Oriental Aromatics Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Realization hit overwhelms volume growth: Revenue fell 13% QoQ despite double-digit production volume growth, as camphor and terpene chemical realizations softened sharply alongside the fragrance off-season.
• Margin recovery underway but reset lower: EBITDA margin rebounded to 7.14% from 4.85% QoQ on improved gross margins, yet management has cut its steady-state margin forecast to 10–12% from the earlier 15–17%.
• Camphor is a structural overhang: New competitor capacity has flooded the market, spreads are below pre-COVID levels, and management concedes there is “not so much room to absorb so much capacity” while committing to stay in the business at full volumes.
• Two new plants are weeks away, revenue is quarters away: Baroda brownfield and Mahad greenfield both commission by end-Q4 FY24, but the 200–300 day customer approval cycle means material commercial contribution is 2–3 quarters out.
• What to watch next quarter: Whether specialty aroma ingredient demand stabilizes as destocking ends, the trajectory of camphor spreads if raw material alpha-pinene keeps rising, and any early customer approvals from the new plants.

The Camphor Problem

• New capacity has reset the market: Substantial domestic competitor capacity has come online, creating a supply overhang that management says the market cannot absorb; pricing pressure persists even at low volumes.
• Spreads compressed below pre-COVID levels: Current camphor spreads are lower than FY18/FY19, and alpha-pinene raw material prices are unstable and moving up again, threatening further compression.
• Strategy is to sell at capacity and wait: Management will continue running camphor at full volumes and develop pricing and sales strategy case by case, but offered no timeline for normalization and admitted it has “no crystal ball” for the next four quarters.
• Profitability question deflected: When asked if camphor, roughly one-third of revenue, is now at EBITDA zero or loss-making, management said only that it “contributes to the EBITDA” and the company “will not get into that kind of business if it makes a loss,” without directly answering the segment-level question.

Management: “I think it's fair to say that there is not so much of room to absorb so much capacity. So, there is no understanding to why this capacity has come up and I think we will have to take it case by case and develop a strategy around pricing as well as sales for camphor going forward.”

Margin Reset

• Steady-state guidance cut sharply: Management revised its long-term EBITDA margin forecast to 10–12% from 15–17%, citing continued turmoil, and will reassess after 2–3 quarters.
• Q3 recovery driven by mix, not camphor: The 229 bps QoQ margin improvement to 7.14% came from fragrance & flavor and specialty chemicals; bulk chemicals and camphor remain under pressure but stayed positive.
• Peak-cycle margins were camphor-led: Management acknowledged that the 20%+ margins of FY21 were driven by camphor and strong demand across bulk and specialty chemicals, a combination unlikely to repeat soon.
• Segment-level margin split withheld: Management declined to break out steady-state margin expectations by camphor, aroma chemicals, and flavor & fragrances, limiting visibility on where the drag is concentrated.

Bodani: “I think the turmoil continues and I think we will stay with 10% to 12% and I don't want to go that much ahead, let's see how we foresee the next 2 to 3 quarters.”

New Capacity: Commissioning Now, Revenue Later

• Baroda brownfield: Commissioning by end-Q4 FY24; water trials mid-March, then commercial production. Brownfield integration is faster because existing infrastructure helps stabilize products sooner.
• Mahad greenfield: On track for completion by end-Q4 FY24, with a sizable multi-product hydrogenation facility built; the company plans to launch a basket of hydrogenation-based products.
• Customer approval cycle is the bottleneck: New products require 200–300 days for customer qualification, though management hopes to shorten this for products previously manufactured, citing better acceptability with global customers.
• CAPEX on hold beyond phase one: Only ₹120 cr of the original ₹350–400 cr plan has been spent; the remaining ₹230–280 cr is paused until management sees how the next few quarters progress.
• Utilization target is 100%: The company plans to run all plants at full capacity across all three divisions in coming quarters, barring planned shutdowns.

Demand & End-Market Conditions

• Specialty aroma ingredients recovering slowly: The destocking phase is ending and realizations are improving, but management expects 1–2 more quarters before reaching a steady state of demand and supply.
• Fragrance & flavor benefiting from raw material tailwinds: Contributions improved within the vertical because raw material prices rose without major corrections on selling prices.
• Bulk and specialty chemicals still uncertain: Management continues to take a wait-and-watch stance, saying only “let's see what happens in a couple of quarters.”
• Inventory days improving: Inventory days fell to 135 from the 155–160 range in the prior quarter, reflecting some liquidation progress.

Camphor Strategy & Competitive Position

• Commitment to stay irrespective of competition: Management was emphatic that camphor is steady, contributing, and the company will remain in the business regardless of competitor actions.
• No visibility on competitor rationale: Management expressed confusion about why new capacity entered the market given limited absorption room, and declined to name the competitor, saying details are in the public domain.
• Pricing strategy still forming: The company will take the situation case by case and develop a strategy around both pricing and sales going forward, with no fixed framework disclosed.

Satoskar: “Right now, we can tell you it contributes to the EBITDA and we are going to be selling it at capacity.”

Guidance & Commitments

Key Metrics