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Revenue growth still some time away

Navin Fluorine International’s (NFIL) Q2FY22 EBITDA dip of 10.6% YoY shows it was walking a tight rope on revenue growth with limited capacity in specialty chemicals, and volatile CRAMS revenue. NFIL is also catching up with peers and is accelerating investment in capabilities by adding a technology team and expanding R&D. Company is in a sweet spot to monetise fluorination opportunities, but the evolution would be gradual compared to impatient market expectations. Acceleration in revenues is expected only after stabilisation of HPP and MPP-2 plants, which we believe could take at least 3-4 quarters (H2FY23). Despite higher investments, NFIL has been able to maintain margins, and higher realisation in ref-gas should offset any potential cost headwinds in specialty chemicals in H2FY22 in our view. We have cut our FY22E EPS by 10% and maintained FY23E estimates. We upgrade NFIL to REDUCE (from Sell) with an unchanged target price of Rs3,100 (40x FY23E EPS) as valuations (P/E) remain unattractive at 45x FY23E and 39xFY24E.

* Unimpressive revenue growth. Standalone revenues rose 5.4% YoY to Rs3.2bn, (+3.4% QoQ) driven by 32.7% YoY growth in inorganic fluoride segment to Rs650mn, and specialty chemical revenue growth of 19.6% YoY (down 8.3% QoQ) to Rs1.22bn. CRAMS revenue fell 17.2% YoY to Rs820mn on high base, and ref-gas revenue declined 5.2% YoY to Rs550mn. NFIL has guided for FY22 CRAMS revenue run-rate to remain stable at U$10mn, while ref-gas should benefit from hardening of realisations. Efforts to drive new products in specialty chemicals continue, and new MPP plant should help expand revenues, which will start only from FY23. In the near term, NFIL has initiated price hike to pass on rise in input costs in specialty chemicals, but it may not be margin-accretive. Inorganic fluoride segment benefited from strong traction in underlying products as efforts on new product introductions continue.

* Gross margin stable. Gross margin rose 50bps QoQ to 55.4%, but was low YoY on lower contribution from CRAMS. EBITDA dipped 10.6% YoY to Rs835mn due to significant inflation in employee cost (+39% YoY) on building capabilities across technology and R&D, as well as retention benefits offered to key business people. Other expenses were up 15.4% YoY due to higher freight cost, and one-off consultancy fees (Rs50mn). EBITDA margin stood at 25.8%, up 90bps QoQ. Net profit declined 7.8% YoY to Rs621mn. Company’s CWIP stood at Rs3.3bn, and it believes it is on track to commence HPP and MPP plants by Q1FY23.

* Investing in capabilities. NFIL has been investing in its technology development team, which is responsible to take the plant from lab to commercial scale. The technology team is a completely new addition for the company. It has hired 50 people in the team who should come handy during HPP plant knowledge transfer from buyer. It is expanding its R&D team from 120 to 200 eventually, and has plans for a new R&D facility likely in Mumbai, which will focus on specialty chemicals and new initiatives. NFIL is expanding its business development team, particularly in the US, to drive CRAMS revenue.

* Other highlights.

1) Capex for new projects in HPP and MPP-2 has been progressing on expected lines.

2) Company plans debottlenecking in CRAMS cGMP-3 plant, which should take six months to execute; cGMP-4 would follow as the order pipeline increases. New plant execution would take 12-15 months.

3) Revenue from the new initiatives will take at least 2-3 years as they have long approval and audit cycle.

4) Repeat order in CRAMS is driven from same products, and also new product addition from same customer. It has seen one product entering phase-3 while a few are reaching advance stage in phase-2 where material requirement is higher.

5) Company plans to take price hike to pass on raw material inflation in specialty chemicals.

6) Ref-gas price negotiation has started and the benefit should flow from next quarter. 7) Employee cost will remain at 11-12% of sales for next few years.

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