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One-off quarter; long-term outlook remains buoyant

Navin Fluorine’s (NFIL) 2QFY23 EBITDA missed our and consensus estimates by 22% and 16%, respectively, on account of i) higher operating expenses driven by lower utilisation of newly commercialised HPP plant, and ii) lumpy CDMO sales and a slight slowdown in domestic specialty sales. Going forward, we believe that with the higher utilisation of the HPP plant, margins should improve considerably. Moreover, recovery in CDMO in 2HFY23 and a new USD 16mn order in FY24 should drive significant growth in CDMO vertical in the near term while ramp-up of newer capacities (MPP and dedicated agrochemical capacity) should boost the specialty chemicals sales in 2HFY23 and FY24, in our view. Although we have cut our FY23 EBITDA/PAT estimates by 14%/21%, we keep our FY24-25 estimates unchanged owing to the buoyant long term outlook across verticals. We maintain BUY with an unchanged Sep’23 TP of INR 5,090 per share as we believe Navin’s long-term contracts along with strong entry barriers offered by its fluorination expertise provide long-term revenue growth visibility.

Sales miss driven by lumpy CDMO sales and a minor slowdown in domestic specialty sales: Navin Fluorine’s (NFIL) 2QFY23 standalone gross profit came in 11% below JMFe and stood at INR 2.05bn (down 3% QoQ, up 14%YoY) as revenue was 16% below JMFe at INR 3.7bn (down 5% QoQ, still up 13% YoY) while gross margin was significantly higher than anticipated at 55.9% (vs. JMFe of 53.0% and 54.5% in 1QFY23). During the quarter, employee expenses were higher at INR 469mn (vs. JMFe of INR 450mn and INR 440mn in 1QFY23). As a result, EBITDA came in 22% below JMFe and stood at INR 900mn (down 10% QoQ still up 8%YoY), and PAT was 31% below JMFe and stood at INR 641mn (down 19% QoQ and up 3% YoY).

EBITDA miss driven by one-off plant operational expenses: Since Navin’s HPP contract sales with Honeywell are reported under its subsidiary, on a consolidated basis, Navin’s 2QFY23 consolidated sales stood at INR 4.2bn (7% below consensus, up 5%/24% QoQ/YoY) and gross profit stood at INR 2.4bn (only 3% below consensus, up 9%/26% QoQ/YoY). However, due to sharp jump in other expenses to INR 845.7mn (vs. INR 654.3 in 1QFY23), EBITDA came in lower at INR 938mn (16% below consensus, down 5% QoQ still up 11% YoY). The company has also highlighted that margins on consolidated basis got impacted on account of partial utilisation of the new HPP plant. Moreover, during the quarter, there was a sharp increase in i) depreciation to INR 176.6mn (vs. INR 123.7mn in 1QFY23) due to plant commissioning, and ii) tax rate to 30.4% (vs. 23.5% in 1QFY23). As a result, 2QFY23 consolidated PAT stood at INR 578mn (29% below consensus, down 22% QoQ and 9% YoY).

Strong export sales growth of 31% QoQ despite CDMO weakness: During 2QFY23, Navin’s export revenue was robust at INR 2.3bn (up 31%/68% QoQ/YoY) on account of a) ramp-up of HPP contract with Honeywell, and b) robust 17% QoQ growth in specialty chemicals exports more than offsetting a drop of 34% QoQ in its CDMO business, which tends to be lumpy.

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