Rating Rationale
August 04, 2021 | Mumbai
S H Kelkar And Company Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.187 Crore
Long Term RatingCRISIL AA-/Stable (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable’ rating on the long-term bank facilities of S H Kelkar And Company Limited (S H Kelkar, part of Keva group; formerly known as Kelkar group).

 

CRISIL Ratings expects the Keva group to report a topline of over Rs 1,500 core in fiscal 2022, driven by healthy growth in the flavours and fragrances segment, continued new client additions and full year contribution from Creative Flavours and Fragrances S.p.A (CFF). Operating profitability is expected to sustain at over 18%, driven by sustained favourable product mix, prudent inventory management and continued benefits of cost optimisation measures taken in last fiscal. For the first quarter of fiscal 2022, the group reported revenue of Rs 355 crore (including CFF). Excluding the contribution from the latter, the group reported revenues of Rs 277 crore, a growth of 44% over the corresponding quarter last fiscal, due to a lower base effect.

 

In fiscal 2021, the group reported a 19% growth in topline, driven by acquisition of CFF (consolidated since August 2021). Excluding CFF, topline grew by 3% for the fiscal. Operating margins witnessed sharp improvement of nearly 300 basis points to 18.3% (adjusted for leases) on the back of favourable product mix and strategic inventory management, which helped manage price escalations in key commodities.

 

The group completed the acquisition of the balance 49% stake in CFF in fiscal 2021 for Rs 141 crore, predominantly funded by debt. Despite the debt raised for the acquisition, debt protection metrics are expected to remain comfortable over the medium term with gearing of below 0.5 time and interest coverage ratio of over 12 times.

 

The rating continues to reflect the established position of the Keva group in the flavours and fragrances industry, extensive experience of the promoters, strong research and development capabilities (R&D) and healthy financial risk profile. These strengths are partially offset by exposure to intense competition and moderately high working capital requirements.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of S H Kelkar, its subsidiaries and step-down subsidiaries. This is because all the entities, collectively referred to as Keva group, have a common management and significant business and financial linkages.

 

CRISIL Ratings has amortised the goodwill amounting to Rs 163 crore, arising from acquisition of CFF over the next five fiscals, starting fiscal 2021.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

  • Established player in the flavours and fragrances industry and extensive experience of the promoters: The Keva group commenced operations as a partnership firm and has a long-standing presence of over nine decades in the industry, spanning over three generations. The group has an established clientele across industries such as fast moving consumer goods (FMCG), dairy, beverages, pharmaceuticals, and tobacco with over 4,100 customers. Mr. Kedar Vaze, the promoter and CEO of the group has over 20 years of experience with the group.

 

  • Strong R&D capabilities: Robust R&D capabilities enable the group to continuously innovate and develop new products as per the changing requirement of the end-user FMCG industry. The group has a creation and development centre each in Mumbai, Amsterdam, Milan, Indonesia and Singapore with a team of 20 perfumers, 7 flavourists, evaluators and application executives. Further, the group also has a dedicated research team of 22 scientists. 

 

  • Healthy financial risk profile: With no major capital expenditure (capex) plans over the medium term, financial risk profile of the group is expected to remain healthy. As on March 31, 2021, networth stood at over Rs 700 crore, while total debt stood at Rs 463 crore (adjusted for leases). Despite the acquisition of CFF, debt protection metrics are expected to remain comfortable with gearing of below 0.5 time and interest coverage ratio of over 12 times.

 

Weaknesses:

  • Exposure to any changes in off-take by users, especially in the wake of increasing competition: Demand for flavours and fragrances move in-line with tastes and preferences of the consumers. With changing tastes and preferences of the consumers and increasing competition, FMCG companies are under pressure to constantly innovate and develop affordable end products. Accordingly, Keva group remains under pressure to innovate and develop cost-effective flavours, fragrances and ingredients, which will help them market their products in cost effective ways. Further, the group faces competition from international players such as Givaudan SA and International Flavors and Fragrances (IFF; rated 'BBB/ Negative' by S&P) who compete in the same segment, and from unorganised local players and other specialty chemicals makers, who manufacture aromatic chemicals. The group's operating performance will be moderately susceptible to any changes in offtake by end-user industries and intensifying competition in the segment.

 

  • Moderately high working capital operations: Operations are working capital intensive, as reflected in gross current assets (GCA) of 264 days in fiscal 2021, driven by the large inventory of over 140 days and cash and investments of over Rs 141 crore. Though the company strategically maintains higher inventory to secure supply of key raw materials and off-set price escalations; it remains exposed to potential volatility in raw material prices. Besides, as a portion of raw materials are imported, sharp foreign exchange (forex) movements can result in inventory loss at times, despite a natural hedge being available in the form of exports of finished products.

Liquidity: Adequate

Liquidity is adequate marked by net cash accrual of Rs 200-265 crore annually against debt repayment obligations of Rs 50-55 crore over fiscals 2023 and 2024. Debt repayment obligation is however lower in fiscal 2022, at over Rs 6 crore. Bank limit utilisation averaged 33% during the 12 months through March 2021. The group also had liquid investments (including cash and cash equivalents) of Rs 141 crore, as on March 31, 2021.

Outlook: Stable

CRISIL Ratings believes the Keva group will continue to benefit from its established position in the flavours and fragrances industry and the extensive experience of its promoters.

Rating Sensitivity factors

Upward factors

  • Substantial improvement in scale and diversity along while sustaining strong operating profitability resulting in ROCE of 18-20%
  • Significant improvement in working capital cycle

 

Downward factors

  • Sustained moderation in operating profitability to below 15%
  • Sizable debt funded capex leading to deterioration in debt protection metrics

About the Company

Set up in 1922 as a partnership firm by Mr. Sadashiv Haribhau Kelkar (who became Vinayak Ganesh Vaze once adopted by his sister, Vaze family) and his brother, Mr. Damodar Vaze; and reconstituted as a private limited company in 1955, S H Kelkar is the flagship company of the Keva group. The group is a leading manufacturer of flavours and fragrances with its products having applications in varied sectors such as FMCG, dairy, beverages, pharmaceuticals, and tobacco. The group has 9 manufacturing units (7 of which are located in India while the remaining 2 are overseas) and 5 creation and development centres

Key Financial Indicators (consolidated)

Particulars

Unit

2021

2020

Revenue

Rs crore

1,337

1,125

Profit after tax (PAT)

Rs crore

144

38

PAT margin

%

10.8

3.4

Adjusted debt/adjusted networth*

Times

0.6

0.4

Interest coverage*

Times

14.0

7.5

*Excluding the impact of leases and

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of Instrument

Date of Allotment

Coupon rate (%)

Maturity Date

Issue size

(Rs Cr)

Complexity

Level

Rating Assigned
with Outlook

NA

Working Capital
Demand Loan*

NA

NA

NA

167.00

NA

CRISIL AA-/Stable

NA

Proposed Long Term
Bank Loan Facility

NA

NA

NA

20.00

NA

CRISIL AA-/Stable

*Includes sub-limit of Rs.95 crore export packing credit facility, sub-limit of Rs.20 crore overdraft facility, sub-limit of Rs.40 crore bills discounting facility, sub-limit of Rs.20 crore letter of credit facility/bank guarantee.

Annexure – List of entities consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

Keva Fragrances Pvt Ltd

100%

Significant business and financial linkages

Keva Flavours Pvt Ltd

100%

Significant business and financial linkages

Keva UK Ltd

100%

Significant business and financial linkages

Keva Fragrance Industries Pte. Ltd.

100%

Significant business and financial linkages

Keva Europe BV

100%

Significant business and financial linkages

V N Creative Chemicals Pvt. Ltd

100%

Significant business and financial linkages

Tanishka Fragrance Encapsulation Technologies LLP

100%

Significant business and financial linkages

Anhui Ruibang Aroma Company Ltd

90%

Significant business and financial linkages.

Creative Flavours & Fragrances SpA

100%

Significant business and financial linkages.

PFW Aroma Ingredients BV

100%

Significant business and financial linkages.

PT SHK Keva Indonesia

100%

Significant business and financial linkages.

Purandar Fine Chemicals Pvt. Ltd (JV)

50%

Significant business and financial linkages.

Keva Italy S.r.l

100%

Significant business and financial linkages.

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 187.0 CRISIL AA-/Stable   -- 10-06-20 CRISIL AA-/Stable 30-07-19 CRISIL AA-/Stable 24-05-18 CRISIL AA-/Stable CRISIL A+/Positive
All amounts are in Rs.Cr.
 
 
Annexure - Details of Bank Lenders & Facilities
Facility Name of Lender Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility Not Applicable 20 CRISIL AA-/Stable
Working Capital Demand Loan* Citibank N. A. 12 CRISIL AA-/Stable
Working Capital Demand Loan* HDFC Bank Limited 35 CRISIL AA-/Stable
Working Capital Demand Loan* HDFC Bank Limited 25 CRISIL AA-/Stable
Working Capital Demand Loan* Standard Chartered Bank Limited 95 CRISIL AA-/Stable

This Annexure has been updated on 2-Sep-2021 in line with the lender-wise facility details as on 20-Aug-2021 received from the rated entity.

*Includes sub-limit of Rs.95 crore export packing credit facility, sub-limit of Rs.20 crore overdraft facility, sub-limit of Rs.40 crore bills discounting facility, sub-limit of Rs.20 crore letter of credit facility/bank guarantee.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

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