Despite good fundamentals, high valuation renders the initial public offer of SH Kelkar and Company unattractive.
The company is in the business of providing fragrances and flavours for consumer goods in segments, such as household and personal care, baked goods and dairy products. At the price band of ₹173-180, the company discounts its expected earnings for the year ending March 2016 by 27-28 times on the post-issue equity.
Global players who have a bigger slice of the market in India, such as Givaudan and International Flavours and Fragrances trade at lower PEs of 23 times and 20 times their estimated 2016 earnings respectively, according to Bloomberg consensus estimates.
Considering that the users of these products are predominantly FMCG companies, the offer seems to have been priced keeping in mind that many FMCG players are trading at PEs of over 30 times their FY16 earnings. But the business is actually more comparable with the specialty chemicals industry. Besides, the fact that there are no listed peers in the Indian markets has driven the higher pricing as well. While Givaudan is the market leader in the Indian fragrances and flavours industry with a 23 per cent share, SH Kelkar has a 12 per cent share.
The company has over 90 years of experience in fragrances, with fragrance manufacturing plants located in Raigad and Mumbai. It is a relatively recent entrant in the flavours space, which now contributes to less than 10 per cent of consolidated revenues.
It boasts of a library of over 9,000 fragrance and flavour products and formulations and good R&D capabilities. Indian and multinational FMCG companies, as well as blenders and producers of flavours and fragrances form part of over 4,000 clients that the company has. Some of the prominent names include Godrej Consumer Products, Marico, Wipro Consumer Care, HUL, Britannia, Vadilal and VICCO Labs. It also exports these products, predominantly to other Asian, West Asian and African countries. About 40-45 per cent of the consolidated revenues come from overseas markets.
At the upper end of the price band, SH Kelkar plans to raise ₹508 crore from this offer. While ₹298 crore will go towards an offer-for-sale from private equity investor Blackstone and the promoters, the remaining amount (₹210 crore) is proposed to be used by the company to repay debt. The post-issue market capitalisation works out to around ₹2,600 crore. From the year ended March 2011 to March 2015, the consolidated top-line has moved up at a compounded annual growth rate of 16.2 per cent to ₹833.9 crore.
During the same period, the consolidated net profits grew at a CAGR of 19.6 per cent to ₹64.3 crore. Consolidated operating margins have predominantly been at 17-18 per cent during these years (14 per cent in 2014-15). With a total debt of about ₹201 crore in the consolidated balance sheet, the company expects to become debt-free post-issue. It currently operates at a capacity utilisation of 35-45 per cent across its plants and is unlikely to get into big capex spends in the next few years. The offer is open from October 28-30.