IGI Logo

Pressure on margin on higher OPEX and employee costs

* NFIL reported an EBITDA/PAT that was 14%/8% lower than our estimate. Gross margin stood at 52%, a miss of 500bp, while EBITDA margin declined by 270bp QoQ to 24%.

* Growth in 4QFY22 was driven by strong growth in the high-value business – Specialty Chemicals/CRAMs (up 21%/16% YoY) – led by price hikes, although there was some setback due to weak demand from the ARV market.

* The management is confident of passing on the increased costs to customers over the next couple of quarters as demand from the Agrochemicals segment remains robust in the Specialty Chemicals business. Refgas volumes in the domestic market are seeing strong traction, although exports may be under pressure due to higher logistics costs.

* We assume an EBITDA margin of ~27% over FY23-24, factoring in the commissioning of various projects already underway. We cut our FY23/FY24 EBITDA estimates by 8% each and our EPS estimate by 7%/8% on the back of higher operating expenses and employee costs (retention of existing employees till all projects are completed is crucial for NFIL).

* The approved de-bottlenecking of its cGMP-3 plant in 3QFY22 is progressing as per schedule. NFIL is undertaking a capex of INR5.4b for a Fluoro-Specialty molecule, with commissioning expected in Dec’23. Thus, setting the stage for strong revenue growth till FY26E.

* We expect a revenue/EBITDA/PAT CAGR of 34%/37%/36% over FY22-24, and value the company at 40x FY24 EPS to arrive at our TP of INR3,955. We maintain our Neutral rating owing to limited upside in the stock.

EBITDA misses our estimate; margin declines sequentially

* NFIL reported revenue of INR4b (up 23% YoY and 9% QoQ).

* EBITDAM stood at 24% (lower than our estimate; -270bp QoQ), with EBITDA at INR958m.

* Gross margin stood at 52% (v/s 56% in 3QFY22) – the lowest in the past 10 quarters.

* Adjusted PAT stood at INR788m (up 11% YoY and 14% QoQ), translating into an EPS of INR15.9/share (v/s INR14 in 3QFY22).

* Revenue rose 24% YoY to INR14b in FY22, with EBITDA rising 14% to INR3.6b (as EBITDA margin contracted by 210bp to 25.3%). PAT rose 7% YoY to INR2.7b.

* Other income in 4QFY22 included an interest of INR53m received for refund of excess income tax paid.

* The company declared a final dividend of INR6/share for FY22 (in addition to an interim dividend of INR5).

High-value business leads the show in segmental revenue

* The contribution of the high-value business to total revenue stood at 62% (recovers after it declined in 3Q from 2QFY22 levels), a growth of 19% YoY and 17% QoQ.

* CRAMS revenue stood at INR880m (up 16% YoY and 47% QoQ). The approved debottlenecking of its cGMP-3 plant in 3QFY22 is progressing as per schedule. There has been no management guidance on its cGMP-4 facility as of now.

* Revenue from the Specialty Chemicals segment stood at INR1.6b (up 21% YoY and 5% QoQ). NFIL raised prices to offset higher input costs, although there was some setback because of lower demand from the ARV market in 4QFY22.

* The contribution of the legacy business to total revenue stood at 38%, up a strong 29% YoY, although it fell by 3% QoQ. Revenue from Inorganics Fluorides stood at INR710m (up 20% YoY, but down 14% QoQ), led by its inability to pass on price hikes in the short term and higher energy costs.

* The Refgas business posted healthy numbers, with revenue at INR800m (up 38% YoY and 11% QoQ). Demand from the domestic market remained robust, although exports were impacted due to higher logistics costs

Growth opportunities lie ahead

* The board has approved a capex of INR5.4b for a new Fluoro-Specialty molecule, which is expected to be completed by Dec’23. cGMP-4 could be another potential growth opportunity over the next couple of years. In the Specialty Chemicals segment, NFIL has a strong order pipeline from the Agrochemical, non-Agro, and non-Pharma industries, which should drive growth.

* The Specialty Chemicals and the CRAMS segment will continue to drive robust growth (17-20% CAGR over FY22-24E), with increasing use of fluorine in the Pharma and Agro space. Long lasting relationships with innovators in Europe is resulting in higher inquires.

* The management expects MPP to hit peak annual revenue in the next three years once it is commissioned by CY22-end. The same for other projects may be achieved within two years of commissioning.

* The stock is trading at 47x/38x FY23E/FY24E EPS of INR80/INR99, with an expected improvement in return ratios to ~21% (+400bp v/s FY21), despite a huge capex (INR6b over the next two years). We value the company at 40x FY24E EPS to arrive at our TP of INR3, 955. We maintain our Neutral rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer