Oriental Aromatics Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Margin pain persists, no recovery timeline: EBITDA margins stayed below 10% for the fourth straight quarter, driven by input cost inflation that could not be fully passed on. Management gave no date for normalization, tying it to a "stable state" that has been absent for two years.
• CAPEX restarts as commodity costs ease: After an intentional pause to avoid locking in inflated project costs, all CAPEX activities have resumed in full swing, with steel and freight prices beginning to correct.
• FY23 EBITDA guided to 7–10%: Near-term margin guidance is well below the long-term 15–17% target, reflecting continued raw material volatility and competitive pressure in camphor.
• Camphor pricing under pressure: Realizations are declining and the competitive landscape is becoming more complex, though raw material stability limits the margin damage.
• What to watch next quarter: Whether the CST backward integration timeline is detailed, any sign of the "new normal" stabilizing, and if camphor pricing pressure intensifies into the festive season.

Margin Pressure & the Elusive Stable State

• Four quarters below 10%: EBITDA margins have now been under 10% for four consecutive quarters, with the root cause being input cost increases across raw materials, logistics, power, and freight that could not be fully passed on to customers.
• Partial pass-through: The company has been partially successful in passing on price hikes in some verticals, but camphor remains competitive and pricing is under continuous pressure.
• New normal not stabilizing: Management acknowledges a "new normal" for raw material prices that is higher than pre-COVID levels, but that new normal itself is not stabilizing, causing ongoing margin volatility.
• External shocks dominate: Margin volatility is driven primarily by external factors: geopolitics, raw material availability, and demand forecasting instability. A stable business environment has been "completely lacking for the past two years."
• No recovery timeline: When pressed on when margins will normalize, management declined to provide a timeline, stating they will share more information when a stable-state scenario builds.
• Diversification as buffer: The diverse portfolio spanning aroma chemicals, camphor, fragrances, and flavors gives a better chance of recovery because if certain raw material groups fall while finished goods pricing stays stable, EBITDA can be regained faster.

Dharmil Bodani: "We are not expecting them to return to 19 levels, there is a new normal and that new normal needs to stabilize, we are finding that the new normal is not stabilizing."

CAPEX Restart & Project Timelines

• Intentional pause, now restarting: CAPEX plans were slowed down intentionally to buffer the impact of severe, non-sustainable cost escalations in steel, freight, and other project inputs. With those costs starting to correct, all project-related activities have restarted in full swing.
• Moderate delay: The pause caused a 3 to 5 month delay in timelines for all current projects across Baroda, Bareilly, and Mahad.
• Baroda greenfield: The multiproduct hydrogenation facility is expected to be completed, commissioned, and validated by end of H1 calendar 2023 (June 2023). Sales impact from spot procurement begins in H2 calendar 2023, with RFQ-driven revenue in H1 calendar 2024.
• Mahad progress: Environmental clearance has been received and plot development activities have moved ahead quickly. First plant commissioning is targeted for end of H1 calendar 2023. The site will be full zero liquid discharge from day one.
• Bareilly expansions: Small expansions in terpene chemicals are expected to be completed before October 2022, with top-line addition starting in calendar 2023. The propanol expansion was completed last quarter.
• Revenue ramp timeline: Baroda and Bareilly numbers will start contributing in FY24, with Mahad following shortly after. The overall process to reach target revenues is an 18 to 24 month journey.
• New product ramp philosophy: The first 3 to 6 months are used for customer acceptance. The objective is to acquire 33% to 50% of available market share within the first 1,000 days of plant commissioning, targeting 75–80% capacity utilization within that window. Full capacity utilization is expected within 3 years from commissioning in the worst case.

Parag Satoskar: "We become five times more careful when we actually take debt otherwise we love to stay debt free."

Camphor: Pricing Pressure & Future Growth

• Pricing under pressure: Camphor is the area of concern, with continuous reduction in pricing. However, the key raw material for camphor is stable or coming down slightly, so the margin impact is not extremely worrisome.
• Competitive landscape complex: Realization and the competitive landscape are becoming more complex on the camphor side.
• Demand intact: Demand for camphor is probably strong and will stay strong in the festive season.
• Beyond pain management: The company is exploring all options beyond the pain management space. Other areas are opening up where future growth will come, though management is not at liberty to share details.
• US FDA approval: The camphor plant is now US FDA approved, which may open additional market opportunities.

Backward Integration & Technology

• CST backward integration going ahead: The company will proceed with backward integration into CST, with a more detailed timeline to be announced probably next quarter. The technology was developed completely by internal R&D with no external technology partner.
• Competitive positioning: The delta between CST-based raw materials and alpha/beta pinene exists, but it does not put Oriental Aromatics in a situation where competition will have an advantage in selling price or realization.
• Mahad product mix: The Mahad expansion plans will contain CST as part of the product mix.
• Flow chemistry: Wherever batch processes have reached critical mass, they have been converted to continuous processes over the last 4–5 years. However, in specialty ingredients, many volumes are too low to sustainably convert batch to continuous.
• Green chemistry program: A phased program covers immediate effects, near-future sustainability improvements, and a master list of raw materials currently from non-sustainable routes being targeted for conversion.
• License fee agreement: The technology license from the Israeli associate is active till 2025, after which no further payments are required. The agreement cannot be modified midway.

Dharmil Bodani: "The delta currently between the CST based raw materials and alpha pining or the beta pining is there it exists, but it does not really put Oriental Aromatics in a situation where competition will have a advantage in terms of selling price or in terms of realization."

Demand Environment & Volume Trends

• Healthy demand, muted revenue: Demand was healthy across all products during the quarter. Production volume improved 5% QoQ and sales volume improved 2% QoQ, but revenue growth was only ~2% YoY, implying pricing declined.
• Consumption intact: Consumption of finished products like fragrance, soap, and shampoo has not diminished. Demand in 2020 and 2021 was fueled by industry overstocking due to supply chain challenges.
• China overstocking risk: In the last 30–45 days, materials that were stuck during China lockdowns are now reaching stock points globally, again creating a situation of overstocking.
• China+ strategy evolution: Customers have moved beyond China+1/China+2 to exploring country of preference and size of supply chain. Competitors buy from Oriental in India/Singapore due to a condensed supply chain that guarantees business continuity.
• FY22 sales drop explained: The Q3 and Q4 FY22 sales drop was primarily a combination of shutdowns taken in September to hook up the single product plant in Baroda, client overturn on the fragrance side (new client acquisition and letting go of less profitable clients), and Q4 historically being an offseason quarter.

Guidance & Commitments

Key Metrics