Oriental Aromatics Limited (500078) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Oriental Aromatics Limited Q2 and H1 FY '25 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am. Over to you, ma'am.

Good afternoon, everyone, and a warm welcome to you all. My name is Purvangi Jain 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 second quarter of the financial year 2025. 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 belief as well as assumptions made by and information currently available to the 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 call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for their opening remarks. We have with us Mr. Dharmil Bodani, Chairman and Managing Director; Mr. Shyamal Bodani, Executive Director; Mr. Girish Khandelwal, Chief Financial Officer; Mr. Parag Satoskar, Chief Executive Officer; and Ms. Kiranpreet Gill Kill, Company Secretary. Without any delay, I request Mr. Dharmil Bodani to start with his opening remarks. Thank you, and over to you, sir.

Thank you, Purvangi. Good afternoon, everybody. It's a pleasure to welcome you to the earnings conference call to discuss the results of the first half of the financial year '24-'25. Our Executive Director, Mr. Shyamal Bodani, shall be briefing you all on the operational highlights for the past quarter. After which, our CFO, Mr. Girish Khandelwal, will brief you on the financial highlights. Over to you, Shyamal. Thank you.

Thank you, Dharmil. Good afternoon, everyone. It is a pleasure to welcome you to the earnings conference call to discuss the results of the first half of the financial year 2024-'25. The second quarter of every year is a time of celebration as our country enjoys the Indian monsoon and prepares for the festive season. This year was no exception. With a favorable monsoon and increased demand across various sectors, our sales have seen growth across all three verticals. In our previous investor call, we highlighted the steady growth we were experiencing. I am pleased to report that the company has continued this momentum, achieving increase in both production and sales across the verticals compared to the preceding quarter of Q2 of last year. Our sales for this quarter marked 6% increase quarter-on-quarter and remained consistent on a year-on-year basis. Our production has also shown positive growth at 15% increase quarter-to-quarter and a 23% increase year-on-year. EBITDA for the quarter has shown a substantial improvement and resulted in 12.08% as compared to 10.29% on quarter-to-quarter and 4.8% on year-on-year. The camphor and terpene chemical division performed historically well in quarter 2, mainly due to robust sales and better realization. The first half of the year in our Specialty Aroma Ingredients division also showed good performance, recording double-digit growth in both production and sales compared to year-on-year basis. The sales forecasted for this division remains strong, and we are encouraged by the demand outlook for H1 2025. The fragrance division continues its growth trajectory, driven by new customer acquisitions in India and international markets. Existing customers, both domestic and international, have shown healthy growth. Notably, smaller and regional customers have also contributed significantly, underscoring the resilience of the India growth and consumption story. On the CapEx front, the contribution of our hydrogenation plant at our Vadodara facility that commenced production in July 2024 is expected to support the top line going forward. We have currently achieved approximately 30% production capacity of the planned capacity only in our third month of operation. The onboarding of RFQ customers is expected to be in H2 2025. In the meantime, there is substantial interest for hydrogenation products shown by our global distributors and our spot customers to whom we have already started commercial sales. We are also happy to announce that on the 12th of November 2024, we commenced commercial production at our greenfield site located in Mahad, Maharashtra, dedicated towards production of the specialty aroma ingredient called Evermoss. This project will be a significant driver for the company's future growth, supporting our mission to deliver complex and high-quality products. With this, I will hand over to our CFO, Mr. Girish Khandelwal. Girish, go ahead.

Thank you very much, Shyamal. I would like to welcome you all to the conference call. Let me first take you through our consolidated performance for the quarter. The operating revenue for the quarter was INR 237 crores, which increased by approximately 4% on a year-on-year basis. EBITDA was reported at INR 29 crores, which increased by 160% year-on-year. EBITDA margins stood at 12.08%. Net profit was reported at INR 15 crores, which has increased more than 500% on a year-on-year basis, with PAT margins at 6.25%. Now coming to the first half of FY '25 performance on a consolidated basis. The operating revenue was reported at INR 453 crores, representing an increase of 7% year-on-year. EBITDA stood at INR 51 crores for the period, which has grown more than 300% year-on-year. EBITDA margins for the period stood at 11.2% vis-a-vis 2.84% in H1 FY '24. And net profit stood at INR 26 crores vis-a-vis a net loss of INR 4 crores in the corresponding period of the previous year with PAT margins reported at 5.70%. Lastly, the net debt-to-equity ratio stood at 0.35x as on 30th September 2024 and cash profit stood at INR 36 crores. With this, we can now open the floor for question-and-answer session. Thank you. Over to you, Manav.

[Operator Instructions] We have first question from the line of Ankit Gupta from Bamboo Capital.

Congratulations for good set of numbers. If you can elaborate on how is the demand scenario currently along with -- there were some issues earlier on inventory destocking as well as oversupply from China. So overall industry scenario, both on aroma, camphor and flavor and fragrance, if you can give a broad view of how the industry is doing, both from demand as well as supply side?

So as we have mentioned in the opening speech, I think all the three verticals that we currently operate on seem to show a steady performance where there is a good balance between the demand as well as supply. And if you look at -- as we have highlighted in our Fragrance & Flavor division, we've seen acquisition of new customers and the old customers showing growth in the products that they are buying and new product launches. On the Specialty Aroma Ingredients vertical, with the advent of the hydrogenation products and a steady state in terms of availability as well as demand for the Specialty Aroma Ingredients division. I think overall, we see that it's -- the demand and the supply situation seems to be very stable. We still have -- we are still a bit cautious on the Camphor and Terpene chemical side, where we still have some price pressures, and we will see how it evolves going forward.

Sure. And my second question was on the EBITDA margin. This is the second quarter in a row where we have seen double-digit kind of margin. And prior to the last 2, 3 years because of the issues that the industry went through, do you think given how the industry scenario is currently, we can sooner or later come back to our old margins of around 15%, if not more?

Have we got -- hello? Parag are you there?

I think he has been disconnected. Okay, no problem.

So I'll take that question on his behalf. I think we have probably gone through the worst. And I think the situation has stabilized reasonably. As much as we are cautious, we would still stay between the guidance that we've given for the -- of 10% to 12%, considering the fact that we have two new plants that have already been commissioned. So we're going to just stay with the 10% to 12% for now. And going forward, I don't want to commit. I'd just like to stay with this for now.

Sure, sure. The last question was on the kind of revenue that we can generate from all the expansions that we have done. So this Baroda hydrogenation plant is operating at 30% capacity, plus your Mahad will start contributing hopefully from Q4 of this financial year or maybe Q1 of this financial year. So on an aggregate basis, once this -- both hydrogenation plant in Baroda and the Mahad site ramps up to 70%, 80% capacity, can we touch INR 1,300 crores, INR 1,400 crores kind of run rate?

So to answer your question, we have given you -- okay, Parag, you're back. Please take that question. We've already given you.

Yes. So is that still Ankit or?

Yes, yes. I'm Ankit, yes.

Yes, yes. So, Ankit, primarily, if you look at broadly, whenever we have a brownfield project, we always say that the top line expected with a 500-day lag because we are in generic materials and it takes 1 year, 1.5 years for us to kind of get all the approvals is anywhere between 1.5 to 1.7 on a cautious approach. And for a greenfield, we are looking at anywhere between 1 to 1.2. I think if you add Baroda, if you add Mahad and if you add the process reengineering and the growth that we will experience in our current set of products, I think we shouldn't be surprised to probably see an addition of anywhere between INR 250 crores to INR 300 crores in the next 2 years to the top line.

We have our next question from the line of Kaustav Bubna from BMSPL Capital.

So I mainly have two questions. The first one is on the greenfield -- on these capacities, which have been recently commissioned, one greenfield, which has been recently commissioned. I understand you just gave some sort of a revenue estimate for the next 2, 3 years, what these capacities can do if they reach optimum utilization. But what about the second half? I mean how much -- I'm just trying to understand how a second half could potentially turn out. So how much incremental revenue apart from the normal business, how much incremental revenue do you think you can see from these -- this plant that has been commissioned in the second half?

So without actually getting into the numbers, I can say that we are -- with our existing set of businesses across the two verticals, which is the Fragrance & Flavors and the Aroma Ingredients verticals, we are seeing that it's going to be a healthy growth of anywhere between 5% to 10%. On the camphor side, since it's a cyclical product, we need to kind of wait and watch what happens in the off-season. So we will kind of update you by the end of next quarter. And when we are looking at contribution of the newer products coming from the hydrogenation facility and the Mahad facility, we are still kind of at the beginning of our commercial transactions with our customers. I can only say that the feedback is pretty positive, and we should be in a position to close commercial sales. But I wouldn't really get into the numbers there because we are still in the process of having those conversations.

So the second question was related to the camphor business. You just spoke about how you're not sure about camphor margin performance because of the seasonality of the product. So I wanted to understand two things. Firstly, if you look at your competitors' numbers, who is mainly camphor, they have posted quite good turnaround in margin performance in the first half, which -- I mean, which kind of indicates that -- I don't know what it really indicates, but that camphor prices have probably stabilized. So could you explain where camphor yields are now versus what it was in the first half of the previous year and what the exact situation is? And also, if you're talking about camphor being seasonal, so will that affect our margin guidance for the second half overall as a company? Should we expect lower margins?

So to answer your first part of the question, I mean, I can only speak for ourselves. And I can definitely tell you that the camphor and the terpene chemical space continues to be under a price pressure, multiple reasons, point number one. Point number two, I mean, we would like to be cautiously optimistic about the guidance that we give on EBITDA, and although we have got -- we have had two good quarters, but we still maintain our expectations of EBITDA to stay between 10% to 12% until we really have the full -- because we have a lot of brand-new plants, which are coming with brand-new products, and they take time to stabilize and get accepted. So we will like to be cautiously optimistic for the whole business. The camphor and the terpene chemicals definitely stay under pressure. The camphor in the religious space is a cyclical product. And our guidance for EBITDA stays between 10% to 12%.

And the last question I had was your current depreciation is around INR 5 crores a quarter. So with these new plants coming in, what will that number go to? What depreciation number should we expect in FY '26?

Girish, do you want to answer this or you can probably -- you can send us an e-mail to Anuj's team and we can respond to that?

Parag, it will be INR 6.5 crores to INR 7 crores a quarter.

[Operator Instructions] The next question is from the line of [ Dhruv Patel from Dhruv LLP ].

Congratulations on a very good set of numbers. I just wanted to ask that we talked about some kind of a revenue growth in this quarter and then the following quarter. So I can see that in quarter-on-quarter, we have a 10% sales growth. But year-on-year, we are not -- we haven't grown much. So your guidance was regarding the year-on-year numbers or the quarter-on-quarter numbers. That's what I wanted to ask.

Girish?

Yes. So our guidance was for the yearly numbers. And this growth he is talking about the sales growth, it is there, but on year-on-year because our corresponding period in June quarter, it was weak and our first quarter was weak, which is why it is showing low.

Okay, right. And do you expect the camphor prices to stabilize or go down? Or like what do you expect from the camphor prices specifically?

So I think it's -- I mean, it's a market which is governed by demand and supply. Like I said, that inherently, the demand-supply situation on the camphor piece stays a bit tricky. And once we get into the off-season, you probably would have some level of negativity coming in terms of pricing. So we'll have to wait and watch, but I wouldn't be able to comment exactly on what would happen.

[Operator Instructions] We have our next question from the line of Saket, an individual investor.

Again, congratulations to the team on a good performance and belated wishes for the festive season. Yes. So this was pertaining to this upcoming greenfield expansion. So you have talked about this it's a single chemical ingredient, so Evermoss AB20018. Now if I look at the asset turn expectation that we have set, so basically at INR 160 crores, we could look at, say, INR 160 crores to INR 200 crores from this molecule itself. So can you talk us through a bit about molecule? Are we the only supplier or because it seems INR 200 crores seems to be big, both at a company level as well as from a molecule level. So how -- what are the use cases? And assuming that we are largely into generic products only. So are we making it for a particular client? Or is it backed by purchase order for multiple clients? So something if you can share about this molecule?

So, Saket, if you look at the greenfield project at Mahad and the investment that has been done, the investment probably has two elements. One element is the overall development of the plot because the plot is a substantially large plot, and we have just taken a...

The line is disconnected.

Yes, Parag line disconnected.

We have line for Dharmil sir connected again.

Parag was disconnected. Reconnect Parag.

Hello?

Yes, Parag sir, hello.

Yes, I'm back. Sorry. Sorry. Can I continue?

Yes, Parag, I think you were talking about some, some amount going into the overall development.

Yes. So primarily, if you look at the investment that has been done, I think close to anywhere between 50% to 55% of the investment has been done towards development of the plot, towards establishment of the basic infrastructure and a utility block, which can be further used for multiple plants. So if you look at the actual investment done for this product, that amounts to anywhere between INR 70 crores to INR 75 crores. And from a demand perspective, I think it's a generic material, which finds wide application across fragrance applications. So we are pretty confident like we are with all our new product launches that we will be able to, in the first 500 days, get substantial share of the global market in this product.

Okay. Okay. Fair point. Now another question that I had. So if I look at, say, hydrogen and both this new molecule, is it safe to assume that these would be higher in terms of EBITDA margin vis-a-vis, say, the overall company, which was, say, 14% to 17% in a more stable environment. I know currently, you are guiding for 10% to 12%, but will this to be margin accretive, higher than normal?

So if you look at the overall product mix, hydrogenation plus Mahad plus our existing products, I think it kind of gives us a very interesting global role across a wide range of products. I mean that's the ultimate objective that we have. I mean, to really offer a basket of products to our customers globally. And so yes, I mean, when I say that whenever we select a product, we ensure that it kind of fulfills the basic EBITDA requirement over a longer period of time depending on the competitive landscape. But as we move on, as we supply a basket of products to our customers globally, I think we become a little more important because of the ability to give a wide range of products. And that will help us kind of look at profitability in a more macro sense rather than micro product-wise.

Fair point. Now if I look at, say, relative ranking of the margins for the 3 divisions, how would they rank up? Is it like Aroma had the best margin, camphor the lowest and specialty somewhere in between? How would that stack up for Q2 only?

We normally do not -- yes, please go ahead.

Yes. So basically, what happens It's all interlinked. So if the chemical prices continue to go down, you will see an improvement of margin in the fragrance business or the flavor business. So there is no fixed rule of which one contributes what. It depends on the quarter that in. Parag, anything else you want to add?

No, I think you -- that's what I was going to probably tell him that for us, since we are backward integrated, it kind of acts as a -- I wouldn't say a hedge, but we have this internal rearrangement that happens on profitability, depending on which area of the business is under pressure on pricing.

Okay. So just one big picture question from...

May please request you to rejoin the queue as there are several participants waiting for their turn. We have our next question from the line of Rohit Nagraj from Centrum Broking.

Congrats on good set of numbers. Sir, first question is about the exports market. So what are you -- I mean, we gauging from the exports market in terms of all the three segments? How has been the demand environment? How have been the inventory situation? And based on our dialogues with customers, how do we foresee that whether we have bottomed out and the demand is picking up strongly in certain segments or it is growing gradually?

So if we look at overall the demand scenario, broadly, we can very comfortably say that the whole discussion on destocking and reduced demand is probably -- has come to an end definitely in H2 2024. Going forward, unless there are no global shocks to any of the major economies, I think we will see a steady -- a steady demand for most of the products that we sell on the Ingredient side. And if you look on the Fragrance & Flavor side, we continue to grow, and we continue to grow by acquiring new customers. And when they grow with new product launches, et cetera, we grow along with them. And we are seeing that product launches after a gap of a year or so are now also happening at a relatively fast pace. So I think there's good situation in terms of demand on the two divisions. On the camphor side, it's seasonal. So we've had a good -- I mean, the season went up very well. We'll now see what happens to the demand in the off-season.

Sure. Just one clarification. The inventory rationalization, is it largely over now and the fresh orders have started coming back to the normal growth rates have started coming.

Yes, yes. I mean we've seen -- I mean, we have already had multiple rounds of conversations about H1 2025 demand for -- from our RFQ customers. And we see the numbers pretty healthy for the requirement of H1 2025.

My second question, in our presentation, we have also said that most raw material prices have been stable or showing some signs of marginal price increases. So for the next set of RFQs, are we more or less protected in terms of the raw material price increase if they happen even in gradual cases? Or will there be a lead lag impact in terms of passing on those price increases?

So I think when we -- because the exposure is -- I mean, when we look at the Fragrance & Flavor business, the pallet is close to 2,000 materials. And when we look at even our Aroma Ingredients, it's a basket of more than 60, 70 materials that we actively commercially offer. You can't really go very micro. But broadly, we can say that there seems to be a stability. We are always going to have some situations where some of the raw materials are unusually high or unusually low. But it's safe to say that everything looks stable in terms of inventory, in terms of availability and in terms of pricing on the raw material side.

Yes. Just to add to that, we will have to also consider the outlook on the Indian rupee.

[Operator Instructions] We have our next question from the line of Aniket Kulkarni from BMSPL Capital.

So I have a question regarding the camphor market. So Trump is speaking about imposing stricter tariffs on China. So if you can tell me how much camphor does China sell to the U.S.? And does the current pricing levels indicate any sort of dumping of camphor by China in the U.S. market? And how much of camphor do we export to the U.S.? And if there is increased scrutiny of exports, can we benefit from the same?

So I think if I've understood your question correctly, I mean, to the best of our knowledge, the United States market is not a major consumer of camphor per se. We can say -- we can very gladly say that we have a sizable position of whatever camphor is sold there in the health care space. And definitely, with -- like you mentioned that if there are any opportunities because of a review in the relationships, I mean, I'm sure whichever country can benefit from it would be able to benefit from it. But I think that's purely speculative for now.

So in this medical camphor space, how much -- can you tell me how much is the presence of Chinese players in which we are present?

So I think in the health care space globally, there is -- I mean, there are players from other countries who are active in selling there. But I think certain advantages in terms of regulatory certifications that we have kind of help us in having a much better position with the customers globally.

[Operator Instructions]. We have our next question from the line of Ankit Gupta from Bamboo Capital.

So just some clarification. The depreciation which will come from -- the additional depreciation which will come from the Mahad plant will be around INR 5 crores, INR 6 crores per quarter is what we have stated?

Per year.

Okay. Okay. And it will start coming from, let's say, Q4 of this financial year?

Yes.

Sure. And my second question was on Mahad, we have done the first phase of expansion. Any time lines that you can give from like where we can start the next phase of expansion? Or it's too early to say anything?

I think currently, we probably will stick to the product portfolio and the expansions that we have already announced. And if there's anything that comes up, we'll definitely be informing the investor community.

That would be the last question for today. And I now hand the conference over to Mr. Dharmil Bodani from Oriental Aromatics Limited for closing comments. Over to you, sir.

Thank you for participating in the earnings conference call. I hope we have been able to answer your questions satisfactorily. If you have any further questions... can you hear me?

Yes, sir, we can hear you.

Yes. If you have any further questions or would like to know more about the company, we would be happy to address them. We are thankful to all our investors who continue to stand by us and have shown confidence in the company's future growth plans. And with this, I wish everyone a great evening. Thank you.

Thank you. On behalf of Oriental Aromatics Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.