavor

manufacturing plant in Raigad is registered with the USFDA. Additionally, plants are

regularly audited by major client companies, such as Coca Cola and Hindustan

Unilever (HUL), to ensure high level of standards. SHKL is also compliant with the

norms required by the Food Safety and Standards Authority of India (FSSAI).

Tapping opportunities in new categories

SHKL is looking at tapping opportunities in new categories of growth, such as men's

grooming, fine fragrance, fabric softener and deodorants, where India is still at a

nascent stage compared with South-East Asian countries. According to Euromonitor,

the Indian men's grooming market is projected to touch sales of INR142b by 2020,

up from INR30b in 2010 and INR75b in 2015. Changing consumer lifestyle, increasing

disposable incomes in urban areas and growing image/appearance awareness

among men are driving growth in the men’s grooming market in India. According to

industry estimates, for India, penetration is low in the men’s fairness cream market

at 4% and in deodorants at 8%. According to market estimates, women’s deo

market stood at INR5.2b, while men’s deo market stood at INR12.6b and is growing

at high pace.

20 December 2016

SH Kelkar

Acquisitions to aid growth in flavor business

Dairy and beverages to be biggest categories; trend toward natural flavors



SHKL is an emerging player in India’s flavor market with a share of ~1.5%. It entered

the flavor market relatively late in the year 2000, as against the fragrance business

where it is present for more than 90 years.

India’s flavor market size is estimated at ~INR18.8b. This market is dominated by small

unorganized players (~42% share v/s just 12% in case of fragrance market). We view

this as a huge opportunity for SHKL as it intends to grow through the inorganic route.

SHKL recently acquired Hi-Tech Technologies (HTT). The acquisition has given the

company access to one of the largest bakery and confectionary players (Parle) in India

and also helped double its market share. It also recently announced the acquisition of

Gujarat Flavors Pvt. Ltd.

Additionally, we believe the dairy segment in India offers huge opportunity as only 3%

of milk is processed in India v/s global average of 28%. In beverages, the share of

carbonated drinks is gradually being replaced by non-carbonated drinks and flavored

tea/coffee. SHKL also intends to grow in the fine fragrance category by forging

partnerships with various luxury brands.

Large unorganized sector provides opportunity for growth

The flavor business was initiated in year 2000 by Mr Kedar Vaze. It entered the

flavor market relatively late in the year 2000, as against the fragrance business

where it is present for more than 90 years. The segment accounted for 6% of

revenues in FY16. F&F industry is characterized by consolidation and significant

M&As as such activities provide ready access to customers and strengthen

capabilities in certain segments. As customer stickiness is a key feature in this

business, inorganic growth is the only way to accelerate growth and reach

geographies that are difficult to access. India’s flavor market size is estimated at

~INR18.8b (as of 2015). This market is dominated by small unorganized players (42%

share, as against just 12% in case of the fragrance market). We view this as a huge

opportunity for SHKL as it intends to grow through the inorganic route.

Exhibit 11: Flavors market expanding at ~10% CAGR

Market size (INR b)

10.2%

10.4%

10.6%

42%

21%

12.7

2011

14.0

2012

15.5

2013

17.2

2014

18.8

2015E

20.6

2016E

10% 2% 6%

Growth (%)

19%

Givaudan

IFF

9.5%

Firmenich

SHKL

Symrise

Others

Exhibit 12: Unorganized segment is ~42% of market

Source: Company, MOSL

Recent acquisitions boosting flavor business

In line with its strategy (as articulated at the time of the IPO) to grow though the

inorganic route, SHKL announced the acquisition of HTT for a consideration of

INR251m. HTT is a Mumbai-based entity with pan-India operations spanning

20 December 2016

SH Kelkar

manufacturing and sales of flavors through its FSSA-licensed facility in Daman. The

acquisition strengthens SHKL’s capabilities in some segments and offers access to

HTT’s large customers in bakery and confectionary (via Parle). SHKL also acquired

GFPL recently at a total cost of INR145m plus working capital. The deal also includes

two brands, Three Birds and Wheel. The acquired company registered total revenue

INR105m in FY16, and EBITDA margins were in line with industry levels. We believe

the acquisition provides an impetus to growth in the flavor business.

Exhibit 13: Recent acquisitions by SHKL

Company Name

Hi Tech Technologies

Gujarat Flavours Pvt Ltd

Category

Flavor

Revenue (INR m)

FY14

FY15

FY16

INR251m

96.9

161.4

230

INR145m plus net working capital 66.1

97.7

104.9

Source: Company, MOSL

Acquisition cost

Exhibit 14: Acquisitions driving flavours growth in FY17

Revenue

Growth %

85%

48%

12%

366

FY13

410

FY14

607

FY15

587

-3%

FY16

1088

FY17E

1415

FY18E

1710

FY19E

Exhibit 15: Market share has doubled post acquisition

Flavour market share

3.1%

30%

1.5%

21%

FY16

FY17

Source: Company, MOSL

Dairy and beverages to be biggest categories; trend toward natural flavors

Flavors serve as raw materials for producers of baked goods, dairy products,

beverages, pharma and confectionary. The business is expected to register robust

growth due to increasing demand for ready-to-eat, fortified juices and milk product

categories. According to Givaudan’s (largest F&F company in world) ‘Vision 2020’

investor presentation, the trend is largely skewed toward more local and small

brands due to a shift in consumer preferences and expectations. For global F&F

players, 80% of the developments in their flavor business have been ascribed to

high-growth markets. The company sees dairy and beverages segments to be the

biggest categories of growth in India. In dairy segment, only 3% of milk is processed

in India v/s global average of 28%. In beverage segment, the share of carbonated is

gradually coming down, while non-carbonated and flavored tea and coffee

businesses are expected to grow at a significant pace.

Given that the industry trend is shifting toward natural from synthetic flavor, SHKL

plans to focus on this emerging category in India. It has thus developed 29-30

unique natural flavors, including ethnic flavors for the domestic flavor market. At

global level, 60% of the flavor market is dominated by natural flavor, while in India,

it is just 20%. Going ahead, SHKL will have a product range developed for this

market and will continue investing in natural products/flavors on an ongoing basis.

20 December 2016

SH Kelkar

SHKL’s revenues to register 16% CAGR over FY16-19E

Exposure to high-growth FMCG companies and geographies



SHKL's strong relationship with domestic FMCG companies like GCPL, Dabur, Britannia,

Marico, Vadilal and Vinni is demonstrated by their growing contribution to the

company’s revenues.

Listed domestic FMCG names have exhibited robust growth over FY11-16 (avg. CAGR

of 16%), and are expected to continue performing well, especially with

demonetization and GST likely to adversely impact unorganized players.

SHKL is well placed in terms of geographical exposure as it derives 84% of revenues

from India and EM (including Asia ex-Japan and MENA regions) which have high

growth potential.

In view of intensifying competition among FMCG companies, product innovation is

expected to gain traction. The company’s products, which are used as raw materials in

many FMCG companies, thus will be a critical component of product success. SHKL

derived 15-20% of its revenue from products launched in past three years.

This, along with its foray into new F&F categories, should help the company record

revenue CAGR FY16-19E of 16%, in our view.

High revenue contribution from domestic FMCG companies to drive

outperformance

SHKL has over the years focused on building strong relationships with domestic

FMCG companies like GCPL, Dabur, Britannia, Marico, Vadilal and Vinni. These FMCG

names have exhibited robust growth over FY11-16 (average CAGR of 16%), and are

expected to continue performing well, especially with demonetization and GST likely

to adversely impact unorganized players. This shall allow SHKL to outperform

industry growth as it has 40% wallet share in such domestic FMCG companies. SHKL,

however, has low contribution from global FMCG companies present in India, which

mostly source from multi-national F&F companies like Givaudan, IFF and Symrise

both globally and in India. However, SHKL is also stepping into MNC FMCG space,

and has HUL in its customer portfolio.

Exhibit 16: Domestic FMCG companies have exhibited robust growth profile

FY11-16 revenue CAGR %

20%

11%

12%

13%

14%

22%

14%

Source: Company, MOSL

20 December 2016

SH Kelkar

Exhibit 17: More than 3,700 fragrance customers

Exhibit 18: Nearly 400 customers in flavor and still rising

Source: Company, MOSL

Exhibit 19: Customer briefing process (a practice prevalent in MNC FMCG companies)

Source: Company, MOSL

SHKL derives 84% of revenue from emerging markets

The Indian F&F industry grew at 9.5%, outperforming global F&F industry growth of

4.8% over last five years. SHKL derives 84% of its revenue from India and EM

(including Asia ex-Japan and MENA regions), as against MNC peers which derive

~43% from developing countries. In 2013, the global F&F industry derived ~57% of

its revenue from North America and Western Europe, and 43% from the rest of the

world.

20 December 2016

SH Kelkar

Exhibit 20: Global F&F industry grew at 4.8% CAGR 2011-16

Market size (USD b)

10.0%

5.4%

7.3%

4.4%

4.6%

Growth (%)

Exhibit 21: Indian F&F industry grew at 9.5% CAGR 2011-16

Market size (INR b)

9.1%

10.7%

Growth (%)

11.0%

9.5%

21.8

-0.9%

22.0

2010

2011

5.0%

4.4%

22.9

2012

23.9

2013

25.2

2014

26.3

2015

27.5

2016

2010

2011

2012

2013

2014

2015

Source: Company, MOSL

SHKL will focus on nine countries in the ASEAN and MENA regions with similar

demographics, income patterns and aspirations like India. Our interactions with top

global companies like IFF, Givaudan and Symrise suggest that they are placing a

greater focus on the emerging markets of Asia-Pacific, South America, Middle East

and Africa as urbanization and changing lifestyles there are expected to benefit

FMCG companies and their F&F suppliers.

Exhibit 22: SHKL revenue share geography-wise

16%

Exhibit 23: Indian F&F industry market share

Givaudan

India

other emerging

markets

Other markets

IFF

Firmenich

SHKL

Symrise

Goldfield

Others

Source: Company, MOSL

27%

57%

Source: Company, MOSL

Exhibit 24: Key extract from IFF Annual report

Exhibit 25: Key extract from Symrise Annual report

Source: IFF Annual report

Source: Symrise Annual report

F&F companies with exposure to emerging markets also have significant competitive

advantages. For example, in 2014, Givaudan SA generated approximately 46% of its

revenue from the developing markets of Asia, Eastern Europe and the Middle East,

while Symrise AG generated approximately ~45% of its sales from the emerging

markets of Asia, Latin America, Eastern Europe, Middle East and Africa. Realizing the

growth potential of emerging markets, many large F&F companies have been

20 December 2016

SH Kelkar

expanding their presence, production facilities, sales organization and product

offerings in emerging markets.

New product innovation to drive growth

SHKL expects the number of new product launches in next five years to be higher

than last five years. In the past 2-3 years, ~15-20% of SHKL’s growth has been

coming from newly launched products. Additionally, SHKL intends to focus on

premium category of products – it derives 80% of its revenues from top branded

business and 20% from lower-cost products. However, it has relatively low market

share in detergents and soaps as this space is dominated by MNCs which typically

buy from global F&F companies like Givaudan, IFF and Symrise.

In the fine fragrance category, SHKL has appointed an expert through which the

company will approach various luxury branded players and showcase its products in

showrooms. Such luxury branded players typically extend their brand into categories

like high-end perfumes, where SHKL intends to capitalize.

To deepen relationships by providing ancillary service

The company recently started providing logistic support to clients – this is not a

focus area for SHKL, but a tactical move to deepen relationship with clients. For

example, ITC buys fragrances from SHKL, which get delivered at a central location

and are then sent to its various production facilities. This increases logistic cost and

time for clients. Here, SHKL plays a role by directly supplying fragrances to its

various production facilities. Although it is an 8-10% EBITDA margin business (which

is lower than its current EBITDA margin), this approach helps the company to

strengthen relationship and customer stickiness. Over the long term, it also intends

to extend support on customized packaging by tying up with packaging companies.

The company also acquired 100% of share capital of Rasiklal Hemani Agencies at

book value – valued at INR282m as on 31st March 2016. Further, an amount of

INR50m was paid by way of goodwill. The payback of 2-3 years is expected through

cost optimization. This was in line with its aim to help consolidate the company’s

leadership position in Fragrance in India as it expands the marketing and sales team

to address growing requirements of customers and directly manage customer

relationships in the northern region.

High-margin branded small pack business showing good traction

SHKL manufactures 350 fragrance products at the Raigad plant, catering to over

1,000 customers (including traders, resellers and SMEs engaged in the production of

soaps, detergents and other homecare products in smaller towns and villages of

India). These products are sold in 25–500g packs under the ‘SHK’, ‘Keva’ and ‘Cobra’

brands. Branded small pack is a focus segment for SHKL with a dedicated sales team

(unlike MNC peers). Currently, this segment accounts for ~14% of the company’s

revenues, with Cobra itself contributing ~6%. In addition to the distribution network,

these products are available off-the-shelf at two outlets: one each in Mumbai and

Bangalore. Management plans to expand this category by enhancing offerings and

distribution network.

20 December 2016

SH Kelkar

Exhibit 26: SHKL’s small pack business brands

Source: Company, MOSL

20 December 2016

SH Kelkar

Margins to

expand

on strategic moves

Shift of strategy in ingredients and exports businesses



SHKL’s gross margin in the ingredients business stands at 35-40%. However, EBITDA

margin of the business is subdued as it operates from the high-cost facility in the

Netherlands.

Thus, it intends to shift production to the Vapi facility in India and also outsource

production of low-value items. This is expected to drive EBITDA margin improvement

to ~20% in the ingredients business over next three years.

On exports front, the company has focused on high-value items. The transition to

replace 15% of low-value item sales with high-value items is now complete.

SHKL invested INR1.8b over FY07-15 to expand capacities for future growth. The

current capacity utilization rate stands at ~45%. We expect improving utilization to

provide operating leverage benefits.

Consequently, we expect overall EBITDA margin to improve from 16.7% in FY16 to

20.5% in FY19.

Shift of strategy in ingredients business

The company conducts research and manufacturing activity of ingredients at the

Netherlands facility through its subsidiary PFW Ingredients Ltd. This activity is very

critical for the company as it forms the backbone of the F&F business. Total

ingredients sales from the Netherlands facility stood at ~INR1.7b (FY16).

SHKL’s gross margin in the ingredients business currently stands at 35-40%.

However, EBITDA margin of the business is subdued as it operates from the high-

cost facility in the Netherlands. Strategically, SHKL intends to shift production to its

Vapi facility and continue with just R&D in the Netherlands. SHKL will also focus on

requirements for in-house consumption with incremental R&D spends. Additionally,

it intends to outsource production of low-value items, and retain production of high-

value and confidential items. SHKL has also build sufficient capacity at the Vapi

(2,064mtpa) facility. By shifting production to India (Vapi) and strategically focusing

on producing high-value items, the company intends to improve its EBITDA margins

to 15% in the near term, and gradually take it to 20% levels.

Exhibit 27: PFW revenue growth profile

Revenue(in Euro '000)

25,039

Growth(%)

Exhibit 28: Subdued EBITDA margins in PFW ingredients

EBITDA( in Euro '000)

2.2%

Margin(%)

24,551

-2%

FY15

FY16

Source: Company, MOSL

540

FY15

1.0%

241

FY16

Source: Company, MOSL

20 December 2016

SH Kelkar

Expect turnaround in exports business

In terms of exports, SHKL has presence in over 52 countries globally. It intends focus

on nine countries in the ASEAN and MENA regions with demographics, income

patterns and aspirations similar to India. SHKL primarily focuses on countries where

demand is growing and economic situation is continuing to hold normal.

Exhibit 29: Presence across globe with major contribution from EMs

Source: Company

The exports business of fragrance has been underperforming as the company’s

exports were not performing well in some regions of Africa (e.g. South Africa and

Nigeria) due to currency devaluation. In these regions, SHKL has lost share to other

products or strategically discontinued the business . On the exports front, SHKL has

taken a conscious call to continue focusing on the premium area of the business – it

has replaced 15% of low-value item sales with high-value items. As the transition is

now complete, we believe the company is set for growth and improvement in

margins.

Increasing utilization to provide operating leverage benefits

SHKL’s usually focuses on a particular product and benefits as the product gains

traction through its lifecycle. Accordingly, the company builds capacities once in 15-

20 years and front-ends the investment cycle. SHKL invested INR1.8b over FY07-

FY15 to build capacity of 20,000mtpa. The company’s current capacity utilization

stands at ~45%. In our opinion, it would undertake initiatives to increase capacity,

considering the multiple levers in place. Given that there are no capex requirements

for next 3–5 years – with the exception of maintenance capex (~INR150-200m) – we

expect operating leverage benefits to play out. SHKL has one work shift, which can

be raised to three during peak times. Management highlights peak utilization levels

could lead to revenues of 3x the current figure.

20 December 2016

SH Kelkar

Exhibit 30: Capacity details of SHKL (FY16)

Installed Capacity(MTPA)

Utilisation(%)

85%

48%

30%

10,342

1,164

1,650

Netherlands -

Ingredients

38%

2,064

Vapi - Ingredients

43%

4,599

Mumbai -

Fragrance

Raigad - Fragrance Raigad - Flavour

Source: Company, MOSL

20 December 2016

SH Kelkar

SWOT Analysis



Quality of identifying

trends and being

localized

24% share of Indian

FMCG industry (40%

of domestic FMCG)

Customer stickiness

with 80%

repeatability

Revenues from fast-

growing emerging

markets constitutes

84% of revenues



Low access to global

FMCG giants

Lack of resources and

muscle power

compared to MNC

peers in terms of

technology.

High inventory days



India’s F&F market

pegged at INR46b

(fragrance INR25b and

flavors INR21b),

growing at CAGR of 10%

over 2011-16.

Tapping the high value

and margin fine

fragrances market

Growing FMCG industry

Increasing consumer

spends



Increased aggression by

global peers like

Givaudan, IFF and

Symrise

Slowdown in FMCG

sector

Failure of final FMCG

product



20 December 2016

SH Kelkar

Earnings to post 33% CAGR over FY16–19E

Higher utilization, operating leverage to boost PAT

We believe SHKL will deliver revenue CAGR of 16% over FY16-19E led by sizeable

revenue contribution from fast-growing FMCG companies, high exposure to

emerging geographies (including India) and product innovation. We expect EBITDA

margin to improve from 16.7% in FY16 to 20.5% in FY19, driven by (a) shift

composition of the exports business in favor of high-value items and (b) shift of

ingredients production base to a low-cost location in India.

Exhibit 31: Revenues to post 16% CAGR over FY16–19E

Revenues (INR m)

16.9%

14.3%

9.7%

10.9%

Growth (%)

18.0%

12.1%

Exhibit 32: EBITDA to register CAGR of 24% over FY16–19E

EBITDA (INR m)

Margins (%)

17.3%

19.1%

20.5%

16.6%

17.7%

18.0%

14.1%

16.7%

6,662

FY13

7,614

FY14

8,355

FY15

9,266

FY16

10,386 12,257 14,294

FY17E

FY18E

FY19E

1,180

FY13

1,370

FY14

1,178

FY15

1,549

FY16

1,797

FY17E

2,341

FY18E

2,930

FY19E

Source: Company, MOSL

Exhibit 33: PAT to record CAGR of 33% over FY16–19E

53%

25%

704

-11%

631

FY13

791

FY14

FY15

802

FY16

1,081

FY17E

1,467

FY18E

1,883

FY19E

14%

PAT (INR m)

Growth (%)

35%

36%

Exhibit 34: Net working capital days to gradually improve

Net Working capital (Days)

172

174

171

167

163

28%

170

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

Exhibit 35: RoCE to improve to 28% by FY19E

RoCE (%)

24.4

16.7

19.2

15.6

16.9

19.5

28.3

Exhibit 36: FCF to grow at CAGR of 21% over FY16-19E

Free cash flow (INR m)

687

785

626

353

399

1,120

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY13

FY14

-65

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

20 December 2016

SH Kelkar

Valuation and view

Initiating with Buy

SHKL offers fragrances and flavors to FMCG companies and thus plays a crucial role

in the success of their products. We thus believe that it is in a sweet spot in the

FMCG value chain.

Revenue growth to outperform MNC peers

The Indian F&F industry grew at 9.5%, outperforming global F&F industry growth of

4.8% over last five years. SHKL derives 84% of its revenue from India and EM

(including Asia ex-Japan and MENA regions), as against MNC peers which derive

~45% from emerging countries. Over the years, SHKL has focused on building strong

relationships with domestic FMCG companies like GCPL, Dabur, Britannia, Marico,

Vadilal and Vinni. FMCG names have exhibited robust growth over FY11-16 (average

CAGR of 16%), and are expected to continue performing well, especially with

demonetization and GST likely to adversely impact unorganized players. SHKL’s

wallet share in domestic FMCG companies has been quite sizeable at 40%. The

company is now also focusing on growing in flavor through the inorganic route.

Cumulatively, we expect SHKL to register 16% revenue CAGR over FY16-19E with

higher growth of 18.5% in FY18 and 18% in FY19.

EBITDA margin to catch up with global levels

Global players like Givaudan, IFF and Symrise enjoy EBITDA margins in the range of

21-25%. Global leader Givaudan has the highest EBITDA margin of ~25%. Our

interactions with SHKL and other global players suggest that 23-24% EBITDA margins

are achievable in F&F industry. SHKL also enjoys ~23% EBITDA margin in the

domestic fragrance business. However, volatility in exports and lower margins in the

ingredients business (sub-5%) have been a drag. Thus, its blended level EBITDA

margin was 16.7% in FY16. The company is taking corrective measures in exports

and the ingredients business (discussed earlier), which should allow it to expand

margins gradually. We believe it can achieve 20.5% EBITDA margins by FY19.

Exhibit 37: EBITDA margin profile of peer companies

EBITDA margins %

Givaudan SA

International Flavors & Fragrance

Symrise AG

SHKL

CY11

20.9

19.5

18.3

CY12

22.1

20.3

20.4

17.7

CY13

23.9

22.1

20.6

CY14

CY15

24.2

24.6

22.4

22.9

21.1

14.1

16.7

Source: Company, MOSL

SHKL is also working to gradually reduce its net working capital days. In FY12, its net

working capital days stood at 195 and inventory days at 148. Typically, inventory

days are high in the F&F industry as companies usually stock rare raw materials and

also buy raw materials in large quantities at attractive prices considering volatility in

prices.

Exhibit 38: Working capital days profile of peer companies

Net working capital days

Givaudan SA

International Flavors & Fragrance

Symrise AG

SHKL

CY11

144

133

142

195

CY12

131

138

136

170

CY13

CY14

CY15

117

122

125

134

129

131

138

141

133

172

176

167

Source: Company, MOSL

20 December 2016

SH Kelkar

Exhibit 39: SHKL to work on optimizing inventory

Inventory (INR m)

139

134

123

2,254

FY13

2,788

FY14

3,175

FY15

3,369

FY16

3,883

FY17E

4,401

FY18E

133

Inventory days

136

131

126

4,950

FY19E

Source: Company, MOSL

As capex is now behind us with low utilization levels at 45%, we expect FCF

generation to double from INR626m in FY16 to INR1,119m in FY19. With asset

turnover ratio improvement and margin expansion, we expect RoCE to improve

from 17% in FY16 to 28% in FY19. We expect SHKL to record CAGR of 16% and 33%

in revenues and PAT, respectively, over FY16–19E.

Given its outperformance v/s peer companies, significant scope for growth in

margins and no major capex requirement (capacity utilization is low at 45%), we

believe valuation premium to peers is justified. The stock is currently trading at a PE

of 22x FY19EPS which is at premium of ~30% to MNC peers and ~20% discount to

leading front end domestic FMCG companies in India. We ascribe a similar discount

to target PE of domestic FMCG companies and arrive at a multiple of 26x on FY19E

EPS for SHKL. We initiate coverage with a Buy rating and a price target of INR338

(20% upside).

Exhibit 40: Peer comparison with MNC peers

Company Name

EV/EBITDA

RoE %

EV/Sales

Sales CAGR

PAT CAGR

FY16-18E

FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

Givaudan SA

International Flavors & Fragrance

Symrise AG

SH Kelkar Ltd*

*MOSL estimates and Bloomberg estimates for MNC peers; Note: For Givaudan, IFF and Symrise the period FY17 and FY18 refers to CY16 and

CY17 and further estimates are not available

Exhibit 41: Peer comparison with domestic FMCG peers

EV/EBITDA

Company Name

FY18E

FY19E

FY18E

FY19E

Dabur

Brittania Industries

Marico

GCPL

SHKL*

*MOSL estimates and Bloomberg estimates for domestic FMCG peers

RoE %

FY18E

FY19E

Exhibit 42: Assumption

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

FY18E

FY19E

9298

10842

12584

7.6

16.6

16.1

1088

1415

1710

85.3

30.1

20.8

Source: Company, MOSL

20 December 2016

SH Kelkar

Bull & Bear case

Bull case



Our bull case assumptions have positive impact on sales growth and operating

margins. We assume higher capacity utilization on account of strong traction in

the fragrance and flavor segments. Additionally, we assume that prices of

critical raw materials to decrease for FY18 and FY19.



We had assumed 380bp EBITDA margin improvement over FY16-19E in the base

case. However, due to a decline in raw material prices in our bull case

assumptions and operating leverage benefits, we are assuming 550bp YoY

improvement over FY16-19E and 8% higher sales CAGR over the base case.



In the bull case, we are assuming that the company will not pass on the benefit

of lower raw material prices and thus enjoy higher margins. We also estimate

that the company will be able to aggressively acquire new companies in the

flavor business, and exports will turnaround quicker than expected.



There is an increase of 10%/22%/32% in FY17E/FY18E/FY19E EPS over the base

case to INR8.2/INR12.3/INR17.2.



Assuming the 28x target multiple in bull case (vs 26x in base case), we get a bull

case target price of INR481 (upside of 71% to CMP) based on FY19 EPS (v/s base

case target price of INR338, upside of 20%).

Exhibit 43: Bull case scenario

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT growth (%)

EPS (INR)

Target multiple (x)

Target price (INR)

Upside/downside (%)

FY17E

11,004

18.8

1,959

17.8

26.5

1,191

10.8

48.5

8.2

FY18E

13,788

25.3

2,813

20.4

43.6

1,786

13.0

49.9

12.3

FY19E

17,214

24.9

3,822

22.2

35.9

2,485

14.4

39.2

17.2

481

Source: MOSL

Bear case



Our bear case assumptions mainly have negative impact on both sales growth

and operating margins for FY18 and FY19.



We are assuming EBITDA margin decline of 170bp over FY16-19E in the bear

case and sales decline of 9%/19% in FY18E/FY19E over our base case.



In our bear case, we assume that the company loses out on market share in the

fragrance business, and its exports business does not turnaround and continues

to remain a laggard. Additionally, we assume that the company is unable to pass

on the increase in raw material prices, and the benefits of operating leverage

will also get delayed.



This will lead to decrease of 3%/27%/42% in FY17E/FY18E/FY19E EPS over the

base case to INR7.2/INR7.4/INR7.5.

20 December 2016

SH Kelkar



Assuming the 24x target multiple in bear case (vs 26x in base case), we get a

bear case target price of INR180 (downside of 36% to CMP) based on FY19 EPS

(v/s base case target price of INR338, upside of 20%).

Exhibit 44: Bear case scenario

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT growth (%)

EPS (INR)

Target multiple (x)

Target price (INR)

Upside/downside (%)

FY17E

10,404

12.3

1,748

16.8

12.9

1,046

10.1

30.4

7.2

FY18E

11,129

7.0

1,758

15.8

0.6

1,075

9.7

2.8

7.4

FY19E

11,635

4.5

1,745

15.0

-0.8

1,088

9.3

1.2

7.5

180

-36

Source: MOSL

20 December 2016

SH Kelkar

Key risks

Increasing competition from international peers

Large international players – Givaudan, IFF, Firmenich and Symrise – collectively

command a 58% share in Indian F&F market. Aggressive expansion initiatives by

these players could dent SHKL’s prospects.

Dependence on success of FMCG products

SHKL’s progress is largely dependent on performance of FMCG products in which

the company’s flavors and fragrances are used as raw materials. Any slowdown in

sales of such FMCG products would have an adverse impact on SHKL.

Concentrated sourcing of raw materials

The top 10 suppliers constituted 35% of SHKL’s raw material requirements.

Accordingly, sourcing of materials may be impacted in case of any negative event at

the supplier end.

Foreign exchange risk

SHKL’s overseas sales and a portion of raw material expenditures are in foreign

currency, mostly USD, Euro and Yen. SHKL’s received 37% of its revenue from

exports and overseas sales in FY16. Thus, the company is highly exposed to the risk

of fluctuation in foreign exchange rates.

20 December 2016

SH Kelkar

Management overview

Mr. Ramesh Vinayak Vaze, Promoter and Managing Director

Ramesh Vaze, aged 74, is the Managing Director. He holds a Bachelor of Science

degree from Mumbai University and has been with the company for more than 40

years. He is also a trustee of the Kelkar Education Trust. He has been Managing

Director since August 2010.

Mr. Kedar Ramesh Vaze, WTD and Group CEO

Kedar Vaze, aged 41, is a Wholetime Director (WTD) and Group Chief Executive

Officer. He holds a Master of Science degree in Organic Chemistry from the Indian

Institute of Technology, Mumbai. He also received a Certificate of Participation in

the Stanford Executive Program from the Graduate School of Business, Stanford

University. He has been with SHKL for over 19 years and has been a board director

since 2010. Mr. Vaze took over as Group CEO in October 2014, prior to which he

held different positions within the company such as CTO and COO, responsible for

all three business segments: Fragrance, Flavors and Ingredients.

Mr. B. Ramkrishnan, Director, Strategy

Mr. Ramkrishnan took over as Director, Strategy, in October 2014. He is responsible

for the company’s long-term strategy development, M&A, and equity/debt raising

activities. Previously, he was Group CEO, responsible for SHKL’s business across

geographies. Mr. Ramkrishnan has been with the company since 2010 and has three

decades of experience. Prior to SHKL, he was CEO at Privi Organics and also headed

Givaudan’s Flavor business. He holds a degree in Chemical Engineering.

Mr. Tapas Majumdar, VP and Group CFO

Mr. Majumdar has been Group CFO since 2012. He has 30 years of experience and is

a qualified CA, CS. He is also a certified public accountant (CPA) from the American

Institute of Certified Public Accountants (Delaware). Prior to joining our Company,

he worked with organizations like A. F. Ferguson & Co., Indian Aluminium Company

Limited, Hindustan Unilever Limited, GlaxoSmithKline and Dubai Aluminium

Company Limited etc.

20 December 2016

SH Kelkar

Industry overview

Global F&F industry estimated at USD28b

The global F&F industry is valued at USD28b, with an almost equal split between

fragrance and flavor. The industry has grown at a CAGR of 4.7% by 2016 to reach

USD27.5b. In CY13, the global F&F industry derived ~57% of revenues from North

America and Western Europe, while rest of the world contributed ~43%.

Exhibit 45: Global F&F industry posted CAGR of 4.8% over CY11–16

Market size (USD b)

10.0%

5.0%

21.8

-0.9%

2011

5.4%

Growth (%)

4.4%

4.6%

22.0

2010

22.9

2012

23.9

2013

25.2

2014

26.3

2015

27.5

2016

Source: Company, MOSL

While the global F&F industry is highly fragmented with several players, there is

increased consolidation among larger companies. In CY13, the top 12 F&F

companies held approximately 83% (64% in CY00) of the global F&F industry. Of

these, the top four – Givaudan SA, Firmenich, International Flavors and Fragrances,

Inc. (IFF) and Symrise AG – individually accounted for more than 10% share, and

collectively constituted 54%. The remaining 8 companies had individual market

share of 1–10%, and 26% collectively. Regional companies comprised the remaining.

Exhibit 46: Givaudan – leader in the global market (18% share)

Givaudan, 18%

Others, 46%

IFF, 12%

Firmenich, 12%

Symrise, 12%

Source: Company, MOSL

Indian F&F industry valued at INR46b

F&F products are key components in diverse FMCG products. The Indian F&F

industry’s total market size was estimated at INR46b (INR25b – fragrance, INR21b –

flavor) in terms of value. Fragrance market and flavor market both registered CAGR

of 10% CY11–16. Imports and exports rose 15.1% (to INR3.9b) and 17.2% (to

INR4.9b), respectively, in CY14.

20 December 2016

SH Kelkar

Exhibit 47: Indian F&F market registered CAGR of 10% over CY11–16

Market size (INR b)

9.1%

7.3%

10.7%

Growth (%)

11.0%

9.5%

26.5

2010

28.4

2011

31.0

2012

34.3

2013

38.1

2014

41.7

2015

45.6

2016

Source: Company, MOSL

Exhibit 48: Indian fragrance industry grew at CAGR 10%...

Market size (INR b)

Growth (%)

11.0%

11.2%

9.5%

8.1%

Exhibit 49: …while flavor industry rose 10% over CY11–16

Market size (INR b)

10.2%

10.4%

10.6%

Growth (%)

9.5%

15.7

2011

16.9

2012

18.8

2013

20.9

2014

22.9

2015E

25.1

2016E

12.7

2011

14.0

2012

15.5

2013

17.2

2014

18.8

2015E

20.6

2016E

Source: Company, MOSL

More than 1,000 companies, ranging from MNCs and large Indian industrial houses

to small-scale units and local manufacturers, operate in the Indian F&F industry.

Large domestic industrial houses with several decades of experience are fewer in

number. In CY13, the top five companies operating in the Indian F&F industry –

Givaudan SA, Firmenich, IFF, SHKL and Symrise SA – collectively held a market share

of ~70%. Major players are able to sustain competition by leveraging on their

resources and R&D facilities to produce high-quality customized products,

particularly for quality-conscious multinational customers.

Exhibit 50: Givaudan – largest player in Indian F&F market with 23% share (CY13)

Others, 29%

Givaudan, 23%

Goldfield, 1%

Symrise, 7%

SHKL, 12%

IFF, 14%

Firmenich, 14%

Source: Company, MOSL

20 December 2016

SH Kelkar

Exhibit 51: SHKL’s share in fragrance market (20.5%) in 2013

Goldfield,

3.0%

Symrise,

10.0%

IFF, 7.0%

SHKL,

20.5%

Firmenich,

21.2%

SHKL, 2%

Source: Company, MOSL

Others,

12.0%

Givaudan,

26.0%

Exhibit 52: SHKL’s share in flavor market (2%) in 2013

Givaudan,

19%

Others,

42%

Symrise,

10%

IFF, 21%

Firmenich,

Source: Company, MOSL

20 December 2016

SH Kelkar

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 (%)

FY12

5,700

24.0

1,044

18.3

173

871

278

633

222

-33

29.9

412

-10.0

7.2

FY13

6,662

16.9

1,180

17.7

173

1,007

218

805

-23

782

250

-7

31.0

-76

616

631

53.3

9.5

FY14

7,614

14.3

1,370

18.0

188

1,183

175

1,085

328

-33

27.1

791

25.3

10.4

FY15

8,355

9.7

1,178

14.1

293

885

185

246

945

286

-45

25.5

704

-11.0

8.4

FY16

9,266

10.9

1,549

16.7

294

1,255

144

1,206

449

-45

33.5

802

13.9

8.7

FY17E

10,386

12.1

1,797

17.3

205

1,591

115

1,638

557

34.0

1,081

34.8

10.4

(INR Million)

FY18E

12,257

18.0

2,341

19.1

221

2,120

138

2,223

756

34.0

1,467

35.7

12.0

FY19E

14,294

16.6

2,930

20.5

232

2,699

165

2,853

970

34.0

1,883

28.3

13.2

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

FY12

2,640

3,713

2,307

6,031

3,451

2,099

1,352

709

278

334

4,383

2,316

1,307

237

523

1,024

497

426

102

3,359

6,031

FY13

120

4,077

4,720

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

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

6,502

3,175

1,945

759

622

1,870

977

553

340

4,632

7,474

FY16

1,446

6,182

7,628

-91

855

8,392

4,914

3,026

1,889

793

181

345

7,285

3,369

2,339

822

754

2,101

1,292

600

209

5,184

8,392

FY17E

1,446

6,911

8,357

-91

655

8,921

5,357

3,231

2,126

793

334

345

7,988

3,883

2,589

671

845

2,664

1,412

672

580

5,324

8,921

(INR Million)

FY18E

1,446

7,901

9,347

-91

123

9,379

5,699

3,452

2,247

793

142

345

9,003

4,401

3,056

549

997

3,151

1,630

793

728

5,852

9,379

FY19E

1,446

9,171

10,617

-91

123

10,649

5,887

3,684

2,203

793

103

345

10,887

4,950

3,564

1,210

1,163

3,683

1,868

925

890

7,204

10,649

20 December 2016

SH Kelkar

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

FY12

3.1

4.0

28.1

0.0

1.1

FY13

4.8

5.9

35.7

0.6

15.6

FY14

6.0

7.4

36.4

1.1

22.2

47.1

38.1

7.8

5.1

28.5

0.4

-0.5

16.6

19.2

1.1

134

0.4

FY15

5.3

7.5

38.5

1.1

25.6

53.0

37.4

7.3

4.7

33.1

0.4

3.0

14.2

15.6

1.1

139

0.5

FY16

5.5

7.6

52.7

1.5

32.6

50.8

37.2

5.3

4.4

26.4

0.5

4.3

12.6

16.9

1.1

133

0.1

FY17E

7.5

8.9

57.8

2.0

32.6

37.7

31.7

4.9

3.9

22.7

0.7

2.4

13.5

19.5

1.2

136

0.1

FY18E

10.1

11.7

64.6

2.7

32.6

27.8

24.2

4.4

3.3

17.2

1.0

5.4

16.6

24.4

1.3

131

0.0

FY19E

13.0

14.6

73.4

3.5

32.6

21.7

19.3

3.8

2.8

13.5

1.2

7.7

18.9

28.3

1.3

126

0.0

4.1

12.6

16.0

0.9

148

0.6

0.2

5.2

15.0

16.7

1.1

123

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

FY12

630

173

246

-204

-122

724

733

-190

543

-187

-366

-216

-253

-101

-3

-573

-206

443

237

FY13

785

173

201

-259

103

1,005

1,031

-344

687

-330

-259

-210

-114

-34

-607

237

332

FY14

1,088

188

146

-343

-729

350

-29

321

-386

-65

-211

-597

527

-161

-6

360

332

415

FY15

945

293

175

-285

-375

753

-136

617

-219

399

-199

-38

322

-183

-176

-75

344

415

759

FY16

1,206

294

130

-394

-374

863

864

-238

626

-331

-565

1,956

-1,589

-162

-441

-236

759

822

FY17E

1,638

205

-47

-557

-291

948

-595

353

115

-480

-200

-68

-352

-620

-152

822

671

(INR Million)

FY18E

2,223

221

-103

-756

-650

935

-150

785

138

-12

-532

-35

-478

-1,045

-122

671

549

FY19E

2,853

232

-154

-970

-691

1,270

-150

1,120

165

-11

-613

-624

661

549

1,210

20 December 2016

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