Navin Fluorine International (NFIL) EBITDA Decline at T2FY22 of 10.6% YoY Shows It Was Walking a Tightrope on Revenue Growth with Limited Capacity in Specialty Chemicals and Revenue volatiles from CRAMS. NFIL is also catching up with its peers and accelerating its investments in capabilities by adding a technology team and expanding R&D. The company is in an ideal position to monetize fluoridation opportunities, but the evolution would be gradual compared to impatient market expectations. An acceleration in turnover is only expected after the stabilization of the HPP and MPP-2 plants, which we believe could take at least 3 to 4 quarters (S2FY23). Despite higher investments, NFIL was able to maintain its margins, and higher realization in refrigerant gas should offset any potential cost headwinds in specialty chemicals at S2FY22 in our view. We reduced our FY22E EPS by 10% and maintained our FY23E estimates. We are improving NFIL to REDUCE (from Sell) with an unchanged target price of Rs 3,100 (40x FY23E EPS) as valuations (P / E) remain unattractive at 45x FY23E and 39xFY24E.

  • Unimpressive revenue growth. Own-source revenue grew 5.4% yoy to 3.2 billion rupees, (+ 3.4% qoq) driven by 32.7% yoy growth in the inorganic fluoride segment at 650 million rupees, and specialty chemicals revenue growth of 19.6% year-on-year (down 8.3% quarter-on-quarter) to 1.22 billion rupees. CRAMS revenue fell 17.2% yoy to Rs820mn on a high basis, and refrigerant gas revenue fell 5.2% yoy to Rs550mn. NFIL forecast CRAMS revenue execution rate for FY22 to remain stable at US $ 10 million, while refrigerant gas is expected to benefit from a hardening of achievements. Efforts to develop new products in specialty chemicals continue, and the new MPP plant is expected to help increase revenues, which will not begin until fiscal year 23. In the short term, NFIL has initiated a higher prices to pass on higher input costs in specialty chemicals, but this may not increase the margin. The inorganic fluoride segment benefited from strong traction in the underlying products as efforts on new product launches continue.
  • Stable gross margin. Gross margin increased 50 basis points QoQ to 55.4%, but was low year-on-year due to the lower contribution from CRAMS. EBITDA fell 10.6% yoy to 835 million rupees due to significant wage cost inflation (+ 39% yoy) on capacity building in the areas of technology and construction. R&D, as well as retention benefits offered to key business leaders. Other expenses increased by 15.4% year-on-year due to higher transportation costs and one-time consulting fees (Rs50mn). The EBITDA margin was 25.8%, up 90 basis points for the quarter. Net profit fell 7.8% year-on-year to Rs621mn. The company’s CWIP stood at Rs 3.3 billion and it believes it is on track to start the HPP and MPP factories by the first quarter of fiscal 23.
  • Invest in capacity. NFIL has invested in its technology development team, which is responsible for taking the plant from the laboratory to the commercial scale. The technology team is a whole new addition for the company. He hired 50 people into the team who should be helpful in transferring knowledge from the HPP factory to the buyer. It expands its R&D team from 120 to 200 eventually, and has plans for a new R&D facility probably in Mumbai, which will focus on specialty chemicals and new initiatives. NFIL is expanding its business development team, particularly in the United States, to generate revenue from CRAMS.
  • Other highlights. 1) Capital expenditure for the new HPP and MPP-2 projects increased as planned. 2) The company plans to decongest the CRAMS cGMP-3 plant, which is expected to take six months to complete; cGMP-4 would follow as the pipeline of orders grows. The execution of the new plant would take 12 to 15 months. 3) Revenues from new initiatives will take at least 2-3 years as they have a long approval and audit cycle. 4) Repeat orders in CRAMS are generated by the same products, as well as by the addition of new products by the same customer. He has seen one product enter phase 3 while a few reach the advanced stage of phase 2 where the material requirements are higher. 5) The company plans to take advantage of rising prices to pass through raw material inflation in specialty chemicals. 6) Negotiation of the price of refrigerant gas has started and profits should appear as early as the next quarter. 7) The cost of personnel will remain at 11-12% of sales for the next few years.

Shares of Navin Fluorine International Limited were last traded on BSE at Rs. 3,350.55 from the previous close of Rs. 3,365.15. The total number of shares traded during the day was 44,925 in more than 5,036 transactions.

The action hit an intraday high of Rs. 3462.00 and an intraday low of 3248.60. The net turnover during the day was Rs. 148,511,114.00.

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