OALNSEQ1 FY23August 02, 2022

Oriental Aromatics Limited

9,124words

130turns

14analyst exchanges

1executives

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Management on call

Anuj Sonpal from Valorem Advisors. Thank you and over to you Mr. Sonpal. Anuj Sonpal

Thank you. Good afternoon, everyone and a very warm welcome to you all. My name is Anuj

Key numbers — 37 extracted

I am glad to inform you all that the production and sales volume for the quarter has improved by 5% and 2% respectively on a quarter-on-quarter basis. Margin and profitability pressures continue du

lad to inform you all that the production and sales volume for the quarter has improved by 5% and 2% respectively on a quarter-on-quarter basis. Margin and profitability pressures continue due to

Rs.234 crore

1.7%

23, the operating income for the quarter was Rs.234 crore, which was an increase of approximately 1.7% on a year-on-year basis, and a increase of 15% on a quarter-on-quarter basis. Operating EBITDA re

15%

234 crore, which was an increase of approximately 1.7% on a year-on-year basis, and a increase of 15% on a quarter-on-quarter basis. Operating EBITDA reported was Rs.17 crore, which was a decrease of

Rs.17 crore

on-year basis, and a increase of 15% on a quarter-on-quarter basis. Operating EBITDA reported was Rs.17 crore, which was a decrease of about 52% on a year-on-year basis, and a decrease of 25% on a quarter-

52%

uarter-on-quarter basis. Operating EBITDA reported was Rs.17 crore, which was a decrease of about 52% on a year-on-year basis, and a decrease of 25% on a quarter-on-quarter basis. Operating EBITDA ma

25%

ted was Rs.17 crore, which was a decrease of about 52% on a year-on-year basis, and a decrease of 25% on a quarter-on-quarter basis. Operating EBITDA margin stood at 7.06%, which was a decrease of

7.06%

year basis, and a decrease of 25% on a quarter-on-quarter basis. Operating EBITDA margin stood at 7.06%, which was a decrease of 796 basis points on a year-on-year basis, and a decrease of 383 basis po

796 basis point

on a quarter-on-quarter basis. Operating EBITDA margin stood at 7.06%, which was a decrease of 796 basis points on a year-on-year basis, and a decrease of 383 basis points on a quarter-on- quarter basis. Net p

383 basis point

ood at 7.06%, which was a decrease of 796 basis points on a year-on-year basis, and a decrease of 383 basis points on a quarter-on- quarter basis. Net profit after tax reported was about Rs.8 crore, which was a d

Rs.8 crore

crease of 383 basis points on a quarter-on- quarter basis. Net profit after tax reported was about Rs.8 crore, which was a decrease of about 63% on a year-on-year basis, and a decrease of 20% on a quarter-on

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Guidance — 20 items

Dharmil Bodani

opening

“Now, that the commodity prices are showing signs of reduction and stabilization, we will be forging ahead with our CAPEX plans.”

Parag Satoskar

“So, our EBITDA expectations of or guidance’s of 15% to 17% are long term guidance’s, which are sustainable, and which we are confident in achieving in a stable state scenario over a long term period.”

Parag Satoskar

“If you look at the current scenario, and how the business is being panned out, if you’re looking at the current financial year, we probably would look at a guidance of anywhere between 7% to 10%.”

Parag Satoskar

“But based on our current situation, for the guidance for this year, we look at between 7% to 10%.”

Parag Satoskar

“And as the world kind of gets into a more sustainable consumption pattern, we are going to probably again, reach a situation where we will be in a position to have a more kind of stable stage scenario, and then achieve our EBITDA margin, so that is what our understanding of the business is, and we are kind of monitoring it on a day to day basis.”

Parag Satoskar

“So, we are seeing across the board and as you rightly said that the diverse product portfolio in fact gives us a much better chance of recovery because if we see certain raw material groups kind of falling in place in terms of the raw material pricing and we having a very stable pricing for our finished goods, we will be able to kind of re achieve or regain that EBITDA faster.”

Parag Satoskar

“So, if we look at our Baroda side, the Greenfield projects or the multiproduct hydrogenation facility project, we feel that it should be kind of completed, commissioned and validated by end of H1 2023.”

Parag Satoskar

“So, when we have developed the plot we will be in a position to kind of quickly start our construction of the plants and the utility plant.”

Parag Satoskar

“So again there we are looking at a timeline of H1, end of H1 calendar 2023 for commissioning our first plant and moving forward and on the Bareilly side where we are doing the Brownfield project.”

Dharmil Bodani

“So this is our philosophy, so when you look at this philosophy our objective is to kind of take the plan to optimum or to 75% to 80% of the capacity within these 1000 days and then still have some capacity left for the CAGR growth that will happen in that particular product based on our understanding of that product.”

Risks & concerns — 15 flagged

Margin and profitability pressures continue due to significant increases across all input costs, mainly due to impact of geopolitical issues, supply chain disruptions from China.

— Dharmil Bodani

The CAPEX plans had been slowed down in a bid to buffer the impact of severe cost escalations from input prices.

— Dharmil Bodani

So, we find ourselves in extremely uncertain situations where we’ve been exposed to multiple things, but not so many things at one time.

— Parag Satoskar

Point number two, in terms of what is going to be the impact of that, we are looking at a very moderate impact of anywhere between say three to five months delay in the timelines that we have set for all our current projects across Baroda, Bareilly and Mahad.

— Parag Satoskar

What is probably the challenge part is the realization, and the competitive landscape which is becoming a little more complex on the camphor side.

— Parag Satoskar

And generally what we have seen is that, when you have a diverse product basket, things balance out and the impact on margin is less volatile.

— Dhwanil Desai

So, specific product or product group which is contributing to the margin pressure or it is across the board?

— Dhwanil Desai

See, it is probably driven by the input cost, if you look at the margin pressure that we are currently experiencing, it is driven by the input costs.

— Parag Satoskar

So, it’s calendar not financial, calendar H1, so, we are looking at the June 2023 commissioning, validating of all these products and the impact of this extra production on sales would probably be seen on the spot procurement side in H2 2023 calendars and on the RFQ side more on the H1 2024 calendar, this is about the Baroda site.

— Parag Satoskar

So, do we see any risk to our camphor business due to competitors or being backward integrated?

— Aakash Javeri

We all have to be mindful that when for a lot of the other verticals, we have been pretty successful or partially successful in passing on the price hikes to the consumer, camphor is one area which is a matter of concern where we are seeing a continuous reduction in the pricing.

— Dharmil Bodani

But in immediate term, if I look at we have been getting much more pressure on the margins on account of raw material.

— Vijay Sarda

So, that was already obviously one off, but when we can normalize to a normal margin because, from your conservatism, you are also sounding to be very cautious, saying that 10% you will be able to, but on an absolute basis, your business as you have moved also from commodity to specialized product and your journeys continuing in that direction.

— Vijay Sarda

So what are the problems that we are currently, are we still sitting on high cost inventories or there is a raw material pressure and industry which were supplying we are not getting any price escalation, because this is the fourth quarter we have seen the margin below 10% almost?

— Vijay Sarda

So if you look at Galaxy Surfactants, and if you ask somebody who kind of uses palm oil today as a raw material source, and if you tell him that the raw materials have come back to normal, they probably would challenge your statement.

— Parag Satoskar

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Q&A — 14 exchanges

My two questions would be on the margin side, actually we have been trajectory a margin from let’s say EBITDA of 15%, 16% odd and currently we are at 8% margin and has this inflation cost it will simulate and currently. So are we seeing this EBITDA margin has been bottoming out or we can say the impact margin has been bottoming out currently and we will see a good traction from –6:01?

Dharmil Bodani

Good question, I think Parag you could take it and address the EBITDA. Sure. Pujan, good afternoon. As we all know that right now, we are trying to probably come out of two shocks, which were the supply chain shock, and also the input cost shocks, we are in it, but we are showing some signs of correction over there. And, we are kind of trying to face another shock which is where we are seeing that, because of the overall environment globally of trying to kind of curb inflation, we are seeing a new shock which is being created, which is where we are seeing that the demand for a lot of materials

My first question is, Parag as you mentioned that this year we are guiding for 7% to 10% EBITDA margin. The question is that, we have a very diverse product basket across product groups. And generally what we have seen is that, when you have a diverse product basket, things balance out and the impact on margin is less volatile. But in our case, even after few month of CAPEX looks like we have not been able to pass on the entire RM price increase and logistic cost increase. So, can you dwell upon this to any specific products which are contributing to this margin squeeze or product concentratio

Parag Satoskar

Sure. So, firstly, Dhwanil I would like to say that as a broad philosophy, Oriental Aromatics always believes in under committing and over delivering so that’s the broad philosophy point number one. Point number two if we look at the industry that we cater to, which is the fragrance.

Yes, so one more I have is, so in the last call, we were thinking that we will capitalize around 180, 190 crore of new capital assets this year. So, what kind of asset turns that we are looking at, we have guided for 1.5 to 1.7 times, and what is the timeline for reaching those kind of revenue from the capitalized assets. In the next two, three years are we planning to reach that number?

Dharmil Bodani

As explained in the previous calls, the CAPEX is now again restarting, the layout of that CAPEX is going to be the requirements of funds as we need them, the numbers still the same. And we’re looking at a three to five month delay in commissioning phase wise across Bareilly, Baroda and Mahad, so I believe that. I’ll just answer this question the second one Parag and then you can go back to the first one. So, I would say in the next financial year, you would see at least the Baroda, Bareilly numbers coming in. And shortly after that, you would see the Mahad numbers coming in. So it’s basically

Some of my questions have already been answered. One of them was, is your plant US FDA approved for camphor?

Parag Satoskar

Yes. Okay. So, do we see any risk to our camphor business due to competitors or being backward integrated? This whole motion of being backward integrated probably, is something which needs to be debated a lot further than probably an investor call. Because, the advantage that we have in terms of having well established global supply chains for our raw materials developed over the past 65 years plus having a well function, well-oiled camphor plant, the product out of which has been accepted by our customer for the past 50 years, more than compensates or some advantage that you might have in ter

I have two questions. One is if you see in last financial year, in the Q1 and Q2, we have done 230 crores of quarterly sales. And in Q3 and Q4 it’s around 205 and 203 crores of sales. So in the Q1 of last year call, it was mentioned that all our clients at that time was running at full utilization. So now in Q3, Q4, the sales were down quarterly. So what I want to know is, if this drop in sales was due to the dropping demand, or was it due to the decrease in the raw material prices or what is the reason for that?

Dharmil Bodani

So, Rajesh thanks for the question. It was beyond going extremely micro, but it was primarily a combination of certain shutdowns that we had taken in the month of September, where we were going to kind of hook up our single product plant in Baroda that had a little bit of the impact on the production and which had an impact on the overall top line. And you also looked at, there was also a little bit of client overturn which happens on the fragrance side, where we were looking at new client acquisition and letting go certain clients where we felt the business was not very, very profitable for u

My questions have been answered. Thank you.

Management

Sir, I have two quick questions before I fall back in the queue. The first one is related to follow up probably on the US FDA approved camphor. So some of these pain management companies which are in large space, they have been growing aggressively. So would you like to take us through the current scenario with US FDA approved camphor versus the pain management industry and our contribution towards that?

Dharmil Bodani

So, Rohit first of all thank you very much for your wishes. The whole team is very, very excited to really be part of this celebration. To answer your question, Oriental historically has probably been one of the first companies to really play an active role in the pain management space in India as well as globally. So, we remain committed to that, that space in many cases has a lot of entry barriers in in terms of drug master file, et cetera, et cetera, which need to be taken care of. And we at Oriental Aromatics can safely say that we’ve been there and done that. So, that kind of gives us a b

Sir what was the volume growth in this quarter?

Dharmil Bodani

Girish has mentioned it, it was 5% in production and 2% in sale. Okay. And what’s the revenue guidance for the current year and how much of that would be volume growth? Volume growth, we are expecting 5% overall, 4% to 5%. So, like I said that we probably have a continuous steady stream of products which we have launched last year, which we’ll see more customers accepting it. So, we probably are looking at a revenue guidance of anywhere between 5% to 7% and volume growth like I said, between 5% to 10%. Okay. So just one thing, if you look at our year-on--year growth which is flat almost 2%. An

I just wanted to understand on the CST side. So after the CST process followed in Mahad phase one or phase two?

Dharmil Bodani

Sorry, I didn’t hear the question, did you hear it? You are saying the question is about CST, and you’re saying that it will be in phase one or phase two? Yes. So, I’ll answer that, we’ll have to just wait and watch which product mix we can choose, it we’ll be there, we are going to go ahead with backward integration. We will announce in probably the next quarter in more detail as to the timeline. Okay. So just follow up on that is, the CST method developed it internally R&D team internally or there’s a technology partner involved in this? No, it’s completely internal R&D.

My question revolves around two things. One, if I look at a bit trajectory going ahead, as you rightly said, we will be looking at 15% kind of margin in next three to five years. But in immediate term, if I look at we have been getting much more pressure on the margins on account of raw material. So, if I just look across, we are not the only one in the space who might be getting penalized on account of raw material, but entire industry. So, what is the sustainable margin where the industry will stabilize or there is a dumping going on from China in this product, so that we are not been able t

Parag Satoskar

So, Vijay there are too many questions, which probably each is a is a separate question. So, if we are looking at probably a question that is that when are we going to achieve that 15% to 17% or how, I would like to reiterate that we are a very kind of a different player in the industry, where we have a very diverse areas of business that we cater to we are not purely a fragrance and flavor compounding company, we are not purely a fully integrated fragrance and flavor compounding company, neither are we purely a camphor company. So, we have we much diverse portfolio, and our estimates. Sorry,

At 7% to 10% EBITDA margin, are you able to realize your return on invested capital target for your new capital expenditure?

Parag Satoskar

Yes, Bobby, to answer your question yes. So, what is it, what is the ROI that we see at this kind of a margin? On this kind of a margin, our ROI would be around 10% to 12%. But this margin as we already said that in the long term our goal is to generate the EBITDA of 15% to 17%. So definitely ROI will improve. Right, but if it doesn’t, will this CAPEX be viable? Mr. Parag you can talk about shocking balance sheet exercise that we do now. Correct. So, Bobby as an internal exercise as an as an internal sounding board we have done our complete math of what if scenario where if the margin stay at

So, question number one would be, what is the inventory and receivable debt vis-à-vis Q4 and Q1, how have that changed?

Management

It stays in the same level. Now, second question, when I look at as a long term investor, that one challenge that the company Oriental Aromatics has seen is volatility in the margins. Now, on one hand we say that we have a very diversified portfolio which should ideally be insulating, but is that in itself a problem because we don’t have the focus, because one basic tenant that we as a investor would see that if we are becoming more and more specialized, or say moving up the value chain, then the volatility in the margin should come down. So while all the scaling up and CAPEX and say diversifi

If we look at our word and the new normal, we have to work a lot on the internal cost reduction programs, and the expenses that we have. Coming back to the questions, we are paying some license fees which is for some technical knowhow that is to the tune of 3.5 to 4 crore every year. So, what are these related to and what are these contracts or when are they renewed?

Parag Satoskar

So, the license fees that you’re talking about and Girish can correct me if I’m wrong is primarily the license fees that we are giving it to one of our associates in Israel, about – 1:07:34 technology that we had taken from them and that particular agreement is going to be active till 2025, so after that we don’t have to keep pay the licenses fees. Okay. So, is it for the bond can we not reverse engineer that contract or the technology? We are bound by that agreement. We are bound over the agreement, so we can’t midway modify it.

Thank you all for participating in this earnings con call. I hope we’ve been able to answer your question satisfactorily. If you have any further questions or would like to know more about the company, we would be happy to be of assistance. We are very thankful to all our investors who have continued to stand by us and also have confidence in the company’s growth plan and focus. And with this, I wish everyone a great evening. Thank you.

Management

Speaking time

Dharmil Bodani

Parag Satoskar

Moderator

Bobby Jayaraman

Rajat Sethia

Rohit

Pujan Shah

Dhwanil Desai

Rajesh Jain

Aakash Javeri

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Opening remarks

Anuj Sonpal

Thank you. Good afternoon, everyone and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the investor relations of Oriental Aromatics Limited. On behalf of the company, I’d like to thank you all for participating in the company’s earnings call for the first quarter of financial year 2023. Before we begin, let me mention a short cautionary statement. Some of the statements made in today’s earnings call maybe forward looking in nature. Such forward looking statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such statements are based on management belief as well as assumptions made by an information currently available to management. Audiences are cautioned not to place any undue reliance on these forward looking statements in making any investment decisions. The purpose of today’s earnings conference call is purely to educate and bring awareness about the company’s fundamental busin

Dharmil Bodani

Thank you so much Anuj. Good afternoon, everybody. It is our pleasure to welcome you to the quarter one earnings conference call of Oriental Aromatics Limited. I hope every one of you all are safe and healthy. During the quarter, the company witnessed a healthy demand across all product, aroma chemicals, camphor, fragrances and flavors. I am glad to inform you all that the production and sales volume for the quarter has improved by 5% and 2% respectively on a quarter-on-quarter basis. Margin and profitability pressures continue due to significant increases across all input costs, mainly due to impact of geopolitical issues, supply chain disruptions from China. This however, is showing signs of stabilization and in some cases have started a downward correction as well. The CAPEX plans had been slowed down in a bid to buffer the impact of severe cost escalations from input prices. Now, that the commodity prices are showing signs of reduction and stabilization, we will be forging ahead wi

Girish Khandelwal

Thank you Dharmil. On a consolidated basis in Q1 FY23, the operating income for the quarter was Rs.234 crore, which was an increase of approximately 1.7% on a year-on-year basis, and a increase of 15% on a quarter-on-quarter basis. Operating EBITDA reported was Rs.17 crore, which was a decrease of about 52% on a year-on-year basis, and a decrease of 25% on a quarter-on-quarter basis. Operating EBITDA margin stood at 7.06%, which was a decrease of 796 basis points on a year-on-year basis, and a decrease of 383 basis points on a quarter-on- quarter basis. Net profit after tax reported was about Rs.8 crore, which was a decrease of about 63% on a year-on-year basis, and a decrease of 20% on a quarter-on-quarter basis. While PAT margins were 3.6%, which was a decrease of 628 basis points on a year-on-year basis, and a decrease of 157 basis points on a quarter-on-quarter basis. Thank you, with this we can now open the floor to the questions and answer session.

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