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Macro headwinds to have an adverse short-term impact

* Navin Fluorine (NFIL) reported 29%/28% lower-than-estimated EBITDA/PAT due to subdued performances in the Specialty Chemicals/CDMO businesses QoQ. Gross margin stood at 57.2%, while EBITDA margin dipped 150bp YoY to 20.8%. NFIL lost ~INR1b in revenue in 2Q due to macro headwinds and deferment of some orders. At the normal level, revenue could have been ~INR5.5-5.7b (in line with our est.)

* The Specialty Chemical segment disappointed in 2Q primarily due to the deferment of sales of two molecules from 2Q to 3Q led by production problems in Dahej. Revenue from these is expected to accrue in 3Q. Five new molecules are also likely to be launched in the ensuing quarter by NFIL. Management is confident that the segment is going to be a high-growth one in future.

* There were planned and unplanned shutdowns in the HFO plant in 1Q and the plant has now been stabilized. It is ramping up post-Jul’23. There was slower- than-expected stabilization of the R32 plant, but management expects the same to run at optimal utilization from 3Q onwards. Pricing pressure in Refrigerant gases continued to impact the segment adversely.

* The entire revenue in the CDMO segment was from new molecules with detailed engineering of CGMP4 on track. Sales from a campaign were deferred to 3Q from 2Q due to the last minute change in product specification by the customer. Orders for a couple of large molecules have also been deferred from CY23 to CY24. The segment is anticipated to remain lumpy going forward.

* Given the underperformance in 1HFY24, we cut our revenue/EBITDA/EPS estimates by 14%/19%/27% for FY24 and by 11%/10%/18% for FY25. Subsequently, we expect a revenue/EBITDA/PAT CAGR of 27%/31%/23% over FY23-25. The stock is trading at 34x FY25E EPS of INR99 and 22x FY25E EV/EBITDA. We value the company at 35x FY25E EPS to arrive at our TP of INR3,460. We maintain our Neutral rating on the stock.

Overall miss on estimates; margin contracts sequentially

* NFIL reported revenue of INR4.7b (est. INR5.3b, +13% YoY) in 2QFY24.

* EBITDAM came in at 20.8% (-150bp YoY), with EBITDA at INR983m (est. of INR1.4b, +5% YoY) during the quarter.

* PAT stood at INR606m (est. of INR842m, +5% YoY). Other income was higher as it includes INR153m of income tax refund.

* Adj. PAT stood at INR453m (-22% YoY) in 2QFY24.

* For 1HFY24, revenue was INR9.6b (+18% YoY), EBITDA was at INR2.1b (+10% YoY) and PAT was at INR1.2b (-8% YoY).

* EBITDAM was at 22.1% (-160bp YoY). 1HFY24 EBITDA stood at 30% of our fullyear estimate.

* The Board has declared an interim dividend of INR5/share plus a one-time special dividend of INR3/share to commemorate the centenary birth year of Mr. Arvind Mafatlal.

Segmental highlights

* The HPP business posted a revenue of INR2.4b (+13% YoY)

* The Specialty Chemicals business posted a revenue of INR1.9b (+5% YoY).

* Agro capex to be commissioned in FY24-end

* The CDMO business reported a revenue of INR482m (+24% YoY)

* The “Navin Molecular” brand was launched at the CPHI event in Oct’23

* The revenue mix in 2QFY24 stood at 50% for HPP business (49% in 2QFY23), 10% for CDMO business (9%) and 39% for Specialty Chemicals business (41%)

* Domestic sales were 51% of the total revenue in 2QFY24 while 49% was exports (55% in 2QFY23). Domestic sales from the HPP business stood at 63% and from the Specialty Chemicals business stood at 48%. Exports contributed 100% of the CDMO business revenue.

Valuation and View

* The HPP and the Specialty Chemicals segments would drive robust growth (at 31% CAGR each over FY23-25), with increasing use of fluorine in the Pharma and Agro space, battery chemicals, and performance materials. The company has already identified various opportunities in the abovementioned spaces.

* The stock is trading at 34x FY25E EPS of INR99, with return ratios expected to remain stable at current levels, despite a huge capex (INR8b) over the next two years. We value the company at 35x FY25E EPS to arrive at our TP of INR3,460. We maintain our Neutral rating on the stock.

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