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Raw material price inflation to weigh on margins

* Navin Fluorine (NFIL) reported a marginal miss on revenues (-5% est.), although EBITDA was 11% below our estimates, weighed by higher other expenditure. Thus, despite gross margin expansion of 200bps QoQ to 55%, the EBITDA margin contracted 120bps QoQ to 24.8%.

* The management has highlighted that the gross margin is likely to be under pressure as one of the key raw materials saw a significant price increase in 1QFY22 – which is likely to continue for another quarter. Furthermore, a large mineral mine was closed down due to labor issues and is expected to resume operations by the end of the year.

* Thus, expect raw material price inflation to continue till the end of CY21, with customers absorbing the increase in costs as per varied contracts (from 3Q–4QFY22). Our estimates were already in line with the guidance and we build in an EBITDA margin of 27–28% (flat v/s FY21) for FY22–24 (in line with NFIL’s guidance).

* That said, a quicker ramp-up in new announced projects such as a highperformance product (commissioning by 4QFY22) and the multi-purpose plant (commissioning by 1HFY23) presents a potential upside risk to our assumption.

* Furthermore, NFIL started manufacturing two new molecules from its Surat facility, and the company is also working on a strategy to debottleneck the CGMP3 facility for further growth (plans to take it to the board by the end of the next quarter) – which, if approved, should be completed within six months.

* Considering all of the above, we expect a revenue/EBITDA/PAT CAGR of 28– 31% over FY21–24E. We value the company at 40x Sep’23 EPS to arrive at Target Price of INR4,040. We maintain Neutral due to a limited upside on the stock.

Miss on EBITDA due to higher other expenditure

* Revenue came in at INR3.1b (+53% YoY; -3% QoQ) – a marginal miss of 5% due to lower-than-expected revenue in CRAMS and the inorganic business.

* EBITDA reported a miss of 11% to INR780m (+50% YoY; -7% QoQ) on higher other expenditure. Employee costs were higher on the account of yearly hikes and bonuses, the induction of new employees on the technology and R&D side, and one-time retention bonuses paid to some key employees. Thus, ~60% of the INR90m increase QoQ was a one-time expense during the quarter.

* The gross margin saw expansion of 200bps QoQ to 55% in 1QFY22.

* The EBITDA margin stood at 24.8% (a contraction of 60bps YoY /120bps QoQ).

* PAT stood at INR564m (+9% YoY; -20% QoQ), with the tax rate at 24.1%.

Segmental revenue snapshot for the quarter

* CRAMS revenue was 12% lower than estimated at INR670m (-12% QoQ) as one of the projects was delayed by a quarter (to 2QFY22). However, NFIL added new customers during the quarter (mid-sized biopharma companies primarily in the US).

* Specialty Chemicals revenue was in line with est. at INR1,330m. Growth was driven by the new product mix and market share gains (exports increased to 47% of segmental revenues).

* Refgas revenue was in line with est. at INR590m. The international markets witnessed good volume growth; service demand improved despite COVIDrelated restrictions. However, prices in the international markets are still subdued, impacting segmental margins.

* Inorganic Fluoride revenue stood at INR560m (est. -8%). However, there was good traction from newer end-use segments in this category.

Valuation and view – huge growth opportunities ahead

* The Specialty Chemicals and CRAMs segments would continue to drive robust growth (18–20%), with the increasing use of fluorine in the Pharma and Agrochemicals spaces. Long-standing relationships with innovators in Europe are also resulting in higher inquiries. For FY22, NFIL’s priority is to ensure a certain revenue run-rate every quarter (as the order book and inquiries are stronger v/s FY21).

* Going forward, NFIL intends to leverage its R&D capabilities and deep fluorination expertise to partner with global companies, thus helping it grow further. It intends to launch a strong product pipeline over the next 2–3 years and scale approved molecules from the pilot and laboratory stages. Also, some of the MPP molecules would be sold (in smaller quantities) from the Surat facility.

* The company is also working with a large consulting firm to synergize specialty chemicals (pharma) and CRAMS. CGMP4 could be another potential growth opportunity over the next couple of years – however, it would be considered only after debottlenecking has happened at the CGMP3 facility.

* The company plans to develop new molecules in the HPP segment for various other players. It seeks to offer a full range of products in this category.

* The stock is trading at 36x FY23E EPS of INR96 and 27x FY23E EV/EBITDA, with expected improvement in return ratios to ~23% (+600bps v/s FY21) – despite huge capex (INR7.3b over the next three years). We value the company at 40x FY23E EPS to arrive at TP of INR4,040. Maintain Neutral.

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