Oriental Aromatics Limited (500078) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Oriental Aromatics Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone, and a very 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 would like to thank you all for participating in the company's earnings conference call for the first quarter of the financial year 2027. 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 decision. 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. Parag Satoskar, Chief Executive Officer; Mr. Girish Khandelwal, Chief Financial Officer; and Ms. Kiranpreet Gill, Company Secretary and Compliance Officer. Without any further 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 is a pleasure to welcome you all to the quarterly earnings call of Oriental Aromatics Limited. Quarter 1 represents a positive start to the financial year for the company. Our performance during the quarter reflects healthy year-on-year growth in revenue and volumes, improved operating efficiencies and a sequential recovery in profitability. While the external environment continues to remain challenging and input costs remain elevated, the direction of our performance is encouraging. Our diversified presence across flavors, fragrances, specialty aroma ingredients, and Camphor and Terpene Chemicals continues to provide resilience across market cycles. Our Executive Director, Mr. Shyamal Bodani, will now take you through the operational performance and key developments during this quarter. Thereafter, our CFO, Mr. Girish Khandelwal, will brief you on the financial highlights. Over to you, Shyamal. Thank you.

Thank you, Dharmil. Good afternoon, everyone. Q1 FY '27 has been an encouraging start to the financial year with healthy year-on-year growth in revenue, production and sales volume accompanied by a sequential improvement in operating margins. Our consolidated revenue from operations for the quarter stood at approximately INR 260 crores compared with approximately INR 226 crores in the corresponding quarter last year, representing growth of around 15% year-on-year. More importantly, this growth was supported by a strong increase in physical volumes. Total sales volume increased by 22% year-on-year, while production volumes grew by 18% year-on-year, reflecting healthy manufacturing utilization, improved operational execution and sustained demand across our key product categories. On a sequential basis, product volumes remained broadly stable. This was primarily attributed to the changes in product mix and the normal quarterly seasonal movement across our 3 businesses. Our EBITDA margins for the quarter stood at 7.62%, representing an improvement of 71 basis points sequentially from 6.89% in Q4 FY '26. This improvement was supported by a favorable product mix, improved sales realizations and the benefit of operational efficiency programs undertaken across our manufacturing locations. While EBITDA margins were marginally lower than the corresponding quarter last year, primarily due to higher raw material costs, we believe the sequential improvement reflects the direction in which the business is progressing. Now let me take you through the performances of our 3 business. Fragrance and Flavors division continues to deliver a resilient performance during the quarter. Demand across our key customer categories remained healthy, and we continue to deepen our relationships with existing customers while progressing new business opportunities across both domestic and international markets. Production and sales volumes at Ambernath were marginally lower year-on-year during the quarter. The primary reason for this was the seasonal nature of business and should not be viewed as a change in the underlining direction of the division. Our brief pipeline remains healthy, and we continue to focus on expanding customer relationships, increasing wallet share and converting development projects into sustainable commercial businesses. Our specialty Aroma Ingredients business delivered healthy year-on-year growth in both production and sales volume during the quarter. However, the broader global market for ingredients continues to remain highly competitive. Capacity additions, particularly across Asia continue to exert pressure on selling prices for several products. The industry remains a buyer's market across many ingredients categories with customers continuing to expect competitive pricing together with high quality, innovation and security of supply. At the same time, several natural and petrochemical-derived raw materials continue to remain elevated, creating an environment where input costs remain firm, while finished product pricing continues to be competitive. Our response continues to be disciplined and structural. We continue to focus on process reengineering, yield improvement, energy optimization, internalization of intermediaries and greater utilization of our multi-chemistry manufacturing platforms. These initiatives are intended to improve our cost production -- cost position independent of any future recovery in the pricing cycle. We also remain selective in the business that we pursue. Our objective continues to be protecting market share and customer relationships while maintaining an appropriate contribution margin. The strength of our business lies not merely in individual molecules, but in the breadth of our portfolio, our chemistry capabilities, our integrated quality and regulatory systems and our long-standing relationships with leading global fragrance companies. The Camphor and Terpene Chemicals division recorded strong year-on-year volume growth during this quarter. Q1 normally marks the beginning of inventory buildup ahead of the festive demand period in Q2 and Q3 and the volume performance during the quarter provides a constructive foundation as we enter the stronger seasonal period. Nevertheless, the domestic camphor market continues to face structural overcapacity arising from significant manufacturing capacity additions over recent years. Our focus, therefore, remains on those areas where Oriental Aromatics possesses clear competitive advantages, consistent quality, regulatory compliances, pharmaceutical-grade camphor, strategic B2B relationships and the continued strength of our Saraswati and 3 Pine consumer brands. Mahad facility. The Mahad facility continues to progress through the commercialization and customer qualification phase. We have -- consistently explained in our previous investor interactions, specialty aroma ingredients follow a longer commercialization cycle involving technical validation, customer qualification and commercial allocation before regular business commences. Customer feedback continues to remain encouraging. Commercial shipments are progressing and the facility is now participating in several global sourcing programs and RFQs, which should support a gradual buildup in commercial volumes. At the same time, we continue to maintain a realistic perspective. Mahad has not yet achieved the utilization levels required to fully absorb its fixed operating cost and therefore, continue to impact consolidated profitability. Our objective remains to progressively move the facility towards 75% to 80% utilization, where we believe Mahad will become EBITDA positive and begin contributing meaningfully to consolidated profitability. Mahad remains a strategic long-term investment. The infrastructure has been created not only for current product portfolio, but also for future expansions and additional molecules. We, therefore, continue to evaluate this investment from a long-term strategic perspective. Operating environment. The broader operating environment continues to remain mixed. The long-term trends towards premiumization across personal care, home care and Fine Fragrances continue to remain intact. We believe this structural trend when compared with Oriental Aromatics backward integrated business model presents a significant long-term opportunity for the company. At the same time, customers continue to exercise discipline around inventories and working capital, while security of supply has become increasingly important in an environment characterized by geopolitical uncertainty and supply chain disruptions. Our integrated manufacturing platform, broad raw material sourcing capabilities and backward integration into specialty aroma ingredients positions us well to participate in these structural opportunities while delivering consistent quality, innovation and reliability to our customers. Raw material inflation nevertheless remains an area that requires continuous vigilance. Several natural terpene-based and petrochemical-derived inputs remain elevated. Wherever commercially feasible, we continue to work with customers to recover these increases while simultaneously improving our internal cost structure through operational efficiencies. Financial discipline. The improvement in the profitability during quarter 1 is encouraging, but further work remains. Our immediate objective continues to be improving operating margins while preserving volume growth and strengthening customer relationships. The company's net debt-to-equity ratio improves to 0.56x as of 30th June 2026, reflecting our continued commitment towards disciplined capital allocation and prudent financial management. This significant investment made over the past several years have created meaningful manufacturing capacity and technical capabilities across our operations. Our immediate priority is, therefore, to maximize utilization and improve profitability from the existing asset before undertaking any major expansionary investments. As we look ahead, quarter 2 and quarter 3 continue to be seasonally important quarters for several parts of our business, including and camphor and Consumer Fragrances. The momentum established during quarter 1, together with our active customer pipeline and improving operational efficiencies provides a constructive foundation for the quarters ahead. However, we remain mindful that the raw material costs, foreign exchange movement, geopolitical developments and competitive pricing continue to influence the operating environment. Our priorities, therefore, remain unchanged: sustain volume growth while strengthening market share across all 3 businesses; continue improving margins through product mix, process optimization and disciplined cost management; accelerate customer approvals and commercial allocations for Mahad, maintain prudent capital allocation and maximize return from our existing manufacturing assets; continue investing selectively in R&D, fragrance creation, application and new product development to strengthen our long-term competitive position. To summarize, Q1 FY '27 represents a positive start to the year. We have delivered healthy year-on-year growth in revenue, production and sales volume, improved profitability sequentially and strengthened our operational performance while remaining disciplined in navigating a challenging external environment. The direction of travel is encouraging. Our focus now is to convert this operational momentum into sustained improvement from profitability, capital efficiency and long-term shareholder value through disciplined execution over the coming quarters. Thank you. I will now hand over to our CFO, Mr. Girish Khandelwal, for the financial highlights. Over to you, Girish.

Thank you, Shyamal. Good afternoon, everyone, and let me begin by sharing our consolidated financial performance for Q1 FY '27. During the quarter, the company reported operating revenue of INR 260 crores, representing a healthy 15% year-on-year growth, reflecting sustained demand across key product categories. On a sequential basis, revenue declined by 8%, primarily due to the changes in product mix. EBITDA for the quarter stood at INR 19.80 crores compared with INR 19.46 crores in the previous quarter and INR 18.06 crores in the corresponding quarter of previous year. EBITDA margins improved to 7.62% from 6.89% in the previous quarter, supported by improved operating efficiencies compared with 8.1% in Q1 FY '26, the margin was marginally lower primarily due to higher raw material costs during the quarter. Profit after tax stood at INR 2.51 crores compared with previous quarter INR 3.98 crores and INR 0.5 crores in the corresponding quarter. The company continued to maintain a prudent capital structure with the net debt-equity ratio improving to 0.56x as of June 30, 2026 compared with 0.58x as of 31st March 2026. Cash profit for the quarter stood at INR 10.20 crores compared with INR 8.72 crores in the corresponding quarter of the previous year and INR 11.72 crores in the previous quarter. With this, we can now open the floor for question-and-answer session. Thank you.

Thank you very much. We will now begin the question-and-answer session [Operator Instructions] The first question is from the line of Rohit Sinha from Sunidhi Securities.

So my first question is in terms of the utilization level and our peak potential regarding the revenue side. So what is the current utilization right now for the overall business and for the Mahad plant? And with the peak utilization level of all these plants, what sort of revenue number we would be looking at and possibly by when that should be achievable?

So primarily, I think the Mahad plant currently, we are looking at a capacity utilization of between 50% to 60%. If you look at the Specialty Aroma Ingredients division and the camphor and the terpene chemicals plant except the hydrogenation facility, most of the other plants are at between 85% to 90%. And the fragrance compounding facility, we have substantial additional ability to increase production. So in terms of capacity utilization, the Mahad facility is something where we feel that in the next few quarters, we will have a better utilization of the Mahad facility.

And with this full utilization, what sort of number we will be looking because INR 1,000 crores is something which we had done last year. And what kind of further possibility of revenue addition is there left for capacity utilization.

I probably can give you a near-term number. I mean we are looking at a trajectory of anywhere between 10% to 15% growth in our sales in the next 1 year. So that's our near-term goal. And I think in terms of our long-term strategic goal based on projections, you can reach out to Girish and he probably can share the numbers with you.

Sure sir. Next...

Sorry to interrupt, Mr. Sinha. May we request you return to the question queue for a follow-up question? Thank you. The next question is from the line of [ Sudhi ] from [indiscernible] Managers.

Sir my question is that we're looking at some favorable product mix. If you could just talk a little more about that. How much are the margins and how will that look like? That is my first question. And my second question is about the raw material price pressure. How are we looking at the coming quarters regarding that?

So I think an answer to your margin question is, frankly speaking, looking at the crystal ball because the global geopolitical situation is having an impact on the availability and the pricing of all your inputs and hence, we probably can only state that we are extremely mindful and we are very watchful of the situation. And we are taking very calibrated steps to ensure that we strike a balance between raw material availability so that all our sales are fully catered for and the raw materials are available at the lowest price. So I think to answer your question on margins, it's something which is very fluid currently. In terms of the impact of the raw materials, I think from a trend perspective, we see that all the alpha-pinene raw materials will tend to be expensive because of the sustained increased pricing in alpha-pinene. The petro again remains in a seesaw situation where the prices have been very firm in the last few months, then they came down for a month. So to answer your question, I think in terms of margin, in terms of the impact, it's something which is an ongoing process, and we are watching the situation very, very closely on the raw material side, on the utility side and also on our sales side.

The next question is from the line of Rajesh Mishra from Liberty Securities.

[Foreign Language] I have two questions. First is [Foreign Language]

[Foreign Language]

Thank you. The next question is from the line of Maitri Shah from Sapphire Capital.

Am I audible?

Yes.

So this quarter, we had close to 22% sales volume increase, while the revenues have been 15%. So there was a dip in the realization of our products. And I think most of the pressure is coming from increased capacity. So with this 10%, 15% revenue growth that you're expecting, what sort of volume growth are we penciling in for that? And how much do you see the realization going further down?

So like I said that, Maitri, we find ourselves in a very interesting situation where some part of the volume growth that we saw in the quarter that just went by was the products that our customers had given us as allocation in Q1. And therefore, they kind of decided to take them before the stipulated period in which they were going to buy because of the geopolitical situations. So to answer your question, the gap primarily is driven because there was an increase in the raw material price. There was a hastening in terms of the customers wanting the material early. And hence, we see this gap. Going forward, our focus is always going to be to strike a balance and to ensure that we are targeting business where we see volume growth where we see also this volume growth add a decent contribution in terms of profit margins. So that's our broad objective. I cannot share with you very specific numbers because these numbers across the 3 divisions keep changing month-on-month.

Got it. So far in Q2, have you been able to kind of have conversations with your customers on the pass-through of the price increase that we've taken in on the input side or still there are contracts we're taking in on a lower realization while taking the hit on the margin from the input?

Wherever it's been possible to do a pass-through, I mean, we've been very, very successful. And like we mentioned that we -- in the specialty aroma ingredients space, and in the camphor space, particularly, there have been significant capacity additions in the Asian region, which kind of puts a bit of a challenge in terms of achieving a pass-through. Having said that, I think we have been in a position to kind of mitigate these challenges by giving a step-up pass-through process to our customers to at least cover the foreign exchange impact as well as any raw material hike impact.

Got it. That's clear. And lastly, on the tax side, what sort of effective tax are we penciling in for FY '27 and then [indiscernible].

Girish, do you want to answer this because it's related to tax?

[indiscernible] for us is around 25% only [indiscernible] there is no tax liability.

Sir, it's 25% for the full year that we expect?

Yes.

The next question is from the line of [ Aneesha Dalal ]from Universal Capital.

Yes sir, am I audible?

Yes, you are, ma'am.

Okay first of all congratulations on the performance. In our last interaction, you mentioned that the industry is currently facing a demand and supply mismatch with significant new camphor manufacturing capacities that have come up in India. This has understandably put pressure on pricing and profitability across the sector. As a shareholder, I would like to give a suggestion that since all the camphor manufacturers are facing the same demand-supply imbalance, why don't the manufacturers come together to work towards as a common cause to the entire industry so that the prices can be corrected.

So Aneesha, I would first like to thank you for giving the suggestion. I think the challenge being that since there is a demand-supply gap because of excess capacity, it becomes very challenging for the existing players to come together and develop a common strategy, especially when the final product market has a very limited CAGR. So the expansion that has happened is not linked to the CAGR capacity of the finished product. And hence, it's going to be pretty challenging for the industry to come together and create a program for coming out of this challenge.

Actually, I'm asking for specifically the manufacturers who are selling the camphor in the raw material prices.

Yes, ma'am, but [indiscernible] it's wishful thinking, and we probably -- I do not have an answer because I can speak for my company, where I can see that there is this demand-supply gap and everybody is trying to probably get a piece of the pie, which is not growing. So I don't know how we come at a strategy. But we have taken your view and we'll see if we can -- if there's something possible.

The next question is from the line of Moksh Ranka from [ ORMH ].

Sir, I wanted to understand regarding our brand Saraswati and 3 Pine, roughly speaking, how much the contribution would be to Camphor division?

So Moksh, like I mentioned in the previous interaction with one of our investor friends, we don't give the breakup of individual subdivisions in our broad divisions. We broadly state the contribution of each of our 3 verticals.

Okay. Also, could you provide some color regarding the camphor pricing as compared to Q1 and maybe last year? And currently, what's the import pricing difference between China? Has it narrowed down what's the scenario there.

So there is substantial double-digit growth -- increase in the price of camphor powder regarding Indian camphor. We do not follow a lot of camphor that is coming from China. So I will not be able to give you a very specific answer about that. I mean, in terms of Indian camphor, there is a very significant growth -- increase in the price of the sale price.

Okay. And any underlying economic reason behind it like because of increased demand or maybe the input costs have become [indiscernible]. So any idea -- like any reason why the sudden increase in...