S H Kelkar – Annual Report 2017 notes

The Smell Engineers:

  • Established over 90 years back in 1922
  • Manufactures and makes over 9700 products to 4100 customers.
  • Downsteam Presence
  • Aggregate capacities – 18,655 tonnes in fragrance and 3,000 tonnes in flavours.
  • Capacity Data
  • Developed 12 molecules in last 5 years (another part of the AR mentions 3 years). Filed patent for 3 molecules. Invested INR264m in R&D in FY17.
  • R&D team – 38 members – 20 scientists, 12 perfumers, 6 flavourists, independent evaluators and application executives.
  • Product creation and development centres in Mumbai, Bangalore, Netherlands and Indonesia.
  • Branded small pack portfolio – Markets fragrance products in small packs of 25 gm to 500 gm to hundreds of traders and re-sellers. Intends to increase the number of branded small packs while exploring opportunities to introduce different application methods for fragrance products.
  • Facilities have been registered by USFDA and certified by numerous bodies including FSSC and the FSSAI.
  • Has a fully equipped F&F testing lab with gas chromatographs, density meters, automatic polarimeters, tintometers, flash-point testers and microbiological testing.
  • Invested in best safety equipment for its workers and and effluent treatment plants near its facilities to ensure quality extends beyond its products.
  • Nearly 65% of company’s employees were with the company for more than 5 years as on 31 March 2017.
  • Company’s average age of employees is 39.



  • Vision – to emerge among the ten largest fragrance companies in the world within the next decade.
  • Doubled revenues every five years in the last decade to reach nearly INR10b in revenues during last fiscal.
  • Continue to be driven by ambition to achieve USD1b in revenues within a decade.
  • India focus – enjoy status of largest Indian origin manufacturer with market share of 13% (F+F).
  • Global ambition – currently exports – 32.5% of revenues, 52 countries. Intend to increase our global revenues to USD1b within a decade through small steps in countries with demographics largely similar to India.
  • F&F market – 80% of the market is dominated by just 11 players with individual annual revenues of more than USD500m. At the bottom of the pyramid, ~4000 players marked by annual revenues of less than USD50m. (Note: If I recollect correctly, the RHP during IPO had said similar – top 4/5 players in India occupy close to 70% market share).
  • SHK occupies the space in the top pyramid (top 11 players) and is arguably growing the fastest in this segment.
  • Time has come to leverage our Indian foundation and emerge as a rapidly growing global player.
  • Will enter select countries instead of spreading thin across a large number. Do not expect enter a large number of countries at one shot, enter only as many countries that fit into our strategic attractiveness criteria.
  • Target countries where we see demographics unfold the way they did in India, leveraging familiarity into how consumer response and appetites will evolve in future.
  • India continues to remain central to our strategy – will make deeper investments to tap the attractive growth opportunity.
  • Evolving from a fragrance only player to focus on fragrances and flavours both, from a research in safe spaces towards intellectual property research.
  • Believe inorganic opportunities could help us fast track growth.
  • New molecule research is expensive and time consuming – this means new companies engaged in this cutting-edge kind of research will need adequate resources on one hand and long-term commitment on other. SHK fortunately has both these attributes.
  • Possess a library of fragrances that has been compiled over nine decades, despite this were not complacent and made largest research investment within the sector of INR264m in new infrastructure and recruitment to address the growing needs of customers.
  • Doing two things effectively – 1. Preparing for a time when an increasing number of customers will seek the unique fragrances built on patent-protected molecules. 2. Already commissioned a studio in Amsterdam manned by international perfumers. Invested in the niche end of fine fragrances bringing a respected international dimension to capabilities.


Operational review:

  • Revenues grew 6.5% while profits grew 43% during FY17.
  • Revenue mix – domestic 67.5%, exports 32.5%
  • Domestic fragrances grew by 7%  while domestic flavours posted a 155% YoY growth. Revenue through organic route was 58% in flavours, concluded two acquisitions.
  • International fragrances moderated by 14%, while international flavours grew by 80%.
  • Exports – marked by intense competition, currency volatility, weakening of Euro vs/ USD (company procured in USD and marketed end products in Euros ). Middle East, which accounted for 31% of company’s international business, was affected by geopolitical tension. Abolishment of import duties across Europe made continental players competitive. Company’s exports grew by 3% in dollar terms as a result of strategic strengthening of processes, productivity and systems in South East Asia. Company addressed growing demand in Indonesia and Thailand through methodical recruitment and other initiatives.
  • Three milestones – INR981cr revenues, INR105cr PAT, INR100 cash + investments..
  • Despite demonetisation were an entire quarter was impacted, SHK managed to post 6.7% revenue growth in the year, v/s global growth of 1% in the operating segment.
  • Company continues to cater to growing needs of a large number of small customers – this was done to precisely derisk against sales slowdown that company was impacted by in last fiscal.
  • Resultantly, company increased its market share from 20.5% in 2013 to 2016 – validating point that during periods of market stress, strong companies enhance their footprint.
  • EBITDA margins for the company expanded 80bp to 17.9% during FY17, through three initiatives –  strong procurement economies through larger volume of purchases, better product mix, generating nearly INR900m in revenues from new products (3 year basis, largely fragrances) (Note: this is almost 8.5% of consolidated revenue from operations for the year).
  • Moderated interest outflow by INR150m.
  • Company has no gearing currently, corresponding to a net worth of INR8.1b – indicates the financial leverage should the company need to pursue debt funded inorganic opportunities. .
  • Receivable days decreased from 91 days to 81 days in FY17
  • Mix of flavours in revenue increased from 6% in FY16 to 12% in FY17, on a growing revenue size. This volume-value play influenced overall margins, trend of which is sustainable.
  • Domestic formulations and ingredients business performed creditably during FY17 at a time when international business was impacted by increased competition and Euro weakness. Company intends to shift its ingredients manufacturing operations from Europe to India to moderate cost structure and strengthen competitiveness.
  • During FY17, company introduced  a concept of ‘loyalty bonuses’ to customers – this achieved critical business gains and proved to be a game changer. It encouraged customers to buy products and restock. This was especially done during demonetisation.


Fine fragrances:

  • Company commenced marketing fine fragrances, which was well received by market. Company’s strategy around fine fragrances represented its strongest business investment in a long time.
  • This segment is large, value added. SHK has had little exposure in this segment.
  • Attractive because – knowledge driven, marked by scale, sophistication and sustainability.
  • Space is challenging – high customer acquisition time, low success rate, right technology, sustainable sourcing and talent availability and retention.
  • Company has already embarked on recruitment of professional perfumers.
  • Has invested in cutting-edge research and filed patents, indicating long term commitment.
  • Right technology – invested in encapsulation technology that will help it grow in non-traditional segments.
  • Company has ventured into this to seed this business over the next 5 years, laying foundation of growth and expected to enhance international position.
  • Global extension of fine fragrances represented an inflection point and one of the most decisive initiatives that could progressively evolve the company’s personality across the foreseeable future.
  • Commissioned a facility in April 2016 for for manufacture of fine fragrances. Intends to cater demand growing out of Indonesia, Iran, Middle East, South Asia and Africa, strengthening profitability.


Strengthening flavours division:

  • Company appointed 12 new distributors to address small scale manufacturers in the food processing sector, keen on diversification.
  • Identified distributors with a nationwide retail presence.
  • Deepened its presence in Delhi and Hyderabad.
  • Aims to reinforce domestic presence by foraying into uncharted Eastern and Central India – West Bengal (opportunity on account of a mass-tea drinking population), Odisha (growing local bakery industry with large production capacities), Jharkhand (new food projects coming up in Ranchi), MP and Chhattisgarh (fast-growing markets).
  • Indian opportunity – market dominated by small unorganised players, benefitting large organised players. Acquisitions quickest way to grow. GST to narrow difference between unorganised and organised sectors.
  • International presence – intention to grow in South East Asia and Middle East.


Outlook for FY18:

  • Acquired Fragrance Encapsulation Technology in FY18 (post 4QFY17 results) because of its deep complementary competence in area of encapsulated technology within the fragrance business.
  • Commissioning new fragrance centre in Amsterdam in FY18.
  • Strengthened R&D in FY17 to focus on accelerated molecular development.
  • Filed patents for products and are optimistic that use of these patented raw materials in fragrance formulations will only enhance our competitiveness.
  • Commissioned studios and embarked on recruitment of professional perfumers.
  • Target 15% topline growth and 20% PAT growth continually, effectively doubling the business in 5 years.
  • Optimistic about 2HFY18 – led by customer launches of products in 3QFY18 and commencement of restocking post GST implementation, strengthening off-take.


Global fragrances industry:

  • Global fragrances market is valued at ~USD11b.
  • It forms ~45% of the aggregate global F&F market which is valued at ~USD24.5b in 2016.
  • Global fragrance market is expected to post a 5% CAGR over the next 5 years. Much of this is being catalysed from India, China and Indonesia where growth is expected to be higher than global average. Growth in mature North American and West European markets is to expected to be muted. APAC fragrance market is expected to be larger than America by 2022.
  • Large part of the growth of fragrances market is expected to be derived from soaps + detergents and cosmetics + personal care – enjoy about 30% market share each. Rising disposable incomes in India and China will continue to drive this growth.
  • Catalysing this consumption shift is a growing recognition that fragrances are indispensable in modern day marketplace success. A study indicated that key driver of consumer repurchase in fine fragrances was scent 78% followed by overall experience 8%, brand 5% and other realities.
  • People can remember smells with 65% accuracy as compared to visual recall which is 50% accurate after three months.
  • Outlook for this segment is positive on account of private labels proliferation and premiumisation.


Global flavours industry:

  • Global flavours market is valued at ~USD13.5b.
  • It forms ~55% of the aggregate global F&F market which is valued at ~USD24.5b in 2016.
  • Global flavours market is expected to post a 5% CAGR over the next 5 years.
  • America and Asia Pacific account for principal share 35% each of market, followed by Europe, Africa and Middle East.
  • Beverages is the largest end-use category 30% followed by dairy, savoury and snacks segment.
  • Similar to fragrances, large part of the growth is expected from India, China and Indonesia, while the growth could be lower in mature markets like America and West Europe.
  • Outlook positive on account of – rising disposable incomes, growing urbanization, changes in lifestyle preferences, growing willingness to experiment new brands and products, packaging revolution – increase in demand for bakery, beverage, savoury and snack products.

Indian F&F industry:

  • Indian F&F market is valued at INR50.1b in 2016 and is expected to grow twice as fast (CAGR 10.2% over next 5 years) as the global market.
  • Personal care and cosmetics in fragrances and savoury, bakery and beverages in flavours are expected to register highest growth.
  • Growth to come from increased penetration in rural markets, premiumisation in personal care and cosmetics, increased demand for bakery, beverages, savoury and snacks.
  • Indian fragrances market estimated at INR25.2b in 2016 is expected to grow at a CAGR of 9.2% over next five years.
  • Indian flavours market estimated at INR24.92b in 2016 is expected to grow at a CAGR of 11.2% over next five years.
  • Company’s market share in Indian F&F – aggregate 13%, fragrances 23% and flavours 3%.
  • There is a visible shift towards natural products and Ayurveda. Company has an Ayurveda extraction unit.


Challenges / Risks:

  • Sustainable sourcing of raw materials.
  • Stringent regulations.
  • Availability of key talent.
  • Product specific risk
  • Currency risk
  • Sectoral concentration risk
  • Competition risk


Disc: Above post is purely from educational perspective. Please refer ‘Disclaimer’ page.


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