Oriental Aromatics Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Shipment deferrals, not demand destruction, drove the miss: Specialty Aroma Ingredients customers pushed Q3 dispatches into Jan/Feb to close their calendar year, inflating inventory 17% QoQ; orders were not cancelled and offtake has already begun.
• Camphor is the margin anchor: Competitive pressure, partly from a weaker Chinese currency, has blocked price hikes even as imported raw material costs rose with rupee depreciation, compressing a historically stable profit contributor.
• Input cost tailwind is real but uneven: Falling raw material costs lifted gross margins 210 bps QoQ to 33.8%, yet the benefit in Camphor & Turpentine was neutralized by FX and competitor pricing.
• The capex cycle is shifting the business mix away from camphor: All current capex is non-camphor; the hydrogenation plant and MAHAD Phase 1 will tilt the portfolio toward specialty ingredients and F&F over the medium term.
• What to watch next quarter: Whether the inventoried specialty aroma material liquidates as confidently forecast, and whether camphor competitive dynamics show any sign of easing.

The Quarter: What Happened

• Top-line contraction: Group sales fell to ₹199 crores from ₹220 crores QoQ, driven by two discrete factors: deferred specialty aroma ingredient shipments and an 8-day scheduled shutdown at the Baroda site.
• Deferral mechanics: US and European customers postponed purchases scheduled for Q3 dispatch to beyond December 2022, a calendar-year-end inventory management decision. The same pattern appeared earlier in Fragrance, where customers delayed then resumed; management sees no demand destruction.
• Inventory build: The deferral impact is visible in inventory, which rose 17% QoQ. Offtake of this material began in January 2023 and management is confident of liquidating it.
• Gross margin improved despite the top-line miss: Gross margins moved to 33.8% from 31.7% QoQ, and EBITDA margin to 7.07% from 6.6%, as the trend of reducing input costs that began in mid-Q2 continued.
• Debt ticked up: Total debt rose to ₹229 crores, primarily from working capital tied up in those higher inventories plus mobilization of debt for capex.
• Production ran full: All plants operated at full capacity in Q3 outside the Baroda shutdown; no capacity was throttled. The Brownfield expansion at Bareilly successfully sold all additional terpineol capacity.

Satoskar: "I do not see destruction in demand. I probably see that once this over-inventorization phenomena gets cleaned up we will again get back to the routine shipment and a routine CAGR growth which in the last two years was surprisingly very high."

Camphor & Turpentine: The Margin Drag

• Pricing blocked by competition: Input costs for key raw materials fell, but the benefit was neutralized by rupee depreciation on imports. Normally this would justify price hikes, but competitive pressure, amplified by a weaker Chinese currency enabling aggressive Chinese pricing globally, has prevented passing any increase to customers.
• Camphor profitability under pressure: A product that historically delivered stable, decent profits is now the single biggest drag on group-level EBITDA. Management confirmed camphor remains margin-positive, but the compression is material.
• De-risking strategy in motion: Three workstreams are underway: exploring newer markets including pharma, developing newer value-added products, and de-risking raw material procurement by accessing gum turpentine from both CST and non-CST sources alongside an active process reengineering program.
• CST exploration: Management is evaluating all options for a CST strategy and will inform investors when ready; no timeline was given.
• Pharma grade camphor: Pharma is one of many avenues being explored to improve profitability; management declined to specify any timeline or proportion change commitment.
• Recovery timeline is longer here: Even assuming no external shocks, the camphor and turpentine chemicals piece will need longer to return to previous EBITDA margins than Fragrance and Specialty Aroma Ingredients.

Satoskar: "Honestly there should have been an increase in the prices of camphor and turpentine chemicals in the local market as well as exports, but the competitive pressures has ensured that we have been unable to pass on this price hike to the customers..."

Fragrance & Flavor: The Bright Spot

• Input cost tailwind flowing through: The Fragrance & Flavor division benefited most from stable-to-reduced input costs, with the trend holding since mid-Q2.
• Demand intact: Local and operating-geography demand remains strong; the division acquired new customers across geographies and increased business with existing customers.
• Functional perfumery resilience: Management anchored the demand thesis in non-discretionary daily-use categories, arguing the underlying consumption base is structurally stable.
• RFQ pipeline supports the outlook: RFQ allocations received from global customers for H1 2023 (calendar year) are either in line with or higher than the prior semester, signaling customers expect demand to persist.

Satoskar: "As long as you are going to take a bath every day, you are going to wash your clothes and you are going to brush your teeth... functional perfumery is here to stay."

Specialty Aroma Ingredients: Deferred, Not Lost

• The deferral pattern is familiar: Customers across the world are over-inventoried and delaying shipments due to recessionary trends and cash flow management. The Fragrance division saw the same pattern in Q1/Q2: customers placed orders, delayed, then started picking up again.
• New customers, not repeat offenders: The Q3 delays came from newer customers, not the same ones who deferred in Q2, suggesting the over-inventorization phenomenon is broad-based rather than concentrated.
• Price realization normalizing: Prices have come down because input costs have come down and the business is reaching a steady state; customers are aware of lower raw material costs and are asking for better pricing.
• Normalization expected within two quarters: Management estimates the over-inventorization should resolve in the next one or two quarters maximum, assuming no further external shocks.
• Baroda plant milestone: The single-product plant commissioned in November 2021 completed one year of operations, achieving close to 70% of planned production in CY2022 with 80% commercially sold. Management now wants to expand capacities and increase volumes.

Capex & Business Mix Shift

• All capex is non-camphor: The hydrogenation facility in Baroda and MAHAD Phase 1 are both directed at specialty ingredients and F&F. By end of FY24–25, the business mix ratios will substantially change away from camphor and turpentine.
• Hydrogenation plant timeline: Commissioning is targeted by end of H1 2023 (June 2023), assuming no delays from instrumentation part deliveries affected by the global chip shortage. H2 2023 is earmarked for sampling, validation, and RFQ customer engagement; volume allocation from RFQs is targeted for H1 calendar 2024.
• MAHAD site: Plot development is well underway; ground-breaking for Phase 1 is scheduled for 8th March. Updates will be provided in subsequent calls.
• Medium-term mix shift: Once the hydrogenation facility and MAHAD Phase 1 become functional, plus internal materials begin flowing to the F&F division, the portfolio will tilt toward specialty ingredients and F&F.

Margin Outlook

• Short-term guidepost: Management guided to 10% EBITDA margin for at least a few quarters, revised down from an earlier 15–17% range due to current market uncertainty.
• Recovery path is two-speed: Fragrance and Specialty Aroma Ingredients should stabilize faster, assuming no external shocks. Camphor and turpentine chemicals will need longer; H2 FY24 should bring some level of stability, but the quantum relative to today's EBITDA remains uncertain and will be driven by competitive pressure.
• Aspirational target intact: Management aspirationally wants to return to 15–17% EBITDA margins. As raw material prices stabilize, the natural tendency is for F&F margins to improve; the specialty aroma ingredients space should ensure a return to 10–12% margins at sustainable, consistent volumes. This is still a few quarters away and described as work in progress.
• Camphor drag is not the only factor: The 8-day Baroda shutdown and a 14-day shutdown at another plant also impacted production; had that production been available alongside customers taking inventoried materials, margins would have been at a substantially different point.

Satoskar: "Aspirationally we would love to really reach that levels of 15%-to-17%... Having said that it is still work in progress we do not want to stick our necks."

Guidance & Commitments

Key Metrics