S H Kelkar & Co (SHK) exhibited a steady ~ 17.1 % yoy consolidated top-line growth from ₹4,613 mn in H1FY16 to ₹ 5,404 mn in H1FY17, aided by ~ 16.9 % & ~ 105.0 % growth in net sales & other operating income respectively. Higher realisations, raw material procurement efficiencies and moderation in other expenses contributed to an improvement of 220 basis points in EBITDA margins, leading to a ~ 35.6 % expansion in operating profits. A combination of reduction of finance costs on account of repayment of debt with the IPO proceeds and ~37.3 % increase in other income gave a fillip to the bottom-line, rising ~ 95.5 % yoy from ₹265 mn in H1FY16 to ₹ 518 mn in H1FY17.
Outlook and valuation
Considering SHKs near debt free status, extensive customer & geographic diversification, Indian demographics and wide usage of its product range in demand inelastic utilities such as home & personal care products, we maintain our case for SHK as a true FMCG proxy play. While the company's larger exposure to emerging FMCG players enables it to grow at a faster pace than the FMCG industry, it is increasingly looking to get in business with established FMCG players through empanelment and unique product offerings from its 9,700 wide range of fragrance & flavor products & ingredients. We also foresee a shift in fragrances & flavors demand from the unorganized sector to organised players on the advent of GST, which directly benefits SHK.
We had initiated coverage on SHK on the day of its listing in November 2015 with a 15 month price objective of ₹ 280 on our conviction that it would trade on premium valuations akin to FMCG companies. The market seemed to agree with our investment rationale when the scrip far surpassed our target, reaching the highs of ₹ 354 on August 2016. Considering the predictability of the business, strong return ratios, robust cash flows & a healthy balance sheet, we maintain a BUY on SHK and raise our 12 month price objective to ₹ 330 ( 15 % upside)
Please find attached file containing our view on – S H Kelkar & Co
LKP Research
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Email: research@lkpsec.com, Web: www.lkpsec.com
The information in this documents has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action.
LKP Securities Ltd., and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.
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