I am sure many of you might have observed the improving fundamentals of companies involved in the Camphor manufacturing space. I will try to explain the reason behind the change in fortune of companies in Indian Camphor Industry.
There are 3 publicly listed companies in the Indian camphor industry:
NOTE: THERE IS HARDLY ANY INFORMATION AVAILABLE IN THE ANNUAL REPORT OF THESE 3 COMPANIES AS TO REASON OF TURNAROUND, SO I HAVE TRIED TO DECODE BY CONNECTING THE DOTS.
Indian Camphor Industry
To begin with, let us understand how Camphor is made. Camphor can be produced in 2 ways:
1. Natural Production: Made from the wood of Camphor tree, mostly found in Japan, Taiwan, Vietnam. With the growing known uses of camphor in chemical industries, Japan raised the prices in the late 19th century. This eventually led to the development of synthetic camphor. Camphor made through camphor wood gives a paltry yield.
2. Synthetic camphor: Was developed in the early 20th century. Much cheaper and scalable. Produced from Pine tree which is abundantly available. Gives a yield of about 90%.
Although India has abundant pine tree but the output from India variety is just 17% compared to 80% from the imported variety. This explains the import of turpentine for these Camphor companies.
Production through synthetic route is at a fraction of cost and available abundantly.
Natural camphor price is at least 3x of Synthetic camphor.
Technical grade(93-94% purity)- Used in Puja Pharmaceutical grade(98% purity)- Used in pharma
The industry is asset light, without the use of any technology implying very little barriers of entry. Because of not having the requirement of technology know how there exists a number of smaller players rendering the market highly fragmented.
How is Synthetic Camphor manufactured?
Synthetic Camphor manufacturing process
Examples of Terpene & Resin Products(Source: www.mangalamorganics.com)
Dipentene is obtained as a byproduct in the process of manufacturing Camphor.
Indian Camphor Industry: End Users
Puja: If you are in India, you must be well versed with the use of Camphor in Puja.
Pharma: Camphor is used as a key ingredient for pain relief. Primarily used in 2 forms- Topical(Surface of body parts) & Inhalers
Camphor is a key ingredient in Vicks, Amrutanjan, Moov, Volini, Tiger Balm etc. In numerous Private labeled medicines, Sports injury medications etc
Tyre: used in formulating adhesives to increase the tack, the stickiness of the surface of the adhesive.(Terpene Phenolic Resin)
Paint: Used as a solvent for paints(Dipentene)
Flavors and fragrances & Cosmetics: Key ingredient to prepare the final mix. The requirement is more so in the flavors industry.
Indian Camphor Industry- Key Players
Mangalam Organics Ltd
Incorporated in the year 1981, the company changed its name twice with the latest one in Oct’2013, from ‘Dujodwala Products Ltd’ to ‘Mangalam Organics Ltd’. The company set up it’s manufacturing plant in Kumbhivali, Mumbai in 1996.
Key Products:
Camphor: Key Terpene product
Dipentene: Byproduct in the process
Sodium Acetate: Byproduct in the process
All three products of Mangalam Organics are Terpene products.
As you can see in the image on the top which is the quarterly financials of Mangalam Organics for the past 3 years. You can observe of the change in fortunes twice, first in June 2017 when the EBITDA margin jumped to 11.4% from 1.9% in March 2017 and the second time in June 2018, when the EBITDA further increased by 6.1% from the last quarter. Let me try to correlate with what are the changes happening in the company.
Mangalam Organics had ventured into the OTC product segment in the recent past. Given the kind of competition and non-availability of products in retail stores would not mean much business to boast of. Even for online channels, there are only very limited reviews available.
Since Resins contribute a meager 10% of sales in FY18, not sure if the turnaround can be attributed to this segment. Mangalam Organics had signed the Terpene Phenolic Resin deal signed with French giant DRT in Feb 2018. Its unlikely for the agreement to show the impact on the financials in just one quarter i.e. an EBITDA margin jump of 6.1% in June 2018, given that it takes good amount time to finalize a number of things post signing agreement before the smooth flow of goods.
Also, post the fire in their resin facility in June 2015, Mangalam Organics had significantly reduced the production of resin products. To expand the facility, it takes time.
Kanchi Karpooram Ltd
Incorporated in 1992, Kanchi Karpooram has its manufacturing facility in Kanchipuram, TN. The company manufactures Camphor, its derivatives, Gum rosin, Value Added Resins, and Fortified Rosin.
Very limited or you can say no information is available regarding the details of the business of the company. The company claims that due to the location of the plant and the quality of the product, they are witnessing growth.
Oriental Aromatics Ltd
The company got listed by the acquisition of the larger listed company by the name ‘Camphor and Allied Products’ in 2008. Oriental aromatics is basically a fragrance & flavors manufacturer. Camphor act as a raw material for the company. With the acquisition, Oriental Aromatics have become a fully integrated player.
Fragrance & Flavors are small components(less than 5% of cost) of FMCG products but a very critical part. We are able to identify soaps, hair oil, shampoo by their smell that builds the brand. So once the fragrance is finalized with an FMCG co, the relationship is to continue until the brand exist. About 90% of business comes from existing clients and 10% of the new clients developed in the last 3 years.
While Camphor is more of a process driven sector, Flavors & fragrances are technology driven sector and more secretive. Hence, Flavors & fragrance industry has very high entry barriers and are non-cyclical like their end consumer(FMCG).
Oriental Aromatics are supplier of 80% of Camphor requirement of P&G’s Vicks brands.
Core business is flavor and fragrance. Orange oil or citrus fragrance/flavor is a key raw material for the industry. The requirement of orange oil is more acute in the flavors industry.
Although the company does not list Dipentene as one of its product, I assume the entire Dipentene produced in the camphor manufacturing process is consumed totally as raw material.
What is driving the turnaround?
Although China based supply scenario is definitely a factor pushing the prices of Camphor but that has stabilized at higher levels for more than a couple of years now. Based on my research, it seems another product called as “Dipentene” is the factor driving the growth. Let me explain how.
Florida(US) & Brazil accounts for about 75% of the total global supply of Oranges. Hurricane Irma which devastated Florida in Aug 2017 destroyed at least 60% of Orange crops. Also, the demand for Orange juice is plunging year by year. PLEASE READ THE LINK BELOW TO MAKE MORE SENSE OF THE FACTORS.
So what has Orange production do with these Camphor players?
The left after Orange peel post the Juice extraction is used to make Limonene. Around 77% of Limonene finds usage in cleaning & degreasing products. I am sure you must be aware of the Citrus smell associated with cleanliness in Hotels, Hospitals, Hygiene products. Because of the smell being associated with something i.e. owning a piece of one’s mindshare, it is very difficult to replace them.
Think ‘Oriental aromatics’ or ‘ SH Kelkar’, major players in Flavors & Fragrance industry. Once the flavor or fragrance for an FMCG product is finalized, they remain the supplier until the brand exists, implying brand connect with the smell.
Now, with the acute shortage of Limonene, Dipetene acts as the only replacement available.
All Flavors & Fragrance manufacturers require Limonene/Dipentene for their end products. The requirement is more acute for flavor biz.
Paragraph from 'Mangalam Organics' Annual Report-2017-18
Growing demand for Dipentene
2016 report on shortage of Limonene(http://botavikos.ru/uploads/events/5620b86be7366.pdf)
It appears that Mangalam Organics was able to adopt early to the demand for Dipentene, it was able to grab the market faster than its competitors. Also, given that Dipentene contributes less than 5% of raw material cost of the end product, the pinch wont be significant for its customers. Something similar to graphite electrodes.
Camphene, Isoborneol as well as Dipentene finds its primary usage in Fragrance and flavors industry.
In Kanchi Karpooram expansion plan, these 3 products have the lion’s share of new added capacity.
Kanchi Karpooram expansion plan(source:http://forum.valuepickr.com/t/mangalam-organics-ltd-a-promising-pine-chemistry-story/19956/117)
Will this continue?
Orange juice demand is falling steeply. So is the acreage to grow orange. Implying Dipentene demand will continue to grow. Since very little information is available on the sector and not much awareness is in itself a added positive. Making Dipentene is a very straight forward process without the need to high technical know how. It can be scaled up quite fast. So, need to closely monitor the information flow on this sector. The only point I am not able to connect is if there are similar such price increase for Dipentene in Indian market, since these companies derive most of their sales from domestic market. There is no data point available. Will keep looking.
Now lets look at the other key products of the industry:
Pharma grade camphor: Oriental Aromatics being in the Pharma grade camphor (Supplier of 80% of Camphor requirement of P&G’s Vicks brands) and not into Dipentene has not seen its margins grow in a similar fashion, neither has the end product prices increased.
Some other factors which is leading to general increase in demand for Pharma grade camphor:
1.Increased rate of self medication
2. Growing self-medication is resulting in the adoption of OTC(Over the Counter products which don’t require doctor’s prescription) products (Private label) by large-scale pharmacy chains
3. Decreasing tolerance for pain
4. No side effect since you don’t have to take it orally
5. OTC product don’t require regulatory approvals
Key pointers from Dialwealth's AGM visit
A couple of very good pointers from another blog that talks about structural changes seen in the Indian Camphor industry based on them attending Mangalam Organics AGM.
1. Production of pine trees in China is coming down from where the raw material is derived also labor in China is getting expensive and less people are ready to work in forest due to which China which was net exporter of terpene and resin which is derived from pine trees has now become net importer and due to which industry has now become a level playing field for the companies across the globe he sees this as structural change and see it lasting for many years to come
2. Industry is at a very early stage of growth one major difference between India and China the two country which major consumption of camphor is that in China 98% of camphor is used for hygiene and medical purpose and in India 98% of camphor is used in Pooja and religious purpose.
Source: https://dialwealth.wordpress.com/2018/10/02/mangalam-organics/
By, Shekhar Yadav
Further reading:
Update: 16.02.2020
The price of camphor has fallen from a level of ₹1400 to ₹900. So, the retailers are selling high cost inventory at a new low prices at an loss.