Oriental Aromatics Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Camphor and terpenes crushed the quarter: The division is under severe price and demand pressure, with camphor prices down ~15% QoQ and alpha pinene at decade lows, dragging down group revenue and margins.
• Fragrance is the bright spot: The division grew 14–16% QoQ, powered by new wins including a significant, long-term contract with a top Indian FMCG company.
• Chinese overcapacity is the systemic threat: Management sees no end to aggressive Chinese pricing, citing 23.5 crore tons of new chemical capacity coming online in '23 and '24, and believes pricing has not yet bottomed out.
• CAPEX plans are under review: The poor camphor performance and uncertain profitability outlook have forced a group-wide relook at CAPEX, with the hydrogenation facility timeline being recalibrated.
• What to watch next quarter: Whether camphor seasonality provides any pricing relief, the pace of new fragrance wins converting to revenue, and any concrete update on the recalibrated CAPEX plan.

The Camphor & Terpene Drag

• Price collapse: Camphor prices dropped around 15% QoQ, with similar declines across other terpene chemicals. Alpha pinene prices corrected by almost 30% over the last 3–4 months due to subdued global demand and are at their lowest in more than a decade.
• Volume degrowth: QoQ volumes fell, driven by a production shutdown during the quarter, the offseason, and customers delaying purchases or seeking better pricing in a competitive market.
• No floor in sight: Management explicitly stated they do not see pricing bottoming out, describing the situation as "extremely fluid" with substantial pressure across the entire ingredients portfolio, not just camphor.
• Structural overcapacity: The competitive landscape has seen substantial capacity addition that is not in line with demand growth, which will continue to challenge the company's ability to get better or constant pricing even during the camphor season.

Parag Satoskar: "I mean we do not see the pricing prices bottoming out, I mean we are still in an extremely fluid situation where we're seeing a substantial pressure on pricing primarily in the camphor and terpene chemicals, but having said that, across all our ingredients portfolio."

Fragrance & Flavor: The Growth Engine

• New wins driving growth: The fragrance division achieved 14–16% growth, achieved mainly due to new wins across all geographies. Multiple fragrance wins with one of the largest FMCG companies in India were secured this quarter.
• Significant order win: A long-term contract was won with a top Indian FMCG company. Management declined to share order size, application, or specifics due to contractual obligations, but stated it ensures healthy growth in the division going forward.
• India story tailwind: Management sees substantial growth possibility as the India story pans out, with backward integration of in-house aroma ingredients providing the ability to deliver value to customers.
• Capacity headroom: The fragrance and flavor plant can add another shift if needed without issue, providing operating leverage if demand accelerates.

The China Overhang & Demand Environment

• Aggressive Chinese pricing: Chinese manufacturers, opening up after COVID, have adopted an aggressive pricing stance that is a primary challenge for the specialty aroma ingredients division globally.
• Deflationary impulse: The Chinese economy is entering a deflationary trend, creating impetus to boost demand both internally and via exports. Management believes the full impact is not yet visible.
• Demand double-whammy: Higher borrowing costs in Western markets have pressured inventory building, and destocking combined with extreme inventory controls has created a double-whammy on demand in the aromatics space.
• Consumer shift, not collapse: Consumption volumes have not changed significantly, but consumer preferences have moved from discretionary to essential products due to deflationary and inflationary trends in the West.
• Normalization trigger: Management expects things to start normalizing when the deflationary trend normalizes and the interest rate cycle begins to reduce or shift, but gave no timeline for either.

Dharmil Bodani: "I have a very interesting people who say that there's 23.5 crore tons of chemical production capacity that's going to come on line in China in '23 and '24. So, if that's true … I mean, we have still not seen the end of the whole picture."

Specialty Aroma Ingredients: Stabilizing but Subdued

• Stable volumes: QoQ volumes have been pretty stable across a wide range of products, though some challenges persist in volumes for bulk specialty aroma ingredients. The curve is smoothening.
• Global approvals on track: Management is extremely satisfied with global product approvals received for new products, and product allocations for H2 2023 in the recently concluded RFQ program are satisfactory.
• Samples accepted, demand soft: Products previously flagged as ready for sampling have found homes in current plants, and samples are on the way and well accepted by global customers. However, demand is subdued and pricing remains challenging.
• Product development plan: The product development plan for 2023–24 continues to stay on track.

CAPEX Recalibration

• Group-wide review: The performance of the camphor division and the profitability outlook for the overall business has caused a relook at CAPEX plans for the whole group. Further elaboration is promised in future investor calls.
• Mahad Phase-I continues: The single-product plant expansion at Mahad is in full swing. ₹30–32 crores have already been spent, with around ₹85 crores remaining, and completion is expected this financial year.
• Hydrogenation facility under review: The facility is currently being constructed, but management is recalibrating elements of the project to optimize productivity with the least investment. The original phased timeline (one plant by October/November, a second by year-end) is being relooked.
• Mahad stabilization timeline: Normal stabilization takes 3–6 months for external approvals, regulatory clearance, customer validation, and batch cycles. The objective is to be ready for the H2 2024 RFQ cycle for bigger customers and active in the spot market as soon as the plant goes live this financial year.

Parag Satoskar: "The hydrogenation facility is currently being constructed as we speak. Which elements of that we will be recalibrating, we will be kind of coming back to the investors in our future earning calls."

Guidance & Commitments

Key Metrics