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Misses on margin; Honeywell adds to revenue

Navin Fluorine International’s (NFIL) Q2FY23 revenue / EBITDA missed our estimates by 10% and 24% due to lower revenue in CDMO segment, and higher costs. Honeywell contract added at least Rs800mn in revenue in Q2FY23, and it will likely add another Rs300mn-350mn in next two quarters, in our view. Further, the company is close to commissioning a multipurpose plant (MPP) and a dedicated plant over next two quarters, which is also expected to add to revenue. NFIL believes margin will expand as it was adversely impacted by spot purchases of critical raw materials for Honeywell, which will soon shift to a long-term supplier. Operating leverage will also help as the company ramps up utilisation at new plants. NFIL has announced R-32 capacity addition with capex of Rs800mn and potential revenue of Rs2bn. It plans for more capacity enhancement in HFCs, and likely addition of backward integration including AHF and chloromethane plants. We increase our FY24E EPS estimates by 2.6% factoring-in R-32 revenue. Accordingly, we raise the target price to Rs4,000 (from Rs3,900) with the multiple unchanged at 40x FY24E EPS. Maintain REDUCE. Key risk: higher than expected ramp-up in CDMO.

* Entire QoQ growth was aided by revenue under Honeywell contract. Consolidated revenue rose 23.7% YoY to Rs4.2bn (+5.5% QoQ) driven by 76% growth in HPP segment, which also includes revenue from Honeywell contract (which added at least Rs800mn in Q2FY23, in our view); adjusted for it, underlying HPP revenue was up 9.2% YoY. Specialty chemicals revenue was up 45% YoY (+0.6% QoQ) to Rs1.8bn while CDMO slumped 52% YoY to just Rs390mn. CDMO was impacted by a weak orderbook, which has been a problem historically as well. NFIL has won a contract to supply US$16mn worth of materials in FY24, which should finally help drive growth in CDMO. We believe Honeywell should add another Rs300mn-350mn revenue in next two quarters, and the specialty segment will likely benefit from commissioning of two plants.

* EBITDA margin dips 255bps QoQ. Gross margin expanded by 210bps QoQ to 56.2% despite lower sales for CRAMS. The margin improvement could be due to Honeywell contract. NFIL has guided for further margin expansion as it shifts from buying certain critical raw materials from the spot markets for Honeywell contract to a long-term supplier (whose plant has commissioned). Employee cost and other expenses rose 31% and 44% YoY respectively on commissioning of new plant in Dahej. EBITDA rose 11.5% YoY (fell 5.3% QoQ) to Rs938mn. EBITDA margin will likely normalise with operating leverage coming into play as the company ramps up operations to peak utilisation. Net profit was down 8.6% YoY (22.4% QoQ) to Rs578mn.

* NFIL planning for HFC capacity expansion. NFIL has announced capacity addition in R-32 with capex of Rs800mn. The plant has potential to generate revenue of Rs2bn (4x asset turnover), which looks significantly higher vs SRF. However, management has not disclosed capacity for R-32, and has calculated certain R-32 prices based on its own assumptions. Considering the incomplete information, we will not compare this with SRF capex / asset turnover. NFIL is planning to add certain commodity capex to strengthen its backward integration, which includes: 1) AHF plant (this is required across segments); and 2) chloromethane plant for MDC, chloroform and CTC (these are feedstock for refgas). NFIL plans to add more ref-gas capacity, and is evaluating proposals for other HFCs, and more capacity addition in R-32.

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