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, some 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. 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 very 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 and all are doing well. Company’s operations are quite clean with high levels of corporate governance.