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Separate CEOs for all business units eliminates execution risk

Navin Fluorine’s (NFIL) 1QFY23 EBITDA missed our and consensus estimates by 2% and 5%, respectively, on account of lower exports despite EBITDA margin expansion. For Navin, 1Q tends be the weakest, as has been in the case in the past. We believe the sharp jump in gross margin despite the challenging environment highlights the company’s ability to pass on the hike in input costs fairly quickly. Moreover, jump in employee expenses has been more than offset by decline in other expenses (owing to lower freight costs), which aided EBITDA margin expansion. The company’s decision to assign three operating CEOs for three business units have eliminated the execution and key man risk to a large extent. We keep our estimates largely unchanged and maintain BUY with a revised Sep’23 TP of INR 5,090 (from Mar’23 TP of INR 4,555 earlier) as we believe Navin’s long-term contracts along with strong entry barriers offered by its fluorination expertise provide long-term revenue growth visibility

Marginal EBITDA miss on JMFe led by lower exports: Navin Fluorine (NFIL)’s 1QFY23 standalone gross profit was 3% below JMFe and stood at INR 2.1bn (up 1%/23% QoQ/YoY) as revenue was 6%/10% below JMFe/consensus at INR 3.9bn (down 3% QoQ, still up 23% YoY) while gross margin was significantly higher than anticipated at 54.5% (vs. JMFe of 52.8% and 52.3% in 4QFY22). During the quarter, other expenses was lower at INR 671mn (vs. JMFe of INR 750mn and INR 733mn in 4QFY22). As a result, EBITDA came in 2%/5% below JMFe/consensus and stood at INR 999mn (up 4%/28% QoQ/YoY). Further, on account of higher-than-anticipated other income of INR 142mn (vs. JMFe of INR 120mn and INR 141mn in 4QFY22), PAT was in line with JMFe (2% ahead of consensus) and stood at INR 790mn (flat QoQ and up 40% YoY).

Domestic business revenue ~5% ahead of expectation: During 1QFY23, Navin’s domestic revenue was 5% ahead of JMFe and stood at INR 2.1bn (up 12%/35% QoQ/YoY). CRAMS revenue was ~18% above JMFe and stood at INR 590mn (down 33%/12% QoQ/YoY). CRAMS business tends to be lumpy. CRAMS cGMP3 plant remains on track to be commissioned in 3QFY23. Specialty chemicals was 12% below JMFe and stood at INR 1.76bn (still up 11%/32% QoQ/YoY). Jump in specialty chemicals was on account of strong domestic sales. Navin’s combined inorganic fluorides and ref gas sales stood at INR 1.5bn (up 1%/33% QoQ/YoY), benefitting from both higher volumes and better pricing. Trial supplies to Honeywell have commenced in beginning of Jul’23 and commercial supplies would start in 2QFY23. Moreover, the board has approved a debottlenecking capex of INR 800mn for a new molecule in the HPP business unit in Surat. As per our understanding, this new molecule is likely to be in the inorganic fluoride unit given Honeywell operations are out of Dahej.

Estimates largely unchanged – maintain BUY: The management continues to be optimistic of strong recovery in CDMO (erstwhile CRAMS) in 2HFY23 owing to a strong pipeline. As a result, we keep our estimates largely unchanged. We maintain BUY with a revised Sep’23 TP of INR 5,090 (from Mar’23 TP of INR 4,555 earlier as we continue to believe that Navin’s long-term contracts provide long-term earnings visibility (CRAMS business poised for strong growth and Cracking the HPP contract code).

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