Robust show in CRAMS and specialty business; margins surge
* NFIL’s consolidated sales beat estimates (up 17% yoy), primarily driven by an impressive performance in the CRAMS segment (up ~2x yoy) and complemented by healthy growth in both exports and domestic business for Specialty Chemicals (up 8.5% yoy).
* EBITDA rose 33% yoy with margin expansion of 350bps on better operating leverage and higher contribution from CRAMS and Specialty chemical segments. Cash position has improved significantly to ~Rs4.1bn and the board has declared a dividend of Rs5/share.
* Management is confident about the strong performance in CRAMS and Specialty Chemicals on the back of the solid order book. NFIL is evaluating scope for capex in R-Gas and Hexafluoro chemistry, in addition to debottlenecking in the CRAMS segment.
* We remain upbeat on the stock due to better prospects from the strong order flow in CRAMS, solid outlook in the Speciality Chemicals business and renewed visibility on better margins. We revise our TP to Rs2,350 (28x FY23E EPS) from Rs1,925 earlier, with OW in our EAP.
CRAMS momentum for H1FY21 aspirational for long term; deal to realign interests: CRAMS delivered an impressive performance for Q2 (~2x yoy), driven by a strong order flow from US and European clients, and management aims to maintain the H1FY21 run rate for coming periods. Similarly, Specialty Chemicals (up 8.5% yoy) delivered growth in exports and domestic markets (up 15%/6% yoy, respectively), on account of demand from Lifescience and Cropscience, although Industrial demand remained weak and is expected to come back only by next year. NFIL is working with two new clients (by FY22E) in Inorganic Fluorides (down 6% yoy), which continues to face weak industrial activity. On the R-Gas front (down 17% yoy), supply chain issues persisted for export markets, and pricing pressures from Chinese products acted as tailwinds for the overall performance. NFIL’s 49% stake (in Convergence) buyout by Piramal is more toward realignment of long-term interests between the two entities and NFIL aims to maintain access to certain chemistries (Hexafluoro) in perpetuity.
Digitization and asset optimization to yield incremental capacity; HPP remains on track: NFIL aims to incorporate industry 4.0 at Dahej plants (cGMP-3) for automation, which should provide additional capacities and enhance yields. It is also working on few facilities that should come online by next year as MPP/Standalone units. The HPP segment remains on track to start by Q4FY22. Optimum utilization of cGMP-3 should certainly pave way for successive plants. Management expects the Speciality business to register similar growth in FY21 as last year, and anticipates some drag on margins once the legacy business bounces back in the near-to-medium term. In the long term, high-value segments and HPP should help deliver margins similar to that achieved in H1FY21, or even better.
Robust outlook; maintain Buy: We remain upbeat on the stock based on improving prospects, led by a strong order flow in the CRAMS business, solid outlook in the Speciality Chemicals business and renewed visibility on better margins. We revise our TP by rolling forward to FY23E to arrive at Rs2,350 (28x FY23E EPS) from Rs1,925 earlier, with 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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