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Focus remains on upgrading its Fluorination capabilities

* NFIL reported an EBITDA/PAT that was 15%/8% lower than our estimate. Gross margin stood in line at 55%, while EBITDA margin expanded by 200bp QoQ to 26%.

* Growth in 1QFY23 was led by strong growth in the High Performance Products (HPP)/Specialty Chemicals businesses (up 33%/32% YoY), driven by higher volumes, greater pricing power, and strong partnerships, which resulted in repeat orders from customers.

* The company implemented a new organizational structure with three separate business units led by three operating CEOs. It has appointed Mr. Partha Roy Chowdhury as CEO of the HPP business vertical. Trial supplies to Honeywell have commenced, with commercial supplies to start shortly

* We assume an EBITDA margin of 27-28% over FY23-24, factoring in commissioning of various projects already underway. We raise our FY24 EBITDA/EPS estimate by 9% each on the back of new capex being announced, in addition to the already announced capex. Thus, providing greater revenue and earnings visibility to the company.

* We expect a revenue/EBITDA/PAT CAGR of 37%/43%/42% over FY22-24, and value the company at 40x FY24 EPS to arrive at our TP of INR4,324. We maintain our Neutral rating owing to the limited upside in the stock.

EBITDA misses our estimate; sequential expansion in margin

* NFIL reported a revenue of INR3.9b (up 23% YoY, but down 3% QoQ).

* EBITDA margin stood at 25.8% (up 100bp YoY and 180bp QoQ), with EBITDA at INR1b.

* Gross margin stood at 54.5% (v/s 52.3% in 4QFY22).

* Reported PAT stood at INR790m (up 40% YoY, flat QoQ), translating into an EPS of INR16/share (v/s INR15.9 in 4QFY22).

* Other income in 1QFY23 included interest of INR9m accrued on additional income tax paid.

* NFIL has implemented a new organizational structure with three business units led by three operating CEOs.

* The HPP business contains Refrigerant Gases, Inorganic Fluorides, and HPP, while the CDMO business contains CRAMs. The third business vertical is the Specialty Chemicals business.

Specialty Chemicals business leads the show in segmental revenue

* The HPP business posted an in line revenue of INR1.5b (up 33% YoY), driven by higher volumes as well as strong pricing power.

* The manufacturing plant for Honeywell International at Dahej was inaugurated on 12th Jul’22 and revenue from the same will start flowing in from 2QFY23.

* A debottlenecking capex of INR800m has been approved by the board for a new molecule in the HPP business unit in Surat.

* The Specialty Chemicals business posted an in line revenue of INR1.8b (up 32% YoY and 11% QoQ) in 1QFY23, backed by strong partnerships and repeat orders from customers.

* The pipeline remains strong given the growth opportunities, especially in Agrochemicals.

* The CDMO business reported weak numbers in 1QFY23, with a revenue of INR590m (34% lower than our estimate, down 12% YoY and 33% QoQ).

* The management’s focus remains on expanding its project pipeline and further diversifying its customer base, with capacity expansion at its c-GMP-3 plant on track to be commissioned in 3QFY23.

* The revenue mix in 1QFY23 stood at 39%/15%/45% for the HPP/CDMO/ Specialty Chemicals business (v/s 38%/22%/40% in 4QFY22).

* Domestic sales constituted 54% of total revenue in 1QFY23, while the rest was exports (51% in 4QFY22). Domestic sales from the HPP/Specialty Chemicals business stood at 78%/52%. Exports from the CDMO business constituted 100% of revenue.

Valuation and view

* The board has approved a debottlenecking capex of INR800m for a new molecule in HPP, which is expected to be completed by Jul’23 (revenue potential of INR1.5b). cGMP-3 debottlenecking is to be completed in 3QFY23. The business case for cGMP-4 is being prepared to take to the board for approval, which is a potential growth opportunity.

* The Specialty Chemicals and the CDMO businesses will continue to drive robust growth (17-20% CAGR over FY22-24E), with increasing use of fluorine in the Pharma and Agro space.

* The management expects MPP to hit peak annual revenue in the next three years. The plant will be commissioned in phases from 2QFY23. The same for other projects may be achieved within two years of commissioning.

* The stock is trading at 53x/39x FY23E/FY24E EPS of INR80/INR108, with an expected improvement in return ratios to 19-22% (up 600bp from FY21 levels), despite a huge capex (INR6.8b over the next two years). We value NFIL at 40x FY24E EPS to arrive at our TP of INR4,324. We maintain our Neutral rating.

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