Oriental Aromatics – #DARKHORSESTOCK

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Price on the date of recommendation-: 344Rs.

Oriental Aromatics ltd is a 56 year old ,  completely* debt free company engaged in business of manufacturing Fine chemicals i.e. camphor, perfumery & specialty aroma chemicals, fragrances and flavour. The company is present in wide range of FMCG products including soap, shampoos, detergents, hair oil, perfumes, cosmetics, air fresheners, etc under the fragrance division as well as biscuits, confectionaries, beverages, ice-creams, chocolates, etc under the flavours segment. Company has grow tremendously over past couple of years with Compounded Profit Growth of 50% and 35% over past 3 and 5 years respectively.

*Debt to equity ratio stood at 0.03 as of First Qtr 2021 as a result we have take a view of complete debt free status. However this may not mean that company would not add any possible debt in the future.

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Established in the year 1964 as camphor and allied products with technical know-how from E I Dupont de Nemours & Company, US the company has diversified across several different verticals thereby manufacturing products catering to wide range of fast moving consumer goods sector.  

In August 2008, Oriental Aromatics’ promoters acquired a controlling stake of 57.66% in the listed entity of Camphor & Allied Products Ltd.(CAPL), a key supplier of Camphor and other specialty aroma chemicals. Furthermore in April, 2017,Oriental Aromatics was fully amalgamated into the listed entity and thereafter, the name of CAPL was changed to Oriental Aromatics Limited (OAL).

The company is one of the privileged few integrated manufacturers of fragrances and flavours as well as aroma chemicals globally. Today Oriental Aromatics Ltd. is one of the largest Indian manufacturers of a variety of Aroma Chemicals, Camphor, Fragrances and Flavours. 

The Company has evolved into a one stop solution provider for the flavour and fragrance industry.

The Company aspires to become a global player in the specialty aroma chemicals and use these synergies to become one of the most prominent fragrance and flavour companies. •

Business Segments

  • Aroma Chemicals and Camphor – Ranging from Pinene derivatives, to petrochem derivatives, and even musk and sandalwood derivatives, OAL delivers quality aroma chemicals to clients across the world. 
  • Flavours and Fragrances – OAL delivers innovative flavours and fragrance raw materials to marquee FMCG companies.

FRAGRANCE

Backed by the finest ingredients and fuelled by passion OAL produces fragrance formulations with highest levels of creativity and performance to bring the most memorable moments. The aim is to develop fragrances with highest acceptability and thus bringing added dimension to the consumer experience. Company delivers custom designed fragrances found in fine fragrances, incense sticks, candles, and various FMCG products like soaps, shampoos, hair oils, detergents, etc.

FLAVOUR

Food is a basic need of mankind but one looks forward to a variety, not only on the plate but also in other everyday needs. OAL understands how important flavour is to one’s sense of being and therefore consistently innovates to satisfy its customers’ evolving needs for different flavours. OAL specialises in custom flavour manufacturing and aims to reinvent the palate of taste. The Company’s goal is to constantly elevate everyday experiences by delivering quality flavours used in oral hygiene, instant foods, beverages, health and wellness, dairy and snack foods.

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AROMA CHEMICALS

Aroma Chemicals form the building blocks for F&F formulations. Every aroma has a specific need and a unique characteristic, whether it’s going to be used to mask, mimic or maximise a taste or smell. OAL is one of the top aroma chemicals manufacturers in India, and exports aroma chemicals across the world. The Company’s synthetic aroma ingredients are produced in its own research and manufacturing facilities. The high quality of ingredients used ensures that they retain long-lasting freshness and remain fragrant. 

CAMPHOR

Camphor has long enjoyed a prominent place in medicine, but its usefulness in making various other products demonstrated its viability in commerce and which is when it gained popularity. In the last 5 decades there has been a great increase in demand for this product due to its varied uses. Camphor has a wide variety of topical uses due to its antibacterial, antifungal, and anti-inflammatory properties to treat skin conditions, improve respiratory function, and relieve pain. It is also used for its scent, as an ingredient in cooking (mainly in India), as an embalming fluid, for medicinal purposes, and in religious ceremonies. OAL is a pioneer in manufacturing synthetic camphor and is one of the largest manufacturers of Camphor in the country.

Camphor division produces pharmaceutical grade camphor that is globally accredited by USFDA (United States Food & Drug Administration) and WHO GMP:

The World Health Organization’s (WHO) Good Manufacturing Practice (GMP) is a system for ensuring that products are consistently produced and controlled according to quality standards. It is designed to minimize the risks involved in any pharmaceutical production that cannot be eliminated through testing the final product.

  • Skin Care: It acts as a disinfectant and prevents skin irritations and infections.
  • Hair Care: It stimulates blood flow to the scalp and promotes hair growth.
  • Antioxidant: It is rich in antioxidants which have myriad health benefits.
  • Anti-fungal: It is a powerful anti-fungal and helps to prevent infections especially those that occur in the skin and nails.
  • Stimulant: It stimulates the circulatory system and can help to relieve pain due to arthritis and gout.
  • Anti-neuralgic: It causes blood vessels to constrict and thereby relieves pressure on cranial nerves.
  • Anti-spasmodic: It gives instant relief from cramps and spasms.
  • Relieves nerve disorders: It helps to reduce the impact of nerve disorders, convulsions, epileptic attacks and anxiety
  • Local anaesthetic: It causes the nerves to become numb, and therefore acts as an excellent local anaesthetic

One of the key specialities of us at darkhorsestocks is that we try to present the stocks which are not very common or hardly few people actually know about. Most of the darkhorsestocks ideas are not covered by any of the brokerages or research house by presenting research reports .

Financials Ratio and Analysis

Financials

For Q1FY21

  • Net Sales at Rs 113.26 crore in June 2020 down 46.5%
  • Quarterly Net Profit at Rs. 10.04 crore in June 2020 down 45.86%.
  • EBITDA stands at Rs. 18.89 crore in June 2020 down 48.02%
  • EPS has decreased to Rs. 2.98 in June 2020
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For Year Ended FY20

  • The operating revenue in financial year ‘20 was Rs. 760 crores.
  • Operating EBITDA reported was Rs. 126 crores which grew 10% on a year-on-year basis
  • Operating EBITDA margins stood at 16.63% 
  • Net profit after tax reported was Rs. 86 crores witnessing a growth of 51% year-on-year.
  • Also cash flow from operations stood at Rs. 181 crores owing to improvement in the working capital cycle and better sales realizations.

Effects on Account of Lockdown/Covid-19

Management has said that the company has lost almost 45 days of sales on account of complete lockdown.

The revenue impact in this quarter was approximately Rs. 55 crores to Rs. 60 crores .

However the management has conformed the company is operating back at 90% of pre covid lockdown levels.

Further the management had guided that the company will be growing around 15% on a revenue basis over the next three to four years. 

Also the management is confident that ignoring one quarters lost in sales the sales for the other coming quarters would not be effected and as a result they are expecting the sales in range of 550-560 cr for the remaining part of the year with stable EBIT margins which currently stand at around 17%.

Capex 

In 2021Company is going ahead with close to 60 to 70 crores of CAPEX on existing plants.

In December, 2019 Oriental Aromatics has formed a special purpose vehicle which is called Oriental Aromatics & Sons Limited where the government has given tax benefits in the event of companies making future CAPEX which makes it evident that the company has a robust plan in place over the next 1000 days.

Why 1000 days? 

1000 days is because company doesn’t run its business quarter-to-quarter, it has to be looked at running business for a long-term making it sustainable and CAPEX for the company is divided into a couple of things, one is expansion of existing products, new technologies that the company has developed in R&D which will be brought to fruition within the next 1000 days and also in terms of additional products that OAL may want to add and have business continuity and de-risking.

As of March 2020 the company was in talks with Maharashtra Government for allotment of land in some chemical zone and company hopes in the near future to conclude the acquisition of this land.

Also it is expected that this projected initial CAPEX under this SPV of close to 150 to 200 crores which will lead to over a 3 year period, adding a growth of 300 to 350 crores to the topline. 

At the EBIT margin of 17% and Net Profit Margin of about 11% it should add approximately 11.5Rs to the EPS and at the current valuations of 15P/E about 171Rs to the Stock price over 3 years which is equivalent to 51% growth just from the Capex over 3-4 year period.

Global Sectorial Outlook

The global flavours and fragrances market was valued at US$ 29.8 Billion in 2019. Looking forward, IMARC expects the market to grow at a CAGR of around 5.1% during 2020-2025 reaching a value of US$ 40.6 Billion by 2025. The key end users of the flavours industry include beverages, dairy, confectionary, meat, snacks, healthcare, bakery, etc. On the other hand, some of the key end users of the fragrances industry include cosmetics and toiletries, soap and detergents, household cleaners and air fresheners, etc. Asia Pacific held a dominating share in terms of revenue in the global F&F market. The Asia Pacific Flavours and Fragrances Market attained nearly USD 7.35 billion in 2019. 

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The Indian fragrances and flavours industry is projected to grow exponentially in the coming years due to increasing demand for personal care products, brand awareness, growing demand from the middle class due to rising disposable incomes and products now being available at affordable price points. India has made a significant impact in global fragrance oil markets by producing essential oils of menthol mint, sandal wood, jasmine, tuberose, and spices.

The camphor tablets market was valued at US$ 107 Mn in 2017, and is expected to reach US$ 163 Mn by 2025, expanding at a CAGR of 7.6% from 2017 – 2025.

Indian consumers are moving towards using high end personal care products like hair gels, lotions, skin creams and so on. These products, on an average, use a higher quality of flavours and fragrances than the usual soaps and detergents. Segments like fruit based drinks and air care market are expected to grow at +30% p.a.

Conclusion 

OAL being completely* debt free company has a strong future growth prospects. The company has presence across several different verticals which differentiates the company from others with cyclical businesses. Management is very confident of achieving 15% growth rate over coming years thereby maintaining strong operating/EBITA margins of 17% . 

Also the management has confidently expressed their view of being able to achieve FY 22 revenues more or less similar to that of FY ’20 revenues if all things return to normalcy. Taking that into consideration and Crunching rough number should lead us to assuming that the sales for year ended FY 2022 should be in range of 800+ cr. Thus taking EBITA margin of 17% and modest NPM of 11%  the EBITA comes around 136 cr and NPM at around 88cr. As compared with the peers OAL trades at quiet cheaper valuations which in case if there is expansion in the valuations should give significant upside to the share. Thus from an long term perspective of about 2-3 years OAL is worth exploring.

Please note that above expressed are our own views. Users are requested to take their own decision regarding investments. No member of DARKHORSESTOCKS would be responsible for any loss.

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