Margins holding firm; growth story intact
* NFIL’s consolidated sales came in below estimates (down 14.6% yoy). Despite growth in export markets (up 15% yoy) arising from Specialty Chemicals and CRAMS (up 56%/36% yoy), a steep decline in the domestic market limited overall growth.
* EBITDA slipped 12% yoy, but margins remained stable as gross margin expanded 550bps yoy on better revenue mix. However, further margin improvement was arrested by elevated employee costs on gross block expansion (cGMP – 3 plant).
* Management is confident of a strong performance in CRAMS and Specialty Chemicals segments on the back of the solid order book in both segments. NFIL is evaluating scope for capex in Specialty Chemicals and is likely to announce one in a few months.
* We remain upbeat on the stock, considering a strong long-term outlook in the Specialty Chemicals segment, CRAMS improvement and a large order win. We maintain Buy and OW in our EAP, with a revised TP of Rs1925 (28x Sept’22E EPS).
Industrials and Agro drive Specialty gains: Overall, Q1FY21 revenues slipped 14.6% yoy to Rs2.15bn, slightly offset by a strong performance in Specialty Chemicals (+12.8% yoy) and CRAMS (+36% yoy). Despite sales loss of ~Rs120mn due to Covid-19, Specialty Chemicals gained market share in export markets from buoyant demand for Industrial, Agrochemical and Pharmaceuticals intermediates, however, the domestic business remained under pressure due to intermittent Covid-19 lockdowns. The CRAMS segment grew 36% yoy on lower revenue base, yet slipped 37% qoq on adverse end-user demand in export markets. Inorganic Fluorides (down 47% yoy) faced headwinds in export and domestic markets on weak volume offtake in both stainless steel and glass industries. Refrigerants too reported a 41% yoy decline, mainly due to the complete cessation of trade and manufacturing activity in the domestic market along with underlying inventory rationalization in export markets.
Strong growth phase ahead: Positive growth enhancing indicators, including gross block expansion in addition to strong order book in hand in the CRAMS and Specialty segments, should benefit topline in FY21. NFIL is confident of capitalizing on new opportunities in the long term emerging from complex chemistries, including HPP, manufacturing for which shall begin from Q4FY22 and commercialization from FY23. Refrigerant gas trading activity has resumed from June with prices moving upward, which shall aid revenues reeling under pressure from lower offtake from OEMs. Inorganic fluoride shall also bounce back with steel industry gradually operating at optimum levels.
Robust outlook; maintain Buy: Strong outlook in high-margin Specialty Chemicals and CRAMS businesses and big order execution remain the key triggers for the stock. We maintain our Buy rating on the stock, with a revised TP of Rs1,925 from Rs1,850 (28x Sept’22E EPS) and OW in our EAP. Key downside risks: Increasing raw material prices and any delay in stabilization of the CGMP-3 plant.
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