I don’t think the argument was ever that a SHK or any F&F player will command a valuation comparable to HUL or P&G.
Though for the sake of this discussion on valuations would put up the 3 possible comparable scenarios
a) SHK v/s IFF, Givaudan, Symrise
b) SHK v/s HUL, Dabur, Marico, Godrej CP
c) SHK v/s Galaxy Surfactants
a) SHK v/s IFF, Givaudan, Symrise
| Company | 5 Yr Sales CAGR | 5 Yr EPS CAGR | 5 Yr Avg Operating Margins | 5 Yr Average ROIC | P/E TTM | P/S TTM |
|---|---|---|---|---|---|---|
| SHK | 5.90% | 14.40% | 11.50% | 10.00% | 15.2 | 1.66 |
| IFF | 10.90% | -9.20% | 14.00% | 5.40% | 77.6 | 5.69 |
| Givaudan | 7.50% | 3.60% | 16.00% | 10.00% | 50 | 5.88 |
| Symrise | 6.23% | 3.20% | 13.80% | 7.00% | 49.9 | 4.23 |
The fact that some of these Global F&F players have grown way better than SHK seems to be misguided, though SHK definitely has been some sort of a laggard. Other return ratios for SHK are also not all that poor. Given the data points it’s surprising to see such a steep discount when it comes to valuations.
b) SHK v/s HUL, Dabur, Marico, Godrej CP
| Company | 5 Yr Sales CAGR | 5 Yr PAT CAGR |
|---|---|---|
| HUL | 8.00% | 16.00% |
| Dabur | 4.00% | 7.00% |
| Godrej | 6.00% | 6.00% |
| Marico | 6.00% | 13.00% |
| Colgate | 5.00% | 15.00% |
| PGH | 5.00% | 0.00% |
| SHK | 7.00% | 13.00% |
Comparing SHK’s growth rates to Personal Care FMCG companies (since SHK is a dominant fragrance player). The margins and return ratios for SHK are of course nowhere near and argument of SHK trading at the multiples these FMCG companies would fail to make any sense.
c) SHK v/s Galaxy Surfactants
For the reasons stated above, the argument was never about SHK trading at similar multiples to that of a HUL or a P&G. The argument though was to compare its valuations with
a chemical company which has these FMCGs as customers (or) raw material manufacturers for these FMCGs. The reason this would make sense is that these companies have the same end user industry which would drive the volumes and limited to no pricing power (these large FMCGs hold the entire bargaining power). The best comparable with the mentioned characteristics in the Indian listed space imo is Galaxy Surfactants.
| SHK | Galaxy Surfactants | |
|---|---|---|
| 5 Yr Sales CAGR (2016-2020) | 5.96% | 6.77% |
| 5 Yr PAT CAGR (2016-2020) | -13% | 28% |
| 3 Yr Sales CAGR (2018-2020) | 4.28% | 6.27% |
| 5 Yr PAT CAGR (2018-2020) | -30% | 15.66% |
| 5 Yr AVG ROCE | 14% | 25% |
| 3 Yr AVG ROCE | 12% | 25.20% |
| 5 Yr Avg OPM | 14% | 13% |
| 3 Yr Avg OPM | 14% | 13% |
| EV/EBITDA | 10 | 24 |
| EV/SALES | 2 | 4 |
| PB | 2.4 | 8.6 |
One can also look at other cash flow ratios as well.
The PAT growth rate numbers for SHK do not reveal the true story because of the year chosen, however I will not shy away from the fact that PAT growth for SHK for the past few years has been surely muted because of several issues. Though the point here is whether the steep discount in valuations as compared to Galaxy Surfactants be justified considering similar top line growth and similar operating margins.
Imo this is a turnaround story and looking at past 3-5 year growth numbers might be misjudging it. One can see last couple of quarter numbers and clearly gauge the difference on all fronts. And my reckoning is if the management is able to deliver even a lower to mid teen top line growth with a 17 % OPM, the re-rating case would only get stronger. The very reason for the stock getting beaten down was management not able to deliver because of a whole lot of reasons. And those issues are of the past now and there looks like a clear roadmap set by the management to achieve the numbers they’ve mentioned.
From an investor pov though, a more conservative approach would be to wait for a couple of more quarters however, majority of re-rating part might already take place by then.
Disc. : Invested.