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Contracts to drive growth over next few years

Navin Fluorine International’s (NFIL) Q4FY22 EBITDA was below our estimate due to lower revenues in specialty chemicals and CRAMS. Company won another large contract for a fluoro-molecule, with peak revenues of Rs6bn. The molecule offers opportunity in downstream products as well. Half of the volumes for the fluoromolecule have been contracted, and NFIL can sell the remaining quantities in the market (including captive demand). This is third large contract for NFIL, which increases revenue visibility over FY23E-FY26E. Our concern however is that the company has been investing minimally in driving growth from its existing products, and that incremental revenues are coming from new contracts. CRAMS is the only segment where revenue growth is from non-contracts. Company anticipates opportunities in adjacencies of new platforms and products, while we need to see how the revenues shape here. We cut FY23E EPS by 12.5% on delay in HPP products sale, and increase FY24E EPS by 5.5%. Accordingly, our target price increases to Rs3,750 (from Rs3,550, 40x FY24E EPS). Upgrade to HOLD (from Sell)

* Steady revenue growth across segments. Standalone revenues rose 23% YoY to Rs4bn (+8.6% QoQ), driven by 38% growth in ref-gas, 20% in inorganic fluoride and 21.4% in specialty, while CRAMS revenue growth was lower at 17% despite spillover from the previous quarter. Ref-gas benefited from higher volumes on low base, and price increase; inorganic fluoride benefited from price hikes. Specialty chemicals gained from price increases. Weakness in the AVR business was offset by new products though these products had relatively lower margins. In CRAMS, the company continues to build project pipelines, and is working on debottlenecking CRAMS-3.

* EBITDA margin dipped 270bps QoQ. Gross margin dipped 350bps QoQ to 52.3% due to margin pressure in specialty chemicals while price hikes made margins optically lower. However, EBITDA margin was impacted from: 1) higher investment in human resources as the company is building new capabilities, and 2) power cost. EBITDA rose 13.7% YoY to Rs958mn and EBITDA margin declined 270bps QoQ to 24%. PBT was up 5.9% YoY to Rs982mn while net profit fell 35.2% YoY on one-off gains in base

* Yet another multi-year contract with potential revenues of Rs6bn p.a. NFIL has won another multi-year contract (third such contract in past two years) with potential revenues of Rs6bn p.a. and requires capex of Rs5.4bn. Company has contracted 50% of volumes to the technology partner and plans to sell the remaining in the open market. The product is already available in the market, but NFIL’s technology will be more green and efficient. This product will also find captive demand for manufacture of new products likely to be started in MPP-2. Peak revenues of Rs6bn are likely to be achieved in FY26E.

* Large incremental revenues from contracts. 1) HPP production (supply to Honeywell for HFO) is slated to begin in Jun’22 and reach peak revenues in the next few quarters; 2) MPP-2 will start production in H1FY23 with revenues of Rs2.6bn-2.8bn; 3) We expect agrochemical intermediate revenues of Rs1.6bn in FY24; and 4) the large contract won during the quarter is likely to generate revenues of Rs6bn in FY25/FY26.

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