S H Kelkar & Company Ltd (SHKCL) is the largest fragrance and flavour company
in India by revenue, with a market share of approximately 12.0%. The company
has four manufacturing facilities, three of which are located in India and one in
The Netherlands, with a total installed manufacturing capacity of over 19,819
tonne annually.
Established Market Leadership: The company has established brands like SHK,
Cobra and Keva, which enjoy leadership positions in their respective categories
and draw substantial brand equity in India. For the year ended December 31,
2013, SHKCL had a market share of 12.0% in the Indian fragrance and flavour
(F&F) industry. On bifurcating, the company’s market share stood at 20.5% in the
fragrance industry and 2.0% in the flavour industry.
Comprehensive Product Offering and Diverse Customer Base: SHKCL has a wide
portfolio of offerings with over 9,700 fragrances, ingredients and flavour products
and a large library of product formulations created over the past 90 years. The
company enjoys a competitive advantage over its peers on the back of its wide
product portfolio. It has a deep understanding of its customers’ requirements and
preferences and has over 4,100 customers, including leading national and
multi-national FMCG companies, blenders of fragrances and flavours, and
fragrance and flavour producers.
Outlook and Valuation: SHKCL is valued at a P/E multiple of 40.4x its FY2015
EPS. In terms of P/BV, the company is valued at 5.1x its pre-IPO and 3.2x its post-
IPO at the upper end of the price band. In our view, the valuation is expensive,
considering its low ROE numbers (around 12-13%) and considering that they are
expected to continue to remain in the same range. Further, the domestic F&F industry is
not a high growth industry, expected to grow at a subtle rate of 9-10% going forward.
The company’s global peers Givaudan S.A. and International Flavors &
Fragrances Inc trade at 28.1x and 20.1x their CY2014 earnings, respectively.
Givaudan S.A. and International Flavors & Fragrances Inc have strong market
shares in the global market of ~21% and ~12%, respectively, and deliver higher
RoEs. On the other hand, SHKCL has negligible market share at the global level.
Thus, SHKCL’s valuation looks expensive vis-a-vis these companies.
Hence, we recommend an “Avoid” on the issue. Investors having conviction in the
long term growth prospects of the company and the emerging consumption story in
India, and wanting to enter the stock to tap this perceived opportunity, could consider
waiting for a possible correction in the stock price post the listing of the IPO.

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