SH Kelkar

By Research Desk
about 4 years ago
SH Kelkar

By Geetanjali Kedia

S H Kelkar and Company is entering the primary market on Wednesday 28th October 2015, to raise Rs. 210 crore, via fresh issue of shares and an offer for sale of upto 1.66 crore equity shares of Rs. 10 each, by PE firm Blackstone (1.32 crore shares) and promoters (0.33 crore shares), both in the price band of Rs. 173 to Rs. 180 per share. The issue will raise Rs. 497 crore and Rs. 508 crore at the lower and upper price band respectively and represents 18.98% and 18.73% of the post issue paid-up capital, respectively. To be listed on NSE and BSE, the issue closes on Friday 30th October.

60 year old S H Kelkar and Company is India’s largest fragrance and flavor maker, with 12% market share as of 31-12-13, catering primarily to the FMCG industry. Having 4 manufacturing facilities – 3 in India (Mumbai and Raigad in Maharashtra and Vapi in Gujarat) and one in Netherlands, its annual installed capacity is 19,819 tons. Company reported 10% YoY higher consolidated net revenue from operations in FY15, at Rs. 837 crore, split approximately 94:6 between fragrance and flavor. Exports account for nearly 35-40% of topline.

Despite growing topline, EBITDA margin shrunk 198 basis points in FY15, to 17.0%, as EBITDA slipped to Rs. 143 crore, down 2% YoY, on account of input costs soaring from average 52.5% of net revenue (between FY12-14) to 55.6%, in FY15. PAT was also lower, 19% YoY, to Rs. 64 crore, clocking net margins of 7.7%, down from FY14’s 10.4%. Thus, FY15 financials fared poorly.

Material cost continued the rise in Q1FY16 as well, to over 56% of the net revenue, of Rs. 224 crore. However, margins seem to be somewhat getting back on track, with EBITDA of Rs. 40 crore (18.1% EBITDA margin) and PAT of Rs. 21 crore (9.3% margin). Provisional and quarterly numbers, ahead of IPO are generally seen better, as well. EPS for Q1FY16 and FY15 stood at Rs. 1.55 and Rs. 4.84 respectively.   

On 5th Oct 2015, compulsory convertible preference shares (CCPS), held by PE investor Blackstone, got converted to equity shares, augmenting equity of Rs. 132.27 crore, on 30-6-15, to Rs. 139.10 crore, currently. Holding of Blackstone, currently at 33.50%, will shrink to 20.76% post IPO, assuming price discovery at higher end and all shares on offer being encashed. Promoters current holding of 64.20% will reduce to 54.4%, post IPO.  

Company’s business being highly working capital intensive, over 4 months of sales are locked in the inventory, while debtors are also given nearly 3 months of credit period. Inventory and trade receivables stood at Rs. 308 crore and Rs. 215 crore, respectively, as of 30-6-15, and have historically remained so high – on annual revenue of Rs. 840 crore, Rs. 520 crore is locked in the inventory and receivables.

Company’s total debt, as of 30-6-15, stood at Rs. 200 crore, which adjusted for cash balance, is Rs. 160 crore, on a net basis. Most of these loans are short term in nature, mainly to meet the working capital requirements. Loans worth Rs. 158 crore will be repaid from fresh issue proceeds, making the company almost debt-free on net basis, post IPO. This should also augment bottomline, as interest cost will nearly disappear from FY17.

It seems that IPO is structured only to facilitate part-exit to Blackstone, who have invested since August 2012. Current debt levels are quite low, with net debt to equity ratio of 0.3:1, as of 30-6-15. Besides debt repayment, there is no other definite object of the issue.

As per media reports, Blackstone had invested Rs. 243 crore in August 2012 in the company. Its holding of 33.50% gave the company a value of Rs. 725 crore then. Post 3 years, company’s revenue and PAT have grown at CAGR of 14% and 16% respectively. Expected market cap, at Rs. 180 per share, will be over Rs. 2,700 crore, i.e. jump of 55% CAGR in the last 3 years. Clearly, financials are not supporting such a rise in the valuation expectation.

With interest savings on account of debt repayment, expected EPS of FY16 stands at close to Rs. 6 per share, which leads to a PE multiple of 30 times, on upper end of the price band. On expected EBITDA of Rs. 163 crore for FY16, EV/EBITDA multiple turns out at 18x. These multiples are clearly not cheap for a company, with less than Rs. 1,000 crore topline, facing input cost pressures, coupled with heavy working capital nature, single digit net margins and absolutely moderate growth rates.

Given the steep pricing, subscription to the issue is not warranted.

Disclosure: Not applying in the issue.

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