Con call notes :
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Margin expansion due to robust demand and good raw material prices. Going forward RM price can vary. Company guides for EBIDTA of 15 to 17% going forward. (vs current 20% TTM and 27% last quarter) Company expects RM prices to go up in near future.
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Baroda expansion continues to be on track. We expect to make by March close
to about Rs. 60 crore of investment in the Baroda project. After our last call we have made
some changes in the product mix in Baroda which will require an additional Rs. 60 crore
capex which we expect to complete by Q3 or Q4 of FY 21-22 taking the total now up to about
a Rs. 120 crore or Rs. 125 crore in Baroda. -
Deodorant and fragrance segment facing global demand pressure due to covid.
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There may have been some panic buying in q2 which cant be expected in q3. Camphor demand expectation remains strong. Plants are running at 100% capacity and is expected to continue for next few quarters.
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First plant at Mahad (new greenfield exp) expected to be commissioned after roughly 450 days.
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the demand for camphor, fragrances and flavors has been robust for Oriental Aromatics and that really is the only reason where we have seen a better price realization on our products.
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Company sees a trend of geographical shift from china to india. Global clients are interested in sourcing from India. Hence the next big capex. ( it is
also a replacement investment where we believe that lot of the molecules that we are going
to produce desperately need another player in the market)
Company’s current dependence on China is very low. New capex is not going to be just pinene driven but mainly petro driven, focused on specialty chemicals which are high value and low volume kind of play. So Chinese dependence is expected to be low. -
Company to spend around 325 cr in next 3 to 4 years and expecting an additional 500 cr (1.7x the expenditure) from it.
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There was a very good answer where management explained their process and vision for the specialty aroma chemical plants in Mahad. It’s hard to summarize it but following is important gist of it.
So, this is just to give you, you know the process begins with the flavor and
fragrance team. The flavor and fragrance team works with Aroma chemicals R&D to tell them
their selection and what they see as the growth molecules of the future and what they see as
the molecules which are currently available but only from one or two suppliers. Once that is
done, it goes to R&D, R&D does a complete detailed study, presents it to management and
then we make a decision on how many molecules we are going to get active there. And if you
recall, I have mentioned we are launching three molecules in this year and I think in 2021 we
would see a role out of close to 15 to 20 new molecules. So, our R&D pipeline is very robust
and we are hoping that with the expansion plans in Mahad and in Baroda we are able to
successfully built the plants and the capacities that we need to fulfill the demand.
It seems that company is able to take advantage of being in the business from 1955 in the sense that they have better visibility of which aroma specialty chemicals to chose for manufacturing in-house. It will be sort a vertical integration for the company. The company plans to chose 25% molecules out of 6000-7000 available.
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New Multi Purpose Plant has been beneficial. Company has realized that its better to produce some specialty aroma chemicals through their own dedicated smaller plants considering the demand (hence the capex).
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Good numbers from this quarter were driven mainly by better realizations for camphor and fragrance. Camphor RM price was down and product price was higher and hence good swing. This might change. Improvement in fragrance price is expected to stay for longer.
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New greenfield plant is through a subsidiary to take advantage of lower tax from government of 15%.
tldr;
- company had sweet spot for camphor last quarter where RM was low and final price was higher. This could change easily. Improvement from fragrance can continue for longer. What % of improvement seen in last quarter is through fragrance is not clear.
- company’s plants are running at 100% capacity so for next 1-1.5 years, much volume growth can’t be expected. So unless company is able to get better product mix or product price increases, growth is hard to continue.
- company is embarking on a very big capex in next 3-4 years which seems promising as its in the field where company has been dealing from many decades. so its more like vertical integration. (Black rose industries had seen similar trajectory recently) company is focusing on mix of molecules based on which molecules are going off patent, which ones are made by 1 or 2 suppliers etc.
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