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Demanding valuation caps upside

Navin Fluorine International’s (NFIL) Q4FY21 EBITDA grew 23% YoY on low base and steady performance in CRAMS and specialty chemicals. It expects specialty chemicals revenue growth in mid-teens for FY22. CRAMS will continue to grow albeit at a lower magnitude; it is sitting on projects for 25 molecules in phase 1 & 2.

Gross profit margins have been range bound despite significant improvement in contribution from high value business, which is key to watch. HPP and MPP plants could be delayed by one-quarter on second wave of covid. Company remains excited on new opportunities and plans for a new innovation centre outside India. We have cut EPS on deconsolidation of CCVL, but raise valuation multiple to 40x (from 30x) on rising opportunities and target price to Rs3,073 (from Rs2,338). Maintain REDUCE.

* Low base drives revenue growth. Standalone revenue rose 22.3% YoY to Rs3.2bn driven by CRAMS revenue rise of 39% to Rs0.75bn, and specialty chemicals revenue growth of 26% to Rs1.3bn. Ref-gas and inorganic revenues rose 3.6% / 15.7% YoY to Rs580mn and Rs590mn, respectively. Specialty chemicals revenue to grow in mid-teens, which will be driven by agro-chemicals in FY22 and CRAMS will continue to grow. It has 25 molecules in initial stages of product development in CRAMS, which have come from the existing customers (repeat business) and provide good visibility for revenue growth.

* Gross margin hurt from inferior mix. Gross margin dipped 150bps YoY to 52.7% and was impacted from 1) lower sales of R-22 in domestic market and non-emissive use, which have higher realisations; and 2) few high margin product sales in specialty chemicals was lower due to logistical issues. EBITDA rose 25% YoY to Rs842mn and EBITDA margin came in at 26% (up 60bps YoY). Consolidated revenue / EBITDA and PBT grew 21.6% / 22.5% and 51% YoY. It had tax reversal in Q4FY20 and exceptional gains in Q4FY21 and therefore, net profit is not comparable.

* Steady revenue growth outlook for FY22. NFIL has guided for a mid-teens growth in specialty chemicals for FY22 largely driven by debottlenecking of few capacities; new MPP plant should help growth only from FY23. CRAMS should see continued growth; magnitude of growth may be small, but it remains confident of sustained growth over the years as it continues to build on capabilities and relationships. NFIL is planning for an innovation centre outside India for new product development and applications.

* Other highlights. 1) Impact from rise in input cost is minimum and limited to solvents, margin compression is on inferior sale mix; 2) quality of business improving from being second to fourth supplier; it is working on molecule where either it is a primary supplier; or second supplier with first in eastern market; 3) NFIL is not excited on import substitution market as pricing needs to be matched to Chinese supplier, but it is focused in innovative products for exports market. Export agrochemicals intermediate market looks strong; and 4) it has been working on partnerships with chemical companies to have deeper understanding. It is seeking board approval for small capex in new product.

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