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In Q1FY25, Navin Fluorine (Navin) experienced a subdued sequential performance, with revenues and EBITDA declining by 13.0% and 8.8%, respectively. Nonetheless, gross margins improved 600bps QoQ leading to operating margin expansion by 90bps QoQ, reaching 19.2%. Q1 revenue was primarily driven by higher contribution from HPP segment as HFO operations stabilized and new R32 capacity boosted sales. However, Speciality segment faced pressure, with 37.0% QoQ revenue decline due to inventory rationalization by customers. CDMO revenues surged 68.8% QoQ. Multiple capexes are getting commissioned in FY25E including Rs5.4bn capex for a agrochemical molecule, capex towards developing completely new capability at Surat, R32 capex, and Rs4.5bn HF capex. Management reiterated strong recovery 2HFY25E and remained confident of overall business improvement, supported by strong CDMO order book, an extensive pipeline, and revenues from newly commissioned capexes in FY25E. Currently, we have kept our estimates and target price unchanged at Rs3,656 while downgrade our rating to REDUCE from ADD due to recent surge in stock price.

HPP, CDMO delivers while Speciality falters in Q1

In Q1, Specialty revenues declined 37.0% QoQ, while HPP revenues degrew 5.4%, and CDMO revenues surged 68.8% QoQ. HPP revenues jumped by 66.3% YoY, while CDMOand Specialty revenues fell 12.9% and 29.6% respectively. Decline in Specialty revenues is attributed to global majors rationalizing inventory levels. In contrast, HPP segment saw improved performance due to stabilized HFO operations and increased demand for R32. In CDMO, strategy to focus on late-stage commercial molecules is yielding positive results with major pharma customers.

Capexes to drive future growth

Navin's agro-specialty project, with a capex of Rs5.4bn, is set to begin commercial production by September, with firm orders secured for FY25E. Rs4.5bn AHF project will augment Dahej capacity by 40,000MT to meet rising demand. Phase one of Rs2.88bn CGMP IV capex is on track for completion by the end-2025. Rs840mn capex for expanding R32 capacity by 4,500MT is expected by Feb-2025 and Rs300mn capex for new capabilities in Surat will be commissioned in Q2FY25E. These multiple capexes would be ramped up from FY26E onwards providing growth visibility. Fresh capex is likely to be announced by mid-2025 once cashflows commence from the commissioned ones.

Subdued 1H, recovery in 2HFY25E

Navin anticipates a stronger 2H, with improving margins as the market stabilizes and destocking phase is finished. Newly commissioned capexes shall also start contributing from 2HFY25E and the company is focusing on generating cashflows to strengthen its balance sheet. Considering optimistic growth coupled with margin expansion, the stock is still trading at higher valuations at 50.5x/34.0x FY25E/FY26E EPS of Rs74.7/110.8. Currently, we have retained our estimates while downgrade the stock from ADD to REDUCE due to surge in stock price, with a TP of Rs3,656.

Risks – Strong recovery in agrochem, better than expected margin expansion

Valuations

Considering optimistic growth coupled with margin expansion, the stock is still trading at higher valuations at 50.5x/34.0x FY25E/FY26E EPS of Rs74.7/110.8. Currently, we have retained our estimates while downgrade the stock from ADD to REDUCE due to surge in stock price, with a TP of Rs3,656.

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