S H Kelkar And Company

In a sweet spot due to its dominance in the flavour and fragrance industry, S H Kelkar and Company has been witnessing robust growth while expanding its global footprint. However, investors need to keep track of certain variables before deciding to buy or sell 

S H Kelkar and Company Limited stands as the foremost Indian-origin company in India's fragrance and flavour sector. Its rich heritage spanning over a century has earned a notable reputation in the fragrance industry. The company’s fragrance offerings serve as essential raw materials across various sectors, including personal wash, fabric care, skin and hair care, fine fragrances and household products. Similarly, its flavour products are indispensable to producers of baked goods, dairy products, beverages and pharmaceuticals. 

Under its SHK, Cobra and Keva brands, the company boasts a comprehensive range of products. It maintains a robust team comprising scientists, perfumers, flavour experts, evaluators and application executives, operating across its facilities and five creation and development centres located in India, Singapore, Amsterdam, Indonesia and Italy.
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Notably, its research team has successfully introduced eight new molecules in the past three years, further enhancing its innovative capabilities.

Additionally, S H Kelkar and Company has filed 18 patent applications, resulting in the commercialisation of two patents in the deodorant and fine fragrance categories. Over time, it has curated an extensive product portfolio catering to the FMCG, personal care, pharmaceutical and food and beverage industries. Its clientele, inclusive of both national and multinational FMCG giants, as well as fragrance and flavour producers, underscores the company’s widespread influence and significance in the market.
 

Sector Overview

The global flavours and fragrances industry has experienced significant growth, reaching a market size of USD 31.0 billion in 2022, with projections indicating a 4.6 per cent compound annual growth rate (CAGR) during 2022-2027. This growth is primarily driven by increased demand for processed foods and personal care products worldwide, fuelled by rising disposable incomes, particularly in emerging economies like India and China. The sector’s dominance by natural chemicals, accounting for over 74.3 per cent of revenue, underscores the growing preference for natural ingredients. 

These ingredients are used across various applications, including pharmaceuticals and aromatherapy. In terms of applications, flavours are increasingly used in food and beverage products, including animal feed, while fragrances find extensive use in toiletries and cosmetics, with the latter segment dominating the industry revenue in 2022. Asia Pacific has emerged as the leading region for flavours and fragrances, driven by changing consumer preferences and increasing demand for healthier food options. However, the corona virus pandemic disrupted the industry initially, leading to supply chain breakdowns and reduced demand due to lockdown measures. 

Nevertheless, the industry showed resilience, adapting swiftly to the crisis and rebounding as restrictions eased. As regards the Indian flavours and fragrances industry, the country’s significant presence in the global market is highlighted by its position as a major exporter of flavour and fragrance ingredients, particularly mint extracts. The sector’s growth is supported by the increasing global demand for natural products, though the majority of India’s industry remains in the unorganised sector. The Indian flavours market is expected to grow robustly, driven by the expanding food processing industry and rising demand for packaged food and beverages. 

Similarly, the fragrance market is buoyed by growing personal care demand and changing consumer perceptions, with a shift towards natural and unisex fragrances driving market expansion. Looking ahead, increasing consumer inclination towards ready-to-eat food products, premium alcoholic beverages and natural ingredients is expected to fuel future demand in both the flavours and fragrances segments in India. The fragrance market in India is projected to reach ₹139.44 billion by 2024, growing at a CAGR of approximately 15 per cent.
 

Financial Overview

S H Kelkar and Company boasts a market capitalisation of ₹2,714 crore. The promoters currently hold about 58.95 per cent of the shares, while FIIs and DIIs possess around 8.24 per cent and 1.27 per cent of the shares, respectively. The free float of the company is at 31.52 per cent. Looking at the quarterly financial performance of the company on a consolidated basis, in Q3FY24 the company reported revenue of ₹496 crore which surged by 29 per cent as compared to ₹384.9 crore in Q3FY23, while the EBITDA of the company also soared by 81 per cent and stood at ₹81.6 crore as against ₹45 crore in Q3FY23. 

Similarly, the net profit of the company jumped 140 per cent to ₹32.1 crore as compared to ₹13.4 crore in Q3FY23. Furthermore, the EBITDA margin in Q3FY24 stood at a healthy level of 16.5 per cent as against 11.7 per cent in Q3FY23, expanding by 476 bps. The healthy performance has been propelled by contributions from new accounts, the resurgence of business from mid-sized SMEs, including e-commerce and start-up companies, and robust traction in exports. The core Europe segment has exhibited strong growth during the quarter. 

Looking at the previous three quarters’ financial performance of S H Kelkar and Company on a consolidated basis, in 9MFY24 the revenue of the company stood at ₹1,396.9 crore which surged by 15 per cent as compared to ₹1,214.1 crore in 9MFY23, while the EBITDA of the company soared by 44 per cent and reached ₹231.2 crore as against ₹160.6 crore in 9MFY23. Similarly, the net profit of the company jumped 46 per cent to ₹90.1 crore as compared to ₹61.8 crore in 9MFY23. 

Additionally, the 9MFY24 EBITDA margin stood at 16.6 per cent as against 13.2 per cent in 9MFY23, expanding by 333 bps. Upon examining the company’s financial health in terms of liquidity and solvency, it becomes apparent that the interest coverage ratio stands at 5.33 times, the current ratio at 1.53 and the debt-to-equity ratio at 0.58, indicating the company’s moderate debt and interest repayment capacity. Taken together, these metrics suggest a strong financial position concerning liquidity and solvency. Additionally, when evaluating performance indicators, the return on equity (ROE) was recorded at 6.6 per cent while the return on capital employed (ROCE) stood at 8.04 per cent. 

Outlook The company reflects robust revenue growth and market performance, marked by healthy year-on-year and quarter-on- quarter revenue growth. This growth is attributed to increased contributions from new accounts, a revival of demand from mid-sized and smaller accounts, and enhanced performance in the global markets. Notably, the core Europe segment reported positive results with healthy revenue growth and strong margins, while the core fragrance vertical strengthened its position in both the Indian market and new export markets. 

Moreover, the flavours segment delivered an encouraging performance. In terms of partnerships and order wins, the company has secured multiple orders from a global MNC player after two years of dedicated effort. The company aims to foster long-term partnerships with substantial growth potential, emphasising its commitment to sustainable expansion. Its financial guidance includes an expectation of over 16 per cent EBITDA margins for the full year, with revenue guidance of 10-12 per cent for FY25. 

S H Kelkar and Company has set a target for return on capital employed (ROCE) at above 20 per cent in the next 1-2 years and aims to reduce capital employed by 10 per cent for improved profitability. The long-term goal is to achieve EBITDA margins between 16.5-18 per cent. In terms of capex and expansion plans, it plans to expand its operations in Indonesia with a new manufacturing facility. Additionally, the company anticipates capex in Europe in 2025-26 to accommodate additional manufacturing capacity. Operational efficiency and sustainability are the key focus areas, with the company emphasising sustainable growth and efficiency improvements. 

The company expects gross margin improvements to be sustainable and aims to maintain pricing power to pass on raw material price fluctuations with a 4–6-month time lag. Its business model emphasises regional manufacturing for efficiency and customisation, with minimal disruption expected from Red Sea-related activities and transportation disruptions due to its regional business focus. It is prepared to handle disruptions effectively while maintaining sustainable growth. Furthermore, when examining key valuation metrics, the company’s price-to-earnings (PE) ratio is 30.6 times, which is moderately higher than its historical median PE of 23.9 times. 

Additionally, the EV/EBITDA ratio stands at 11.8, which is close to its historical EV/EBITDA median of 11.9. Moreover, considering the guided revenue growth and EBITDA margins by the management, a rough estimation of the forward price-to-earnings ratio results in a forward PE of 19 times, which seems pretty attractive. However, despite the company’s attractive valuation, concerns about the management’s reliability prompt caution, necessitating a close observation of future developments to determine the outlook until there is further clarity. Hence, we recommend HOLD. 

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