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Sell Navin Fluorine International Ltd For Target Rs.3,100

Steady performance, superior valuation

Navin Fluorine International’s (NFIL) Q1FY22 EBITDA grew 50% YoY on a low base, but dipped 7.4% QoQ to Rs780mn (I-Sec: Rs903mn) on higher expenses. CRAMS outlook remains strong with good growth visibility for FY22E with rising enquires helping build the pipeline beyond. Margins are impacted from lower domestic ref-gas sales and RM price pressures in specialty chemicals, where NFIL has multi-year price contracts. The RM price pressure therefore is negatively surprising as NFIL is committing long-term contracts without back-to-back RM supply.

Company remains persistent in building new application products, and investing in people to help absorb technology from global partners. NFIL expects to make a new product capex announcement in 18 months, which is ambitious in our view. We have updated our model to factor the annual report and slightly tweaked our estimates. Our target price is Rs3,100 (earlier: Rs3,073) implying 40x FY23E EPS. Downgrade to SELL (from Reduce) on elevated P/E valuations of 47x FY23E and P/S of 8.9x FY23E.

* Low base drives YoY revenue growth. Standalone revenues rose 53% YoY to Rs3.1bn, (down 3% QoQ) driven by CRAMS revenue rise of 97% to Rs0.67bn, and specialty chemicals revenue growth of 37% to Rs1.3bn. Ref-gas and inorganic revenues rose 28% / 100% YoY to Rs590mn and Rs560mn. Ref-gas sales were impacted by weaker demand in India and lower prices for exports.

Inorganic fluoride benefited from strong demand from steel and glass industries. Domestic demand for specialty chemicals was hurt due to low demand from pharma industry, while exports benefited from higher demand from agrochemicals and industrials. CRAMS was negatively impacted by delay in revenue recognition on one project, which has been pushed to Q2FY22.

* Gross margin improves, but EBITDA hit on investments. Gross margin rose 220bps QoQ to 54.9%, but was still low YoY on lower domestic ref-gas sales, and delay in passthrough of RM inflation affecting one key product in specialty chemicals. EBITDA dipped 7.4% QoQ to Rs780mn and margins shrunk 120bps to 24.8% due to higher employee costs (on one-time payouts and hiring of employees to drive new business) and other expenses. Net profit fell 54% QoQ to Rs564mn on absence of one-off gains of Q4FY22.

* CRAMS business outlook strong. NFIL continues to see good traction in its CRAMS business. Though the segmental orderbook is not as strong as in FY21, it remains confident of adding same incremental revenues in FY22 as in the previous year. Enquires have increased sharply in CRAMS, which provides strong visibility on sustained growth beyond FY22. NFIL plans debottlenecking of cGMP-3 plant in next few quarters and is considering a cGMP-4 plant as demand visibility in the order pipeline increases.

NFIL has seen demand from three customer segments in CRAMS: 1) projects that are scaling-up fast, where it is seeing rise in repeat orders for servicing; 2) mid-sized biotech companies in the US where NFIL has added new customers after persistent efforts over last few years; and 3) longstanding relationships with large innovators based out of Europe, where NFIL traction has been good.

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