S.H. Kelkar Ltd

lsubs · November 1, 2021, 7:50am

The debt is in the consolidated books and not stand-alone… From the latest financial results

Standalone

Consolidated

The euro-denominated debt is at a much lesser interest rate compared to INR denominated debt.

(Looks like current Euribor rates are in negative territory)

Possibly, that could be one of the reasons for this? Not sure…

Rohit_Kadam · November 1, 2021, 8:12am

Thanks; and any reason why the promoter pledge refuses to go away?

lsubs · November 1, 2021, 1:28pm

I have no other information about the reason for the pledge. But, there is a pattern…

There was a buyback in 2019 (Buyback 2019 | Keva). Post the buyback, the pledge was reduced the next quarter…
There is now a buyback in 2021 (Buyback 2021 | Keva). We should probably see the pledge reduce in the quarter after that…

Historical information from BSE

(Data from SH Kelkar & Co | Tijori Finance)

kiraank · November 1, 2021, 2:48pm

Yes. This is what has been clarified on concall.

Rohit_Kadam · November 2, 2021, 3:40am

Do promoters participate in the buyback? That is tender their shares? And use the cash raised to clear the pledge? In that case, it is even more worrisome and raises questions on the real reason as to why they keep pledging. If they think shares are really undervalued, they should not be participating in the buyback and let their stake in the company increase.

don’t understand despite two buybacks at prices much above the then prevailing market prices, the market has ignored their signal.

lsubs · November 2, 2021, 5:21am

From the Board meeting outcome (keva.co.in)

At the end of the last buy-back in 2019, Certificate of Extinguishment of Equity Shares.pdf (keva.co.in), promoters had tendered 13,50,309 shares of the 30,00,000 shares extinguished.

Disclaimer:

I have no clue about the reason to pledge.
“Correlation is not causation”… Just because the last time, there was correlation between the release of pledge and buyback, I am not implying that the buyback is tied to the pledge. I don’t know about that.

Rohit_Kadam · November 2, 2021, 5:24am

That is the point; the management should clarify and explain these actions in simple terms; which is not happening and the market is responding accordingly.

lsubs · November 2, 2021, 7:07am

I completely agree. It always helps to have clear communication from the management…

After my reply, I had a quick look at the Earnings Call Transcript (from Tikr). They have given the following responses… (Highlights are mine)

Bhavesh Chauhan
Okay, sir. Sir, lastly, I would like to ask management on their views on capital allocation. Sir, we have some debt in our books, and then we are going for a buyback. And also, there could be opportunities for inorganic growth. So by doing a buyback, are we saying that we are not going to repay our debt in a very meaningful way, and also, there are no further inorganic growth strategy that the company is looking for?

Kedar Vaze
So there is a couple of points. One is that last year onwards, we have been maintaining very low ratio of profit distribution given the uncertainty around the pandemic. We are now looking at the post pandemic situation in Europe, and we expect that in various parts of the world. And this is anybody’s guess. Your guess is as good as mine. So we are now proposing and planning on the basis that we are in a post-pandemic situation and there is no extra need to conserve cash. We don’t see any effect of complete stoppage of business happening. So we are now restoring back our confidence in the cash flow and distributing the profit as per the profit distribution policy. In addition, we have had a onetime gain of INR 64-odd crores in the first quarter as a result of a tax refund. So this is passed through to the shareholders that the buyback proposes to do.

On the debt side, most of the debt in terms of the quantum is in Europe, acquisition in Europe, working capital in either euro or U.S. dollar. And the interest rate continues to be a very low interest rates. So we are comfortable to maintain the current debt level and continue to grow the business from here on. It doesn’t make a very big sense to reduce the debt in the European markets where the debt interest rates are very low.

Viraj Kacharia
Okay. Second question is, so you said that we have a good amount of visibility in terms of growth, and hence, we kind of hinted for a buyback option as well. But if I have to look at for the next 2, 3 years, given that we are still kind of quite very strongly positive on growth and margin recovery, would this be more like a regular feature in terms of buybacks? So I’m just trying to understand between buyback and repayment of debt. I mean, what is a – I mean, how…

Kedar Vaze
So we are committed to our distribution policy, profit distribution policy of 30% to 40% per annum. We will look at both measures, dividend, buybacks and any other route or distribution method that from time to time, what makes sense in terms of taxation, in terms of shareholder value. We also believe that buyback gives a better representation and better value for longer-term shareholders than dividend where effectively, people can own the share for one day and get a dividend rather than having to own it for a bit longer. And we are committed to the profit distribution policy which we have announced between 30% and 40% of the PAT that we generate.

These responses have satisfied the doubts I had about the buyback vis-à-vis dividend. Also, I don’t think there is an ulterior motive to buybacks. The reason for pledge is personal and I am okay with management not elaborating on that…

Disc: Invested at lower levels. ~3% of portfolio

babuchit · November 9, 2021, 12:45pm

Large volume and 20% price raise today.

nilwadmalwar · November 9, 2021, 1:04pm

F7655BEF_208F_448E_A044_E37F4B548487_182538.pdf (78.7 KB)

lsubs · November 16, 2021, 1:03pm

Summary of Investor Call Transcript - Q2/FY21

Business Overview

the demand environment is pretty normal at this point, in fact, it is quite healthy. Given the festival and recovery post July-August, I think from September second half, we have seen good recovery in demand
About 10% of our domestic business is in small customers and they continue to maintain their business.
- when the pandemic lockdowns happen, this 10% business has a very acute slowdown but we expect this business to bounce back. There is also pent-up demand from the consumers to buy these products
Mahad Floods
- As of now, we have not lost any business as a result of the Mahad flood
- we do have a plant in China, which was bought as a BCP for the Mahad plant, so we have two plants manufacturing more or less the same products and in this lockout period or stoppage period due to the floods, we have ramped up our capacity in China and have produced additional materials to balance the shortfall that we faced
- The only issue there is that the costs, which were incurred in this period have not represented or reflected in the books of accounts till we have a confirmation from the insurance claims, so that part should also be coming in the quarters ahead
  - We have booked Rs. 6.2 crore as the exceptional cost in the P&L this quarter.
New Products/Orders
- we have won an order for a homecare brand of one of the MNCs at India
  - This specific product will be anywhere between Rs. 25 to 30 crore annual revenue and we hope to get additional more businesses in line with this long-term strategy
- industrial products
  - we have seen almost 100% growth in these areas over a last couple of years, so it is doing well. We will continue to see growth in those areas
  - overall revenues - At the moment it is small, it is in sort of Rs. 10 crore ballpark, but you see that this is only I would say 1% or 2% of the total potential of these market, so if the market is very large, we are seeing this will be sort of growth area for us
- Fragrance encapsulation technology
  - looking at first initial leads at European market for exporting this encapsulation and also in the Middle East, so the initial trials and feedback from the client is good. Again, it is a scaling-up business, it is quite small at the moment and we will continue to grow that as we go ahead
- CFF
  - overall Fine Fragrance globally remains weak and is expected to turn around this quarter once it is sort of a post-pandemic demand
  - we are doing good amount of business wins. As the Fine Fragrance is extremely fragmented market, it takes a few years for any meaningful volume growth but we have good amount of wins and we are quite happy with the development funnel and business traction in the Fine Fragrance business.
  - 2% to 3% of the total business but it is completely a new activity which has started two-three years ago and it will ramp up.
  - Our long term objective is to make 20% of our European business in brand credentials which is a healthy ratio for volume and margin business. Most of the global MNC businesses have roughly 25% of their Fragrance business as Fine Fragrances
  - our objective is to increase this 3% to roughly 20% while continuing to grow the overall pie
- Wellness Ingredients
  - Our research in that has created a couple of new products. Again, it is a nascent market and the market is very big. We are coming in late in this market but we want to be a product differentiated by science because in natural extracts business, there are a lot of players but with an undifferentiated product mix
  - it will take two-three years of product maturation and building the product range to then go into those markets
  - around Rs. 5 crore range per annum this fiscal but that has good traction and we are in discussion with some large MNCs as well as local players, so it is a new area for us and it will take some time before the business is meaningful. In terms of growth rates, it will grow fast but in terms of the overall number, we will still be in the Rs. 10-20 crore range for few years.

RM/Supply Chain

we are working with our clients on an ongoing basis, we are continuously having a dialogue with them around the price and cost inflation
With our inventory policy of maintaining high enough levels, we are quite well-covered in to the next couple of quarters and we will look at gradual phased manner price increases to our clients, so that we balance the recovery in growth with the price inflation and we do not want to end up with a situation where the price inflation stops the volume growth recovery

Financials

Margins
- We are now looking at scenario pretty much like hyper-inflation on some of the commodities. We are working closely with our clients and looking at undertaking price hikes in the months to come
- we will be in a better position to focus on absolute EBITDA and absolute margin rather than relative percentage margin as the sales price will get distorted quarter-on-quarter in the upcoming two-three quarters
- I expect that the situation should be normal by end of the fiscal, so April or May, we will see the normalcy in terms of ratios but till that time in two-three quarters, we will be required to focus mainly on the absolute margin and absolute profit without looking at the percentage on sales as that number will get distorted
Debt
- most of the debt in terms of the quantum is in Europe, largely towards acquisition and working capital, either in Euro or US Dollars, and the interest rate continues to be a very low , so we are comfortable to maintain the current debt level and continue to grow the business from here on. It does not make very big sense to reduce the debt in the European markets where their interest rates are very low
Buy back
- last year onwards, we have been maintaining very low ratio of profit distribution given the uncertainty around the pandemic. We are now in a post-pandemic situation and there is no extra need of conserving cash
- We are committed to our profit distribution policy of 30% to 40% per annum. We will look at both measures, dividend, buyback and any others distribution method that, from time to time, what makes sense in terms of taxation, in terms of shareholders value. We also believe that buyback gives a better representation and better value for longer term shareholders than dividend
- we have had a one-time gain of Rs. 64 odd crore in the first quarter as a result of a tax refund. So this is getting passed through to the shareholders via proposed buyback

Forward Looking

We are committed to 12% CAGR growth. I do not see any change there on the business in the long term
The European business has been clocking 12% CAGR over the last two years and we expect that to continue.
The margin percentages will be something which will see a dip and we will need to take a certain strategic hit in the margin in this quarter given the hyperinflation, but we will be able to restore that back to a long-term 42%-43% gross margin and continued growth.

Vaibhav_Gupta1 · November 23, 2021, 6:37pm

I am a bit concerned about the company’s ability to pass on the cost. During Aug concall they mentioned that they would be able to pass the cost and maintain EBITDA in the range 19-20%

Aug Concall

While in Nov Concall, they mentioned that Margin might not improve till Next Apr- May and focus would remain on absolute EBITDA

Nov Concall

While Inflation in RM is an actual thing, but assuming that they would be able to pass the cost and failing to do that in the next quarter is concerning

Additionally, During Aug’21 Concall, they mentioned that they are confident of 12%-15% minimum Growth for coming years. This got reduced to only 12% growth in November

While things can change drastically in a short term, I believe 5yr growth plan shouldn;t change in a quarter

Aug Concall

November Concall

lsubs · December 16, 2021, 1:39pm

Two acquisitions have been announced - one in the aromatics space with the strategy to deepen presence in a highly penetrated European fragrance market. The other is in the domestic flavors segment…

Business Updates

Acquisition of Holland Aromatics B.V.:

Keva Europe B.V., has entered into an agreement on December 14, 2021 to acquire a 100% stake in Holland Aromatics B.V. (Holland Aromatics)
As per the agreement and subject to customary closing conditions, 62% of the stake will be acquired upon closure of the transaction, and the balance 38% shall be acquired in two tranches of 19% stake
each over the next two years. The consideration for the acquisition of 62% stake is Euros 13.02 million. SHK plans to fund the investment through local debt raised in Europe in order to avail the benefit of lower interest costs

Acquisition of NuTaste Food and Drink Labs Pvt. Ltd.:

acquisition of 100% stake in NuTaste Food and Drink Labs Pvt. Ltd (NuTaste) through the wholly owned subsidiary Keva Flavours
SHK will be acquiring a 100% stake at a total consideration of Rs. 13.25 crore. SHK plans to fund the
investment through a combination of debt and internal accruals.

Participation in Global RFPs

SHK had earlier been shortlisted by a large global FMCG MNC as one of the registered suppliers of fragrances. The Company is pleased to share that it is now participating in the global RFP (Request for Proposal) and will engage with the MNC on an interactive pitch for commercial tender submission. The tender has a tender submission fee, which is estimated at ~Rs. 12.5 crore for SHK. Such global tender participation is in line with the Company’s strategy of more deeply associating with large global MNCs.

mrkakade · March 6, 2022, 1:15pm

Q3FY22 earnings call summary -

Attended By - Kedar Vaze and Rohit Sarogi (CFO)

Main points from discussion -

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.
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.
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.
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.
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.
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 -

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.
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).
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.
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.
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.

HIMSHAH · April 7, 2022, 4:34pm

Updates

ausking · April 8, 2023, 7:38am

Almost one year since your review. Stock is now down to Rs 104. Are you still confident on delivery capability of this company ?

mrkakade · April 11, 2023, 1:40pm

I lost my patience in this. Poor performance consistently and non effective management of situations like inflation, inventory etc. justifies poor valuation ratios as compared to global peers. I exited my position after Q3 results. To summarize its good business with mediocre management.

Kishore_Sattu · September 5, 2023, 2:42pm

can someone explain this https://www.bseindia.com/xml-data/corpfiling/AttachLive/6e830f13-5abb-4eb4-b63d-ba5453e7d02e.pdf

how can they use amount employee trust received to reduce companys debt?

akacker · September 6, 2023, 1:21am

My understanding from the FY23 Annual Report (start with Annexure C)

The Employee Benefit Trust (EBT) was set up to purchase shares from the secondary market as a basis to provide share based incentives to employees.
EBT borrowed from the parent to make purchases into the trust and was holding ~32 lakh shares
There seems to be a mechanism for price of share to be set at purchase price + cost.
There is an additional note that says that since the share price has declined, the scheme is not attractive any more (I assume this means their purchase cost made it unattractive as an incentive). The note says it will look at revising the scheme in accordance with SEBI rules for share based incentives. The action they seem to have taken is to liquidate the current shares and will probably launch a new scheme (the latter is just speculation - I have no way of knowing)
They did not dispense any shares to employees in FY23 (their share incentive program is called STAR scheme)

Does not seem like anything significant (other than not having a good share based incentive and whether this may result in key employee attrition) - but happy to be corrected

Disc. Am invested so my interpretation may be biased

rishitdedhia13 · October 6, 2023, 4:10pm

It’s a CSR initiative of the group. As per mentioned in their Annual Reports