SH Kelkar shares climbed nearly 10 per cent since listing in November 2015.
SH Kelkar shares climbed nearly 10 per cent since listing in November 2015. The share price of the company jumped from Rs 207.30 on November 16, 2015 to Rs 226.95 on July 11. On the other hand, benchmark index BSE Sensex gained 7.25 per cent during the same period. JM Financial is bullish on the shares of the company with target price of Rs 260.
Below are five points explaining why the brokerage house is positive on SH Kelkar shares:
1) Domestic flavour and fragrance (F&F) industry is dominated by global MNC’s – amongst the top 5 players, 4 are foreign companies together constituting 58 per cent of the market between themselves. SH Kelkar is the only domestic company that features amongst top 5 with a market share of 12 per cent. Its share is higher at 20.5 per cent in the fragrance space where it ranks a close number 3 after Givaudan (global no.1) and Firmenich. JM Financial estimates suggest that organised F&F players can continue growing in double-digits for many years to come. The company has historically grown its domestic revenues at a CAGR of 16 per cent through market share gains and it is expected that the trend is likely to continue.
2) SH Kelkar has reported positive free cash flow (FCF) in 4 out of the past 5 years despite incurring substantial manufacturing and R&D capex in recent years. This was aided in part by the success in its efforts to reduce working capital which has dropped from 67 per cent of sales in FY11 to 48 per cent in FY16. Further moderation in working capital and lower capex henceforth should help FCF
stay healthy in the future as well.
3) Regulatory environment is increasingly getting more stringent with a higher focus on health and safety aspects. This is expected to result in higher cost of compliance which may not be feasible for unorganised segment.
4) The company has, over the years, created a large library of product formulations and is currently a supplier of 9,700 fragrance, ingredients and flavours products.
5) The brokerage house expects SH Kelkar to scale up its market share from current levels by 200bps (implying a share gain of 40bps per annum) over FY15-20. This would help the company nearly double its domestic F&F turnover between FY15-20 implying a CAGR of 14.6 per cent.