OALNSEQ2 FY23November 10, 2022

Oriental Aromatics Limited

5,859words

59turns

7analyst exchanges

1executives

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Management on call

Sonpal. Anuj Sonpal

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

Key numbers — 40 extracted

s stay strong and in line with the demand in 2022. Production in the fragrance division grew by 9% quarter on a quarter basis, and the sales volume also increased by 8% on quarter-on-quarter basis

fragrance division grew by 9% quarter on a quarter basis, and the sales volume also increased by 8% on quarter-on-quarter basis. Production volume in camphor and terpene chemicals divisions reduced

quarter-on-quarter basis. Production volume in camphor and terpene chemicals divisions reduced by 4% on quarter-on-quarter basis, primarily due to the preventive shutdown at the Bareilly Plant in Ju

13%

ients stood at the same level as compared to the previous quarter, but the sales volume dipped by 13% due to the delay in delivery of shipments based on the request of some of our global customers. T

6.61%

running at optimal capacity. There is a marginal dip inhibitor for this quarter which is at 6.61% as compared to 7.06% in the previous quarter. The primary reason for this marginal correction can

7.06%

pacity. There is a marginal dip inhibitor for this quarter which is at 6.61% as compared to 7.06% in the previous quarter. The primary reason for this marginal correction can be attributed to the

INR 28.40 crore

ntinue to invest heavily in new projects. Free cash flow for the first half of the year was minus INR 28.40 crores. The primary reason for the back cash flow number is the higher working capital requirements in

28.9%

ing projects compared to financial year 2021 22. In the current quarter, our gross margins were 28.9% as compared to 32.4% in the last quarter. We stay committed to work on our gross margins and impr

32.4%

to financial year 2021 22. In the current quarter, our gross margins were 28.9% as compared to 32.4% in the last quarter. We stay committed to work on our gross margins and improve it going forward.

rs,

riefly in Q1 22-23, due to unreasonable increase in input costs, then. Due to this decisions of ours, we have saved in some cases almost 7% to 8% in projects cost. Now that we see the prices have stab

increase in input costs, then. Due to this decisions of ours, we have saved in some cases almost 7% to 8% in projects cost. Now that we see the prices have stabilized, although at higher levels in

INR 166 crore

ization program as explained in our earlier calls. Current net debt along with working capital is INR 166 crores and this will peak at around INR 300 crores in the next 12 months. In spite of minor delays, whi

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Guidance — 20 items

Dharmil Bodani

opening

“In the fragrance division, the increased input costs have already been factored in for the new projects, and for the old projects we have created a pass through plan, where we will be gradually passing the increase in prices to our customers over the next three quarters.”

Dharmil Bodani

opening

“We stay committed to work on our gross margins and improve it going forward.”

Dharmil Bodani

opening

“The specialty ingredients division and the F&F division will be the main drivers for taking up the gross margins in the coming quarters.”

Dharmil Bodani

opening

“The hydrogenation plant at Baroda will be commissioned by the end of H1 2023.”

Dharmil Bodani

opening

“The nominal delay of three months over earlier guidance is due to certain utility systems that we need for this plant, which has items having long lead times.”

Girish Khandelwal

opening

“16.7 crores and higher inventory levels by 19.2 crores as compared to the FY 2022 and also due to the investment in the project.”

Parag Satoskar

“Primarily Praful the CAPEX revolves around the multiproduct hydrogenation facility that we are going to put in Baroda, and also the new Greenfield project that we are going to put in Mahad, the camphor part of the expense, our CAPEX is very limited, which is only related to certain process reengineering projects that we are doing in Bareilly and probably installing zero liquid discharge system for environmental stage.”

Parag Satoskar

“Again, Praful it would kind of differ from product to product, for example, in the terpene, chemicals division, the contribution of alpha pinene will be substantial, but the moment you get into these specialty aroma ingredients, you would have kind of a completely differential basis of contribution of naphtha, non-naphtha or alpha pinene basis.”

Parag Satoskar

“Ankit, we have already you know for the few quarters coming by we have kind of revised guidance in terms of margins from 8% to 10%, point number one.”

Parag Satoskar

“So, I think, we are taking one quarter at a time and we are ensuring that we kind of manage the shift as efficiently as possible and try to get as close to the guidance in terms of margins.”

Risks & concerns — 13 flagged

The camphor pricing has been under pressure due to the change in the competitive landscape.

— Dharmil Bodani

There is however, tremendous pressure on pricing as the Chinese manufacturers have become competitive due to their currency devaluation and local feedstock availability in China.

— Dharmil Bodani

However, the competitive landscape in some of our key products like camphor might make it difficult to achieve that immediately.

— Dharmil Bodani

Sure, given the kind of pressure we are seeing from our competitor you know, especially the Chinese, how do you think the growth will pan out for us for FY 24?

— Ankit Gupta

So if that needs to be kind of taken into consideration we Feel that I will bet the pricing pressure, but there will be sufficient demand to ensure that all the plans that we have are running at optimal capacity.

— Parag Satoskar

So, is there like a structural decline in the long-term margins that you are guiding for now?

— Neha

We don't see as of now, any signs of recessionary trends in the products that we sell; however, we see that tremendous pressure on pricing,

— Parag Satoskar

The challenge is that there is no stability in a lot of these other factors which are beyond our control.

— Dipen Shankar

So lastly under margin front, so are we seeing these pressure of passing on the inflation effects on raw materials only in terms of bulk, aroma chemicals or even in this specialty set of aroma chemicals, we are facing the kind of pressure?

— Dipen Shankar

So there is this 12% to 14% straight advantage for them in terms of price, betterment, opportunity which they can offer to the customer, so that’s put pressure on the margins but we are countering that in our way as well, in terms of better procurement and also better combinations…

— Dipen Shankar

Okay, the last question is that we have been tracking our company for a long time, one thing that always stood out that was the product diversification, we did not have any product concentration and despite in the tough environment our margins have taken a sharp decline.

— Dhwanil Desai

Generally I can understand that in a company where the product concentration or customer concentration is pretty high, but is the pricing pressure across all products or is the camphor pricing is the only contributing factor, we are still trying figure it out, so if you can help us understand that part?

— Dhwanil Desai

Point number two, definitely it gives us the ability to increase the basket of products that we can offer internally to our fragrance and flavor division, which then can create even more valuable fragrances and also to our global concern, so I think to answer your question the hydrogenation facility definitely ticks on all the boxes which are needed for our future also.

— Parag Satoskar

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Q&A — 7 exchanges

Hi Sir, I just want to understand out of the total INR 300 to 350 crores CAPEX, how much of it is dedicated to the camphor segment?

Dharmil Bodani

Parag? Yeah. Primarily Praful the CAPEX revolves around the multiproduct hydrogenation facility that we are going to put in Baroda, and also the new Greenfield project that we are going to put in Mahad, the camphor part of the expense, our CAPEX is very limited, which is only related to certain process reengineering projects that we are doing in Bareilly and probably installing zero liquid discharge system for environmental stage. Got it, sir. So, my next question is, we understand that aroma chemicals currently contributes around 1/3 to the topping of a company. So, I just wanted to understan

Thanks for the opportunity, given the volume raw material prices that we have, we are seeing currently, when do you think we can get back to our targeted margins of around 15% to 16%?

Parag Satoskar

Ankit, we have already you know for the few quarters coming by we have kind of revised guidance in terms of margins from 8% to 10%, point number one. Point number two, I think as Dharmil as mentioned in his speech, although we are seeing the first signs of green shoot were the input prices have started coming down, but I think too, at the same time, we are also seeing a very aggressive pricing regime coming from the Chinese manufacturers of these products, and so, the customer expectations for a price reduction has increased many fold. So, I think, we are taking one quarter at a time and we ar

Hi, good afternoon. Thank you for taking my question. My first question is regarding sales. So if you can first of all help explain, you know, by when will the hydrogenation facility give a full year of sales, and what is the amount that we are looking at, and the same from Mahad as well? What will be peak sale expected from the two, you know, the CAPEX that we are doing at these two facilities?

Parag Satoskar

I have understood the first question; can you repeat the second question please? Once the CAPEX is done and it's fully utilized, are we still projecting the same revenue that we were historically that is the question. On the sales front Dharmil in his opening speech has already mentioned that we are planning for commissioning the hydrogenation facility by end of H1 2023 calendar and we will use the second half of 2023 calendar for doing spot sales and the spot sales and getting customer approvals. So, to answer your question, the first full year of sales from the hydrogenation facility will be

Good afternoon, everyone, and thanks a lot for the opportunity. So, firstly wanted to understand the demand for these specialty aroma chemicals. So, as Dharmil has eluded in opening remarks, so, are we foreseeing demand structurally going down in this recession environment? So, are we foreseeing that kind of thing over the next one to two years, because most of our products are exported, so we wanted some clarity.

Parag Satoskar

Dipen, just to answer your question, since most of our specialty aroma ingredients are used in functional perfumes, which are primarily used for making fragrances for functional products or FMCG products like soaps and detergents which are day to day commodities and which are not items of discretionary procurement. You probably might see perhaps changes in preferences globally, where a customer might go from top brand to private layman just to reduce his household expense down, but I think the use of detergents, the use of things like soaps or shampoos will continue to stay strong and that is

Hi, Dharmil and Parag. Good afternoon. The first question I have is… so I think as you mentioned the incremental CAPEX, very less CAPEX will go towards camphor and it's mainly for process improvement. So currently, our mix one third each, fragrances, aroma chemicals, and camphor. So once the CAPEX comes on stream and the peak revenue we will realize the proportion of camphor will go down significantly, so is that the right understanding?

Parag Satoskar

So I wouldn't probably mention significantly, I think we have done our calculation, but what we are trying to do is we are also trying to juice up and find out how much more capacity can we take out of our Bareilly plant by process engineering? So, with minimal investment, we would try to focus on doing incremental increase in our capacities of camphor, and other terpene chemicals, and so yes, there will be an objective probably to have a little more contribution by the specialty aroma ingredients and the hydrogenation products going forward, but there would not be a significant drop in terms

So hydrogenation as a chemistry… is a completely new chemistry that although we handle 28 different chemistries that never had global capacities for this particular chemistry so it is kind of surge in a completely different bucket or compartment, point number one. Point number two, definitely it gives us the ability to increase the basket of products that we can offer internally to our fragrance and flavor division, which then can create even more valuable fragrances and also to our global concern, so I think to answer your question the hydrogenation facility definitely ticks on all the boxes

Parag Satoskar

So hydrogenation as a chemistry you will have a lot of players who would probably be having the capabilities to handle that chemistry, but the basket of products that we envisage to make at that plant along with the existing basket of products is something which probably very few companies in the world will be in a position to offer on a long term sustainable way, so that's our game. Rajat Setiya Sure, understood. Sir what will be the top three clients contribution to our revenues today and how was that, let us say three to four years back? I don't have the exact numbers with me, I will probab

Thank all for participating in this earnings con call. I hope we have been able to answer your questions 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 thankful to all our investors who have continued to stand by us and also have the confidence in the company's growth plan and focus, and with this, I wish everyone a good evening. Thank you.

Management

Speaking time

Parag Satoskar

Moderator

Neha

Dharmil Bodani

Dhwanil Desai

Praful Siddhartha

Dipen Shankar

Ankit Gupta

Anuj Sonpal

Girish Khandelwal

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Opening remarks

Anuj Sonpal

Thank you. Good afternoon, everyone. 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 would like to thank you all for participating in the company's earnings call for the second 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 may be 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's beliefs as well as assumptions made by an information currently available to management. Audiences are cautioned not to place any undue reliance on forward looking statements and making any investment decisions. The purpose of today's earnings con call is purely to educate and bring awareness about the company's fundamental business an

Dharmil Bodani

Thank you. Good afternoon, everybody. It is a pleasure to welcome you all to the Earnings Conference Call to discuss the results of the quarter and half year ended 30th September 2022. Thank you for joining us today. During the quarter that has gone by we have seen the first signs of easing in input costs and this is welcome news. The sustainability of this trend in context of the current global geopolitical situation needs to be closely watched. During the quarter the company has witnessed a healthy demand in fragrance, flavors and the camphor business. Specialty aroma ingredients and terpene chemicals have seen a bit of softening of demand due to overstocking of the materials in the supply chain. However, the forecasting for H1 calendar year 2023, for both these divisions stay strong and in line with the demand in 2022. Production in the fragrance division grew by 9% quarter on a quarter basis, and the sales volume also increased by 8% on quarter-on-quarter basis. Production volume i

Girish Khandelwal

Thank you very much Dharmil. I would like to welcome you all to the conference call. As always Dharmil has taken you through the business performance of the company and as well as all the market and business developments. I would like to focus on the operating performance. On a consolidated basis in Q2 FY23. The opening operating income for the quarter was Rs. 220.8 crores, which was a decrease of approximately 4.2% on a year-on-year basis and 5.5% on a quarter on quarter basis. Operating EBITA reported was 14.6 crores, which decreased as compared to Rs. 16.5 crores in the previous quarter and Rs. 19.8 crores in the corresponding quarter. Operating EBITDA margins stood at 6.61% as compared to 7.06% in the previous quarter. Net Profit After Tax reported was Rs. 6.3 crores, which decreased as compared to Rs. 8.4 crores in the previous quarter and Rs. 12.1 crores in that corresponding quarter. While PAT margins were 2.85%, which was a decrease of 75 bps on a quarter-on-quarter basis. On a

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Oriental Aromatics Limited

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