SH Kelkar & Company’s (SHKCL) Rs 500 cr initial public offerings (IPO) hit capital market on Wednesday. The IPO comprises of a fresh issue/Offer for sale of upto 1.66 cr shares, in which Blackstone PE Fund is selling around 10 per cent share and the promoter is selling around 2.5 per cent share of the total pre-IPO outstanding shares. Shares of SH Kelkar & Company could be subscribed to in the price band of Rs 173-180 (face value of shares: Rs 10 each) via the book building route.
The company will raise Rs 210 crore by issuing fresh shares, while the US-based private equity giant Blackstone will mobilise Rs 290 crore by offloading its 10 per cent stake in the company. The issue will close on Friday, October 30, 2015.
The public offer subscribed 42 per cent on the first day of the issue on October 28. The IPO received bids for 84,01,680 shares against the total issue size of 2,02,34,342 shares, as per the NSE data till 1700 hours on Wednesday.
JM Financial Institutional Securities Limited and Kotak Mahindra Capital Company Limited are the book running lead managers to the Issue, Keynote Corporate Services Limited is Advisor to the Issue and Link Intime India Private Limited is the registrar to the issue.
Here is all you need to know about the IPO and what analysts are saying
Business and Background: SHKCL is the largest fragrance and flavour company in India by revenue, with a market share of approximately 12 per cent. 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. The company exports fragrance products to 52 countries and are an emerging flavour producer in India with exports to 15 countries.
Objectives of issue: The company proposes to use the issue proceeds for repayment/pre-payment in full or in part of certain loans availed by the company, investment in their wholly owned subsidiary KV Arochem Private Limited and general corporate purposes.
Company’s brands: 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 per cent in the Indian fragrance and flavour (F&F) industry. “On bifurcating, the company’s market share stood at 20.5 per cent in the fragrance industry and 2 per cent in the flavour industry,” Angel Broking said in a research report.
Product Offering and 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.
Promoters and management team: Company is led by a experienced management team that has the expertise and vision to manage and grow business. Ramesh Vaze and Kedar Vaze, co’s Promoters, have over 50 years and 15 years of experience in the fragrance and flavour industry, respectively. In addition to promoters, co’s senior and mid-level management teams are also very experienced, having worked in large multi-national companies, in the fragrance and flavour and FMCG industries, with an average experience of over 20 years.
Anchor Investors: The Company on Tuesday raised Rs 150 crore by allotting shares to anchor investors in a pre-IPO placement. The list of anchor investors includes T Rowe and Neuberger Berman, ICICI Prudential, L&T Mutual Fund and Small Cap World Fund.
Hem Securities: The company is bringing the issue at price band of Rs 173-180 per share that will convert into P/E multiple of 30-31.5 on post issue annualised EPS of Rs 5.71. The company having established market leadership and brand name has comprehensive product offering and diverse customer base. Also company with its strong research and development skills has long standing relationships with suppliers. Hem Securities recommend investors to “Subscribe” the issue.
ICICIdirect: SH Kelkar would be a major beneficiary of increasing demand from FMCG companies specifically present in personal care, packaged foods & dairy products. At the price band of Rs 173-180, the stock is available at 31.1x FY16E earnings and 23.5x FY17E earnings while it is available at 2.6x FY16E EV/sales and 2.3x FY17E EV/sales. The brokerage house believe the IPO at this price band is available at reasonable multiples. ICICIdirect also recommend investors to “Subscribe” the issue.
Angel Broking: 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. The brokerage house believes that the valuation is expensive, considering its low return on equity (RoE) numbers (around 12-13 per cent) 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 per cent going forward. The company’s global peers Givaudan SA and International Flavors & Fragrances Inc trade at 28.1x and 20.1x their CY2014 earnings, respectively. Givaudan SA and International Flavors & Fragrances Inc have strong market shares in the global market of around 21 per cent and around 12 per cent, respectively, and deliver higher RoEs. On the other hand, SHKCL has negligible market share at the global level. SHKCL’s valuation looks expensive vis-a-vis these companies.
Angel Broking said, “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.”