S.H. Kelkar Ltd

Stock Opportunities Untested - but worth a good look
99

Q3FY22 earnings call summary -

Attended By - Kedar Vaze and Rohit Sarogi (CFO)

Main points from discussion -

  1. Holland Aromatics and NuTaste - Both acquisitions are at 10 EV/ABIDTA valuations and both acquisitions found as significant value accretive due to current market scenario post covid. FnF Industry is going through consolidation and all major players doing acquisitions. For SHK, due to acquisition on Holland aromatics it has North Europe presence after being presnt in South Europre strongly. Holland aromatics already has Unilever, Britania and such MNC customers onboard and it will help strenthening cross sales. NuTaste provides significant opportunity on Falvours side where it caters to QSR customers which is new area for SHK. Double digit revenue growth expected in both acquired subsidaries and there will be furhter synergies due to locations, products and customers.

  2. Overall acquisition strategy - While earlier SHK stand was to reduce debt, current opportunities are found significant value. Overall debt levels are expected to peak out @550 Cr in next quarter due to acquisitions and higher working capital. Company will start reducing debts from Q2 sizably. Company is committed to bring down debts to 2 times EBIDTA level. SHK apetite for acquisitions has been mostly over.

  3. Operations update - Current revenue growth are despite hangover effects of covid. On margins front, company has taken price hikes and is further in process of disucssions for further hikes with customer. 40-42% operating margins and 15-16% EBIDTA margins will be the norm in long run.

  4. New Business update -

    1. Global RFP for large FMCG MNC customer - SHK is in commercials negotiations phase. Overall size of contract will be 1 Bn USD over contract period (3 to 4 years). SHK became elligibles bcs of global presence in Europre and APAC (India + China + Indonesia).
    2. RFP qualification and award is long drawn multi year process. Supplies and testing carried out over years and now company is in final stage. Quite confident to get significant business from current RFP.
    3. Current SHK capacities will be sufficient to cater to this new business and no further capacity addition needed, unless customer ask to set up site in proximity to customer site. That can be discussed with customer for advnace/loan funding for capex if such situation arises.
    4. Margins may be somewaht lower than current level but operating efficiency benefit will be there due to scale.
    5. Company is in process of applying for more such global RFPs and at various stages. SHK locations (Europe + APAC) has qualified it for such global RFP supplies.
    6. 12.8 Cr expenses for supplies to global MNC for RFP qualification will be amortized over contract period post supplies start.
    7. If award decision happpens by April then supplies (and revenue accredition) can start from Sept 2022. This is typical timeline for new supplies set up.

  5. Other business update -
    Some parts (like East Asia) are yet to recover demand after Covid impact. Europe is ahead in demand recovery and India recovered mostly to pre covid level, Indonesia is expected to catch up now. Double digit revenue growth can be seen overall level.

  6. Firemenich stake acquisition - Its quite common globally to have cross holdings in competitor. Its due to common customers and internally plyers supply to each other for some or other components of final product. Firemenich will not have influence on SHK decision making due to this acquisition and neither management is willing to sell any significant stakes in the company.

My takes -

  1. While I bought SHK as turnaround story recovering from debt reductions and streamlining acquisitions, its debt levels are going up for some good resons (value accretive acquisitions) and some not so good reasons (higher working cpaital requirements due to infletions and more inventory). Overall SHK management seems to be committed to bring down debts and increase capacity utilizations.

  2. With Global MNC business award through RFP, which management sounds quite confident and its visible from spends (12.8 Cr) and multi year process, companies revenue can double in next 2 years. Currently its at 1.5K Cr INR at annual level. Similar or more addition ( 1 Bn USD = 7.5K Cr INR, so Annually roughly 2K INR when supplies reach normal level).

  3. With this new business, even though EBIDTA margins may come down a bit, I hope working effeciencies and better capacity utilizations shall improve ROCE over the period.

  4. Currently SHK Market cap is 2K Cr INR. In 2 years period if new business scenario plays as mentioned by management, I expect stock price to rise 5 times current level. Its due to P/E rearating (from current less than 12 PE) to normal levels of 25 PE (for global large Fnf Players its more than 30 PE on an avg) coupled with doubling revenue. Also FnF segment shall be beneficiary of post covid recovery. Though FMCG companies will batter to maintain margins due to high infletion, I hope B2B players like SHK will cover up their margins by taking contractual rate hikes with customers. I have seen that in MoldTek doing with Asian Paints and other customers.

  5. I have more confidence in SHK story after Firemenich acquiring 10% stakes in SHK. Afterall, who knows market better than these top global players? (Firemeich is no. 2 FnF company globally).

Disclaimer: Have significant position in my PF and holding more than a year now. My views may be biased and reader need to complete their own research before taking any position.

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