PL Stock Report: Navin Fluorine International (NFIL IN) - Q2FY24 Result Update – HPP & Specialty business key growth drivers - Upgrade to BUY

Navin Fluorine International (NFIL IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs3,430 | TP: Rs4,007

Q2FY24 Result Update – HPP & Specialty business key growth drivers

Quick Pointers:

§ Adjusting for Rs 1bn, sales deferment, topline would have been Rs 5.5-5.7bn.

§ EBITDA margin drop to 20.8%, given lower operating leverage & one-off expense of Rs60mn.

Navin Fluorine International (NFIL) reported better performance on YoY basis, led by HPP & specialty chemicals business. CDMO dragged performance for the quarter, however it is expected to improve sequentially going ahead. We believe, HPP and Specialty Chemicals segments will drive robust growth (at 28-30% CAGR over FY23-26), with increasing use of fluorine in the Pharma and Agro space, battery chemicals and performance materials. The stock is trading at 30x FY26E EPS of Rs 133.6, with an expected improvement in RoE to ~20%, despite a huge capex (Rs8bn) over the next two years. We value the company at 30x FY26E EPS (earlier Target P/E at 40x) to arrive at our TP of Rs 4007 (earlier Rs 5064). We upgrade our rating from ‘Accumulate’ to ‘Buy’ as we believe stock has corrected in the near term.

§ Consolidated revenue at Rs4.7bn (+13% YoY/ -4% QoQ; PLe ~Rs5.1bn), grew YoY on the back of growth in HPP & specialty business (24%/5% YoY). Sequentially, topline dropped 4% led by CDMO & specialty business.

§ For the quarter, topline was lower than expected primarily due to slower stabilization of R32 plant, production issues in Dahej resulting in deferral of sales of new products. In CDMO business, repeat orders announced earlier for 2 large molecules moved from CY23 to CY24.

§ EBITDA margin declined to 20.8% (vs 22.4% in Q2FY23; PLe 23 %), despite improvement in gross margins led by loss of sales and one-off expense of Rs 60mn. EBITDA stood at Rs 983mn (5% YoY/ -14% QoQ).

§ PAT at Rs0.6bn (5% YoY/ -2% QoQ; PLe Rs0.65 bn) was impacted by higher depreciation and interest expense (+37% YoY & +398% YoY respectively). PAT margins stood at 12.8% vs 12.5%/13.8% in Q1FY24/Q2FY23 respectively. Effective tax rate stood at 21.5% vs 24.8% in Q1FY24.

§ Concall takeaways: (1) Adjusting deferral of sales of around Rs 1bn, topline would have been around Rs 5.5-5.7bn (2) For the quarter, net debt stood at Rs 7.8bn (gross debt at Rs 12bn) while net debt to equity at 0.34x. (3) Cash conversion cycle at the end of H1FY24 was about 90 days vs 135 days in FY 23. (4) Production issue in Dahej resulting in deferral of sales lead to loss of Rs340mn in the quarter. (5) Rs5.4bn agrochemical project to be commissioned by FY24 end of which 50% is long term contract and rest is spot based (6) For R32, 50% is domestic, 50%- exports and currently in discussion with 2 customers for CY24 volumes. (7) For specialty chemicals, Rs 150mn revenues lost from 2 molecules in domestic market (8) Capex of Rs 300mn towards development of new capability in Surat on track and to generate revenues from FY25. (9) R32 plant commissioned in Q1FY24 & stabilized the production by Sep’23. (10) Demand for R 22, especially in international markets, was muted and we expect demand to start picking up from end January onwards. (11) launched new brand Naveen Molecular for CDMO business. (12) AHF project for adding 40,000 MTPA on track and to commission as per schedule.

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