Recommendation from Chemical Sector

Recommendation from Chemical Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.  

S H Kelkar & Company Ltd. : The Aroma Of Wealth

HERE IS WHY
✓  Leader in its industry
✓  High growth opportunities
✓  Focus on cost control

S H Kelkar & Co (SHK) is engaged in the manufacturing of industrial perfumes. It started off in 1922 and today its fragrances and flavours are found in a number of bestselling brands in their respective product categories all over the world. Some of its fragrances which had been developed decades ago are still market leaders. It offers a wide range of over 9,000 products, produced in six state-of-the-art manufacturing facilities in India. SHK is the only Indian company that has filed patents in the field of fragrance and novel aroma molecules. This reflects the strong research and development capabilities of the company and the competitive advantage it bears in the industry.

The company’s consolidated net sales came in at Rs 1,322 crore in FY21 compared to Rs 1,114 crore in FY20, which grew by nearly 18.7 per cent. A strong demand recovery in the domestic markets and further rise in demand across international markets led to higher revenues. It well surpassed its set target sales growth. Its primary business segment of fragrances contributes nearly 90 per cent to the revenues. The segment witnessed a high growth of 198.7 per cent in Europe and registered a steady growth of 5 per cent in India. In addition, Creative Flavours & Fragrances SpA (CFF), the company’s wholly-owned subsidiary, also delivered a strong performance as it witnessed robust demand and volume off-take in the European markets.

The EBIDTA was recorded at Rs 1,083 crore in FY21 as against Rs 1,122 crore in the previous year. That is de-growth of about 3.5 per cent. Also, the PAT stood at Rs 144 crore as against Rs 35 crore in the previous fiscal. Even in the challenging times, it posted all-time high profitability as the PAT jumped by a massive 311 per cent over FY20. The profitability was driven by cost control measures, higher operating leverage, better product mix and good traction in the domestic market for fragrances. The cash flows from operating activities decreased from Rs 205 crore in FY20 to Rs 195 crore in FY21 by 4.8 per cent.

For the first half of FY22, it reported a steady performance. Its business in the European region registered healthy growth driven by uptick in demand and rising consumption. Net sales for the quarter ended September 2021 stood at almost Rs 358 crore. That’s a slight growth of 0.96 per cent QoQ basis and a growth of 1.82 per cent YoY basis. The EBITDA (exclusive of other income) was Rs 54 crore which saw a rise of 30 per cent QoQ but a decline of 24.25 per cent YoY. The rising price levels of raw material have led to margin contraction. The net profit number stood at Rs 22 crore, which decreased by 72.8 per cent QoQ and 59 per cent YoY. 

The lower PAT was a result of an extraordinary loss of Rs 6.2 crore and a reversal of additional tax provision aggregating Rs 64.5 crore in Q1FY22. Looking at some key ratios, the ROE was at 16.19 per cent and the ROCE was at 16 per cent, which is quite decent. The stock is trading near the PE level of 11.7. Its debt-to-equity ratio is at 0.54. Recently, it has also approved a buyback of its shares amounting to Rs 60.9 crore through a tender offer. It has become a leader in the Indian fragrance industry, constantly growing ahead of the market led by its rich nine decades’ experience, longlasting customer and vendor relationships. Considering all such factors, we recommend our reader-investors to BUY the scrip.

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