One of the companies I have been tracking for a while is Oriental Aromatics Ltd. After being listed for so many years, the company has finally got the market’s love only recently, when the the share price from a low of ₹125 on March 23rd 2020 almost trebled to current at around ₹350 on 07th Aug, 2020. And there is a reason behind that. I will be covering in details the company in the current blog “Oriental Aromatics Ltd- Analysis”.
I already have covered a brief about the company in one my earlier blog ‘Connecting the Dots: Indian Camphor Industry‘. The company is a smaller player in Fragrance & Flavors market which finds application in FMCG(Fast Moving Consumer Goods) products.
Before discussing about Oriental Aromatics Ltd(OAL), I have shared a brief about the industry to make sense where OAL stands.
Indian Fragrance & Flavors Industry
Indian Fragrance & Flavor Industry
80% OF FLAVOURS WE TASTE COMES FROM WHAT WE SMELL & 75% OF EMOTIONS ARE TRIGGERED BY SMELL.
Oriental Aromatics Ltd- Analysis
About the company
Incorporated in 1955, Oriental Aromatics Ltd(OAL) is now a integrated flavor, fragrance (F&F) & aroma chemicals company headquartered in Mumbai. F&F finds application in FMCG products & aroma chemicals is used to make F&F. You could have guessed it right, it is a totally B2B company.
The company is much smaller in size relative to the larger MNCs that dominate Indian market. OAL has grown by focusing more towards domestically grown FMCG companies as well as supplying aroma chemicals to larger F&F players.
Coming to OAL, the co. is majorly India focused while deriving about 25-30% of its sales from export market. OAL started as a F&F company and gradually backward integrated mainly via acquisitions. Aroma Chemicals & Camphor derivatives are used as the building blocks of F&F.
Till date, the company has acquired three companies. In August 2008, a controlling stake of 57.66% was bought over by the promoters of Oriental Aromatics Ltd (OAL); a key customer of Camphor & Allied Products and became its holding Company.
In 2015, the company acquired two Indian aroma chemical manufacturers – Arofine Chemical Industries and Vaishnavi Chemicals Private Ltd. together at ₹17.29cr.
In April, 2017 the equity shareholders of Camphor and Allied Products Ltd. (CAPL) approved a scheme of arrangement for amalgamation of Oriental Aromatics Limited with Camphor and Allied Products Ltd. in order to create a larger backward integrated company. The name of the company changed from Camphor and Allied Products Limited to Oriental Aromatics Limited in Feb 2018.
The company claims to be one of only ten completely integrated flavor, fragrance and aroma chemical manufacturing companies in the world. And that is going to help the company enormously.
Management
The company is currently run by third generation promoters family which are skilled as well as quite passionate about the business. Both the brothers of the promoter family running the business, Dharmil & Shyamal holds 74.167% stake in the company. The promoters have been very conservative in terms of withdrawing salary from the company. The total salary of the promoters stood at just ₹2.5cr in FY19.
Although it sounds positive but in terms of execution, things look very average.
One of the acquired companies ‘Arofine Chemical Industries’ which was run by the wife-husband duo. They joined the management team as CEO & Head of R&D.
Subsidiaries & Joint Ventures
In terms of subsidiaries, the co. has only one subsidiary(99% stake) by the name of PT Oriental Aromatics (Indonesia) which had a revenue of ₹7.3 crores and loss of about 1.9cr in FY19. OAL had setup a manufacturing unit in Indonesia but did not get the success they expected. So, they closed the manufacturing plant and booked a loss of ₹10cr in FY19. The Indonesian entity will continue to remain as sales and marketing office for OAL.
Earlier the co. had one subsidiary in USA i.e Oriental Aromatics Inc.,there was no operation for the subsidiary & was shut down in FY19.
Oriental Aromatics Ltd- Analysis
Products
Now lets talk about the key product categories. Oriental Aromatics Ltd has products in the below categories:
Fragrances & Flavours: Co. derives 30% of revenue from F&F. Co. supplies Fragrances to FMCG companies and its Flavors are used primarily in sweet products.
Aroma chemicals: The company is focused on this segment and is witnessing higher growth & hence higher margins. Aroma chemicals are more generic and high volume products used to make F&F mix. It is supplied to larger F&F companies.
Camphor:. Camphor is used as a key ingredient for pain relief. Primarily used in 2 forms- Topical(Surface of body parts) & Inhalers. OAL supplies pharma grade camphor to P&G’s Vicks brand globally.
OAL has a market share of 35% in Camphor products.
Oriental Aromatics Ltd- Segment Wise revenue
Acquisition of 'Arofine Chemical Industries'- The Game Changer
OAL acquired a small Aroma Chemical company ‘Arofine’ in 2015 primarily for the huge range of specialty aroma chemical(150+) range they had as well as the technical knowledge the team possessed.
To scale up the basket of specialty aroma chemical range Arofine had, OAL setup a Multi purpose plant(MPP) to manufacture these products at Baroda which was commissioned in May 2018. These aroma chemicals finds application in F&F and hence the target customer would be larger F&F MNCs. This plant caters to both domestic & export demand.
The company is witnessing huge traction in terms of demand for these products. The plant is already running at more than 100% capacity. To meet the demand, the company has setup a expansion plan of ₹60-70 cr totally for thus MPP in FY21.
THE MANAGEMENT CALLS THE MULTI PURPOSE PLANT ITS GAME CHANGER. AND THE ACQUIRED PORTFOLIO ITS KEY TO FUTURE.
Given that even Indian F&F industry is dominated by global MNCs, the company wants to grow primarily via the aroma chemical route.
Oriental Aromatics Ltd- Analysis
How is the product pricing done?
Fragrance & Flavors: FMCG companies give them their budget for fragrance or flavors for certain products. The company calculates their margin doing backward calculation and does the procurement and production accordingly.
Camphor prices: Commodity product. Prices are determined by demand-supply situation.
Generic & Specialty Aroma Chemical Pricing: A standard price of these products exists in the market. Based on the cost the company decides around which price to sell.
Oriental Aromatics Ltd- Clients
Customer Concentration
Top 3 customers of Oriental Aromatics derive 250 crore of revenue i.e. 33% of FY20 Revenue of 759 cr for the company.
1. Divine Camphor: They are basically a distributor of Oriental Aromatics’s camphor products. More of a distribution kind of relationship rather than being a client. OAL gets about ₹120 crores from this channel.
2. Makhteshim Agan– OAL has been supplying ingredients(Astromusk) to Makhteshim Agan (an F&F co.) since 2012.
3. International Flavors & Fragrances(IFF)– IFF is also an F&F co. OAL has been supplying the ingredients (Sandal Alcohol) to them as well for a long time.
Together IFF & Makhteshim Agan contribute over more than ₹100 crore of revenue which is like 15% of total revenue. There is definitely some amount of customer concentration which we should keep an eye on.
Rest ₹509 cr of the FY20 revenue of 759 cr is divided among 2000 customers in 33 countries.
Oriental Aromatics Ltd- Analysis
Oriental Aromatics Ltd- Value Chain
Raw Materials
F&F products can be made via both petro-chemical route as well as alpha pinene(more environmental friendly). The company manufactures product via both these routes, more via petro-chemical. Also, more than 60% of the company’s raw materials are imported.
Earlier the dependence on Alpha pinene were 95%. Now its 20%. Product mix has changed.
OAL has over the last few year have reduced their dependence on import of Alpha pinene from China. They used to source 95% of alpha pinene from China in 2015-16 which is 2019-20 has come down to 4%.
Oriental Aromatics Ltd- Analysis
Plants
The company has 3 facilities:
1)Baroda, Gujarat:
In their Baroda facility, the co. manufactures generic & specialty aroma ingredient. Started in 1999 and then a new MPP plant was setup in 2018. About 75% of total production of this facility is exported.
Baroda facility has 3 plants:
1. The first plant is fully automated and produce a single product called as Astromusk (Categorized under Bulk/Generic aroma chemicals) with a capacity of 3500T. Very important ingredient in the fragrance business.
2. The second plant makes 700T of single product which is of Sandal Alcohol (Bulk/Generic aroma chemicals).
3. The third one is a Multi Purpose plant(MPP) which came into existence in May 2018. Using automated technique the company manufactures 150-180 different Specialty aroma chemicals. Capacity is 2500T and are low volume, high value products.
2)Bareilly, UP:
In the Bareilly plant, Oriental aromatics manufactures 12,000T of Synthetic Camphor & its derivatives. The Bareilly plant is USFDA & WHO-GMP approved as the company manufactures pharma grade camphor used as a key ingredient for pain relief. Primarily used in 2 forms- Topical(Surface of body parts) & Inhalers.
First Synthetic Camphor plant in India with technology from DuPont of USA in 1964 was setup. OAL supplies pharma grade camphor to P&G’s Vicks brand globally.
3)Ambernath, Maharashtra: They started manufacturing fragrances & flavors in this plant from 2014. The total capacity is 6000 MTPA.
Expansion
Expansion: The company has landbank of 100 acres in Baroda & Bareilly of which around 60% is occupied by existing plants. So there is a room for both brownfield and greenfield projects.
The company has setup a Capital Expenditure(CAPEX) plan of ₹60-70 cr to add more reactors to the MPP at Baroda to meet the strong demand.
Also, the company has formed a SPV to setup a new plant in Maharashtra. For this new plant company will be spending about ₹200 cr (80% Debt & 20% Equity). The state govt is giving a lot of incentive for companies to setup manufacturing plant including a concessional tax rate of 15%. The plant is expected to be fully operational in the next 3 years. As of now, the company is in the process of acquiring land bank.
The management in the call said that the expansion is towards the overall business growth but gauging by the management commentary it looks like it will more be towards aroma chemicals.
Oriental Aromatics Ltd- Analysis
Oriental Aromatics Ltd- Financial Analysis
The first question obviously would come to mind when you look at the sales number is the 49.2% jump in revenue in FY19. That is due to a couple of factors:
1. Launch of the new Multi Purpose plant in 2018
2. Increase in raw material cost led to increase in product prices
In FY20, the sales grew in terms of volume but the value dropped due to drop in raw material prices. Profitability margins was helped by drop in raw material prices but not proportionate drop in end product price.
Also, a key driver of the margin improvement was the higher demand for specialty aroma chemicals both in terms of value & volume terms from their MPP plant which came into being in May 2018 at Baroda.
In FY20, the company has considerably reduced its gross debt by almost ₹170cr. That is also leading to improved quarterly margins in FY21
.
Also, if you look at the ROE & ROCE, there has been considerable improvements mainly led by operational efficiency.
Oriental Aromatics Ltd- Analysis
Given that Oriental Aromatics Ltd is into niche business with lot of entry barrier, the company can maintain its margins but growth would not be very high but ok kind of at 10-15%.
Niche businesses has very limited market.
F&F is more of a consistent kind of business which will grow moderately in line with FMCG companies growth with consistent margin. In the current scenario, most of their verticals are doing good such as those catering to biscuits, confectionery, soap, sanitizer, disinfectant, camphor, aroma chemicals but the fine fragrance, tyre, paints not so.
Management’s commentary on outlook of camphor is also very strong.
But the key driver is the Aroma Chemical vertical which will continue to be company’s focus.
Earlier I had assumed that higher demand for F&F products in cleaning & hygiene product was the growth factor but got to know that only after thoroughly analyzing the company that it is the Aroma chemical vertical. Quite obvious was the increase in Gross margin since Q2Fy20 from 35% to 39% and then 43% in Q4FY20.(Reason for the share price appreciation recently) No doubt the F&F segment would have seen increase demand but the key factor was different.
The growth & margin drivers for the company has been aroma chemicals produced at their Baroda plant which is running at 100% capacity utilization. The company is adding more reactors to this plant to increase their production to meet the demand.
Given that even Indian F&F industry is dominated by global MNCs, the company wants to grow primarily via the aroma chemical route. I think that is a good move given the difficulties associated with breaking into the FMCG companies on a larger scale, given that most of these FMCG companies have got the F&F manufacturers with them to India.
Overall all the companies verticals are linked to FMCG companies, some are doing well and some not so.
In conclusion, OAL is an small & OKAY kind of company.
Update(16.08.2020)
The company manufacturers bulk aroma chemical products for IFF & Makhteshim Agan which contributes more than 15% of total sales. Some part of these bulk chemicals goes towards fine fragrances where the demand has dried down. Although its a long term contract of many years for which the OAL has setup the capacity only for these 2 clients. NOT SURE IF THAT HAS IMPACT ON THE SALES OR NOT. TRYING TO FIND OUT. { Got the reply from the management that the market demand derives the quantity to be produced for these 2 clients }. So the current slowdown in fine fragrance will have negative impact on sales from these two clients.
Overall all the companies verticals are linked to FMCG companies, some of these FMCG verticals are doing well and some not so.
In conclusion, OAL is an small & OKAY kind of company.
Valuation
In terms of valuations, the company is trading at a Price to Earning multiple of 13.35 and Price to Sales multiple with 1.5 times. The company’s operating cash flow has also improved to ₹181cr in FY20. It looks quite cheap but needs to keep a track on how the company’s quarterly performance.