S H Kelkar & Company Ltd Management Discussions.


The broad-based cyclical growth witnessed in the preceding two years, lost momentum with the global economic expansion decelerating significantly in the second half of 2018. Heightened trade tensions and tariff hikes between the United States (US) and China, decline in business confidence, tightening of financial conditions, and higher policy uncertainty across many economies contributed to this deceleration. World economic growth in 2018 dipped to 3.6% from 3.8% witnessed in 2017. The euro area economy slowed as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Natural disasters hurt activity in Japan.

2017 2018 2019 2020P
World Output 3.8 3.6 3.3 3.6
Advanced economics 2.4 2.2 1.8 1.7
US 2.2 2.9 2.3 1.9
Euro Area 2.4 1.8 1.3 1.5
Japan 1.9 0.8 1.0 0.5
UK 1.8 1.4 1.2 1.4
Other Advanced economies* 2.9 2.6 2.2 2.5
Emerging Markets and Developing
Economies 4.8 4.5 4.4 4.8
China 6.8 6.6 6.3 6.1
India 7.2 7.1 7.3 7.5

*Excludes the G7 (Canada, France, Germany, Italy, Japan, United Kingdom, United States) and euro area countries P=projections Source: World Economic Outlook - April 2019

Growth in advanced economies came in at 2.2% in 2018, slightly lower than the 2.4% in 2017. Similarly, emerging markets and developing economies experienced slower growth at 4.5% in 2018, as compared to 4.8% in 2017. Chinas growth was negatively impacted by a combination of needed regulatory tightening to restraint shadow banking and an increase in trade tensions with US.


Growth is expected to pick up in the second half of 2019 driven by an accommodative policy stance in advanced economies, the prospects of easing of trade tensions between the US and China and ramped up fiscal and monetary stimulus by China to counter the trade wars effects. Global growth is expected to slowly edge up with 3.3% in 2019 scaling up to 3.6% in 2020. Pickup in growth expectation is subject to a rebound in Argentina and Turkey and certain emerging market risks not manifesting. Brexit uncertainties and Chinas growth not being as high as expected are risks that may impact these projections.


India continues to be the worlds fastest growing major economy impacted to a minimal extent by the World economy. The provisional estimates of Central Statistics Office (CSO) expects Indias GDP growth rate for FY 2018-19 to moderate slightly to 6.8% as compared to 7.2% witnessed in the previous year. The weakening rupee, rising crude oil prices, lower farm and manufacturing growth and weaker consumer demand dampened the economic growth.

GDP growth in % Inflation rate in %
2013-14 6.6 5.8
2014-15 7.2 4.9
2015-16 7.6 4.5
2016-17 7.1 3.6
2017-18 7.2 4.7
2018-19P 6.8 4.9
2019-20P 7.3 4.6
The Central Statistics Office (CSO) 7.5 4.3
Source: CSO

Growth in agricultural sector is estimated at 2.9% and in manufacturing sector at 6.9% in FY 2018-19. The FMCG segment is the key beneficiary of robust manufacturing growth and prevailing low inflationary environment. Governments focus on agriculture, MSMEs, education, healthcare, infrastructure and tax rebate under the Union Budget 2019-20 is expected to boost consumption.

Source: CSO


The economy is expected to slowly gain momentum with GDP growth projections of 7.3% and 7.5% in FY 2019-20 and FY 2020-21 respectively. Growth acceleration is attributable to the sustained rise in consumption and a gradual revival in investments, especially with a greater focus on infrastructure development. The improving macroeconomic fundamentals garnered strong support by the implementation of reform measures, which has helped foster an environment to boost investments and ease banking sector concerns. India has already surpassed France to become the sixth-largest economy. By 2019, it may become the fifth-largest economy and possibly the third-largest in 25 years.

Source: IMF


The global flavours and fragrances (F&F) market size was valued at US$ 27.2 billion in 2018 as compared to US$ 25.9 billion in 2017. Increasing demand from application industries such as food, beverages, and cosmetics & toiletries is projected to drive the growth. Aided by a rising global population and increasing urbanisation, the demand of processed foods and beverages has been witnessing a continuous growth creating a positive impact on the growth of the market. Moreover, driven by rising incomes, changing lifestyle and increasing consciousness towards physical appearance, the market for personal care products, another key growth driver for the F&F industry, has also been witnessing a strong growth. Other major factors driving the F&F market include emerging markets, rising demand for organic and natural products, a growing young population, etc.

In the flavours market, traditional segments like beverages, dairy, savoury and snacks continue to be the primary growth factors. Increasing use in pharmaceutical, dietary supplements, and nutraceuticals has been the new growth driver. The upward trend of health and wellness is anticipated to enhance the preference given to natural flavour ingredients.

In the fragrance market, personal care and soap & detergent categories are the main growth drivers. Growing number of retail stores, new product launches, and growth in lower price point segments are the influential factors contributing to the growth of the fragrance market.

Natural flavour and fragrance is an emerging trend in the F&F industry. Natural flavours and fragrances are perceived to be safe, healthier and therapeutic. This segment is expected to grow rapidly owing to the rising preference for organic ingredients in food and personal care sector. Manufacturers engaged in developing natural flavours and fragrances often charge a green premium on their products.

Another prevailing trend in the F&F industry is the use of encapsulation technology. Fragrance Encapsulation is a technology of covering the fragrance oil with a protective capsule, thus ensuring long-lasting release and heat stability in various product formats notably in Fabric Wash & Fabric Care. This technology is a must-have for fragrances used in Fabric conditioners and other similar formats in Fabric Care.

The US and UK continue to be the biggest markets in the global fragrance and flavour industry with developing markets in Asia Pacific (APAC) witnessing increasing demand growth. Among APAC nations,

India and China are exhibiting rapid growth, boosting usage of flavours and fragrances due to the growing population and rapid urbanisation. Increase in per capita spending on consumer products in high-growth economies, such as China, India, South Korea, and Indonesia is expected to drive the F&F market in the Asia Pacific. These markets are expected to become the largest markets globally in the future.

Fragrances – Growth drivers

APAC nations to drive growth: A growing population with rapid urbanisation and increasing disposable incomes is driving growth in these high-growth economies.

Increased preference for naturals segment: As natural fragrances are perceived to be safe, healthier and therapeutic, affluent consumers prefer natural fragrances over synthetic ones.

Premiumisation in personal care: The Personal care market globally is seeing accelerated growth owing to growing affluence for aesthetic appeal. Millennials are driving the premium personal care segment, in turn driving the growth of the fragrances market.

Private labels exploring developing markets: Witnessing tremendous growth in the developing markets, increasing number of big brands in the fragrance industry are expanding businesses to tap the new growth potential. Encapsulation: Encapsulated fragrances are mainly used in the fabric care and textile industry for manufacturing detergents with long-lasting fragrance. This technique is bringing about a revolution in the segment by enhancing the fragrance longevity multiple times.

Flavours – Growth drivers

Cooking at home losing steam: Increasingly, consumers especially in the US and UK, prefer to eat out or to consume ready-to-eat meals and processed foods. This growth in the food and beverage industry in turn is enabling growth in the flavours market.

Non-food segment growth: Flavours find enhanced application in pharmaceuticals, dietary supplements and nutraceuticals further increasing growth.

Encapsulation: Encapsulated flavours are used to provide improved taste and shelf-life and protection from harsh conditions like oxidation, moisture uptake, evaporation etc. It also enables controlled or triggered release and separation of incompatible flavour constituents to avoid adverse effects.


Increasing demand for ready-to-eat and convenience foods, health and wellness foods coupled with technological advancements are predicted to trigger the flavours and fragrances market growth. Increasing disposable income along with rapid industrialisation in developing countries such as India and China is estimated to fuel the flavours and fragrances market.


Erratic supply of raw materials and sustainable sourcing are the key challenges facing the global F&F industry. FMCG players are exploiting the use of technology to decipher the blend formulation. With increasing costs on the one hand and limited ability to initiate price increases on the other, players are facing the pressure of reduced profitability. Differentiation stands as the key for global F&F players to stand out and command a premium for their offerings.



The Indian F&F industry is witnessing enormous changes with ever-evolving needs of the consumer. The industry constantly needs to improve, diversify, update, and create new flavours and fragrances to appeal to the end users. High growth in bakery, confectionery, snack food and beverages, in turn bodes well for demand in flavours. Fragrance segment is riding high growth in personal care sector given increasing premiumisation trend. Growing disposable income, ever-increasing use of personal wellness products, urbanisation, premiumisation and increased penetration of FMCG products is driving growth in the F&F industry.

The year gone by was slightly challenging for the F&F industry as small and regional FMCG players deferred orders due to pressure on working capital led by delay in GST refunds, whereas, large FMCG players delayed new launches. Indian Flavour and Fragrance market in 2018 is 6,000 Cr with Fragrances at 3,000 Cr and Flavours at 3,000 Cr. Keva continues to be the largest Indian origin player.

The Indian market is reasonably consolidated, with the top four global players and Keva constituting majority of the F&F industry Players in this space invest a significant amount in R&D so as to develop unique combinations of flavours and fragrances. End users generally tend to have extremely stringent vendor selection processes and quality norms, making it imperative to maintain customer relationships and high brand equity.

The global F&F players and some of the larger Indian players are directly aligned to the major FMCG players and supply specific fragrance or flavour blends for specific products. A few FMCG players also have blending capability for some blends, for which they source ingredients directly from ingredient manufacturers.


The growth of the domestic F&F industry is dependent on growth of end user segments, mainly FMCG. With India growing at the fastest pace in the world, all economic factors are in favour of growth of the FMCG sector. Additionally, rapid urbanisation, deepening reach in rural areas, rising disposable incomes, budding nuclear family concept, growing trend for premium products work in favour of FMCG and thereby F&F industry growth.

Outlook for fragrance segment

Evolving categories like deodorants, air fresheners, perfumes and cleaning products are expected to be the key growth drivers for fragrance segment. Growing aspirations and rising disposable incomes with prevalent going-out culture is driving consumers to look for aesthetics and smell rather than just the utility of the product. A new area of growth for the segment is the naturals category which remains largely unexplored hitherto. Manufacturers have the cost advantage in the naturals segment as India has rich sources of raw materials.

Outlook for flavour segment

The Flavours segment is witnessing significant growth riding the growing popularity of low-fat and low-carbohydrate foods which need masking by added flavours to the otherwise bland taste. Other trend giving impetus to flavours segment is emergence of ‘dial-a-food culture which is essentially an outcome of increasing population of working women due to rapid urbanisation. Emergence of new flavours in the packaged beverages and foods and rising demand for basic products in the domestic rural markets is driving demand for flavours. New flavours are also emerging in the health and nutrition category.


Indias long-term growth is steady, diversified and resilient as it is a consumption-led economy, not dependent on world economy for growth. As per Boston Consulting Group report, India is expected to be the third-largest consumer economy in the world by 2025 as its consumption is expected to triple to US$ 4 trillion, owing to shift in consumer behaviour and expenditure pattern. Another report by PricewaterhouseCoopers, predicts India to surpass US to become the second-largest economy in terms of purchasing power parity (PPP) by the year 2040.

Indias rate of growth has become more stable which is driven by stabilisation of growth within each sector – agriculture, industry and services led by various Government policies. By 2027, the GDP is expected to reach US$ 6 trillion. The growth is slated to be driven by digitisation, globalisation, favourable demographics and reforms. By 2025, as per McKinsey Global India, the country will have 69 cities with a population of more than one million each. Economic growth will be centred around these cities. The output of Indian cities will come to resemble that of cities in middle-income nations.

Given this background, the consumption of FMCG products will witness significant growth, translating in strong growth for the F&F industry.

Financial Performance Analysis

On a consolidated basis, the Companys total income (net of excise duty) stood at 1,071.48 Cr in FY 2018-19 as compared to 1,046.72 Cr in FY 2017-18. Regional and small players in some categories witnessed a transitory slow-down due to delayed GST refund leading to uncertainty among certain customers. The Company anticipates business in these segments to recover going forward.

Fragrance segment, which contributes 90% to total revenue, clocked 2% degrowth in domestic business and 14% growth in the international business. Flavours segments clocked 19% degrowth in domestic business and 14% growth in the international business.

Pricing pressures on key raw materials impacted profitability. The Company undertook price increases to partially cover the unprecedented raw material inflation. This, combined with the several cost-optimisation measures undertaken over the last several quarters, resulted in stable gross margins. The Company expects gross margins to stabilise once the Mahad facility operations fully ramp up.

EBITDA stood at 160 Cr in FY 2018-19 as compared to 171 Cr in FY 2017-18. The Company registered a PAT of 88.3 Cr in FY 2018-19 as compared to 93.9 Cr in FY 2017-18. Cash profit was at 119.6 Cr in FY 2018-19 as compared to 116.7 Cr in FY 2017-18.



In FY 2018-19, the segment contributed 90% of business revenues. The Company has a highly motivated and experienced team of specialised perfumers. This team creates innovative complex compounds and ingredients used across a wide range of the fragrance portfolio. A variety of daily consumables comprise of various fragrance products and ingredients created by the Company.

Products and applications

With a rich heritage of more than nine decades of presence in the Indian fragrance market, the Company enjoys unparallel brand equity. Deep understanding of the customer needs comes naturally, thereby earning preference over both domestic and international peers. The Companys leadership is the combined result of long-standing customer relations, wide and unique product portfolio, five state-of-the-art manufacturing facilities and a skilled team of 13 perfumers. From big FMCG players, mid-sized companies, small and medium enterprises, smaller traders to small blenders, the Company services all possible sectors. Thereby, the Companys fragrances find wide application across personal care products like soaps, shower gels, deodorants, fine fragrances etc.

Key Macro Highlights

• Overall, the segment recorded 10% YoY growth led by dedicated focus on key categories across customers

• The Company has introduced the concept of channel partners to partner the organisations growth agenda. These channel partners have strong regional hold and will assist the Company in strengthening its reach and catering to the needs of its 2,500+ customer base, especially in unorganised sector where some business was negatively impacted due to GST implementation. This will also help Companys existing field force of 35 people to focus on key accounts

• Roll-ons are apparel perfumes in roll-on (roller ball) format designed for direct application. It has launched 47 high quality premium products for general trade and organised retail segments. It also participated in various trade exhibitions and consumer fairs to increase its brand awareness and reach a larger mass. The Company plans to leverage the existing brand equity of Keva to harness opportunities in this category further

• Aroma ingredients division: The Company is focussed to accelerate returns on investment it has made in the aroma ingredients division. The Company ramped up production in the state-of-the-art greenfield facility at Mahad. The facility was commissioned in September 2018 and is running at full capacity. The facility is manufacturing Tonalid and other key materials used by the Fragrance industry. It has been successfully audited by key customers. Following the acquisition of a majority equity stake in Anhui Ruibang Aroma Chemical Co., China in May 2018, the Company has optimised the capacity at its Tonalid manufacturing facility in China at nominal capex. The installed capacity is now optimised to 400 MTPA.

Domestic sales

Highlights of FY 2018-19

The Company reported a decline in domestic revenues owing to considerable slowing of demand and customer churn in certain categories. Operating profit was negatively impacted by volatility in raw material prices, though the margin remained stable.

Domestic sales, constituting 67% of total fragrance segment, de-grew by 1.7% in FY 2018-19.

The Company entered into Paints category by initiating pilot projects with certain market leaders.


Though smaller players have been severely impacted by GST implementation, the larger FMCG players continue to launch new products by responding to evolving tastes and preferences of its consumers. The Company has successfully tackled unexpected extended raw material inflation with price hikes initiated during the year. The Company is still competitively placed and on-track to expand its operations to newer clients and geographies.


Highlights of FY 2018-19

The Companys exports have witnessed a growth of 14% exporting to over 50 countries through a distributor model. The major market is the Middle East followed by South East Asia. There are five creative centres in India, Amsterdam, Indonesia, Singapore and Milan (CFF).

The Company also entered the fabric care market in Myanmar.


The Company aims to consolidate its position in the fine fragrance and fabric care segments by expanding its international footprint and building talent pool. With the acquisition of fragrance encapsulation technology a couple of years ago and further improvisation of the same, the Company is set to expand its presence in the premium fabric care segment.



Amongst flavours manufacturers, the Company holds a position of pride due its innovative and superior quality products. The Company has a state-of-the-art facility having FSSAI approval. The Company has earned a distinguished name in the flavours segment in sectors like beverages, dairy products, confectioneries, bakery products, savouries, nutraceuticals, and more. The edge over competition is attributable to a highly motivated team of flavourists who understand the ever- changing consumer needs and innovate accordingly.

In FY 2018-19, the segment contributed 10% of business revenues. The flavours team creates new and unique flavour blends to strengthen the brand equity of the various brands. Currently, natural flavours created from carefully sourced ingredients are high on demand given the rising popularity of health and wellness sectors.

The Company, in association with flavourists, evaluators, consumer opinion researchers and subject matter experts, is strategising to create a range of natural flavours to excel in food science.

Scale with agility

The Company has excelled in the use of various technologies and creates flavours in multiple forms like liquids, dry mixes and encapsulations. The Company is accredited with US FDA registration, reflecting superior quality controls are in place. Halal certified flavours are also manufactured by the Company. With a high clarity of purpose and process design, the Company is able to formulate and create an array of flavours.

The Company caters to both domestic and international clients successfully given its strong manufacturing processes and high level of agility. The use of advanced planning techniques and variable capacity enables the Company to alter production as per demand. Strong relationships with reputed logistics companies ensure high efficiency in logistics.

Products and applications

The Company produces flavours covering the entire spectrum – all forms i.e. natural, nature-identical and artificial; and states i.e. dry, mix, liquid and encapsulated. The Company earns an edge over competition with differentiation as reflected in producing flavours for shakes and smoothies in the dairy segment, flavours for fruit-based and health drinks in beverages, different flavours encompassing all cultures and age groups in confectionery, in bakery and pharmaceuticals.

Domestic sales

Highlights of FY 2018-19

• Domestic revenue stood at 51.98 crore in FY 2018-19 registering a decline of 12.42 crore owing to churn in some orange-based flavoursowing to orange oil price situation

• To increase market visibility, a new range of products under brand "Auris" was launched during the year for sale on e-commerce platform. The range comprises of around 10 flavours

• • The Company improved its distribution network in North and South India

• The Company participated in Food Ingredients India to enhance brand equity. It also undertook several social media initiatives to create positive impact on student community in food technology and home users


The Company is committed to making investments in research and development and enhancing its production facilities. The Company has recently come up with a food innovation centre in Mulund, Mumbai and is on track to launch another in Gurugram. The Company endeavours to enhance customer awareness through participation in food ingredient expos. The next growth wave in the flavours segment is expected to be driven by growth in beverages, bakery, confectionery, nutraceuticals and dairy. In these segments, the Company is making necessary investments. It upgraded some of its existing equipment base, while also bought new machinery to cater to the evolving needs and trends. Seasoning is a big category, wherein the Company expects tremendous growth opportunities going forward. The Company is also exploring newer domestic geographies in Central and East India which are hitherto underserviced.


Highlights of FY 2018-19

• The international flavours business reported 34% growth as compared to the previous year

• International sales increased led by strong demand in export markets especially Africa, Jordan, Turkey and Egypt

• The Company faced challenges owing to trade tension between Iran, Qatar and rest of the Gulf countries

• The Company initiated a focussed coverage for food flavours in the Middle-East and Bangladesh. To promote the flavours segment, the Company participated in Gulf Food Ingredients – one of the largest food shows around the world. This led to improved brand visibility


The Company is targeting the high growth beverages, bakery and confectionery segments especially in the neighbouring and South East Asian countries. In the Middle-East, Africa and Thailand, flavours present a good growth opportunity for the Company which it is looking to explore.