Navin Fluorine International’s (NFIL) Q4FY23 revenues/EBITDA benefited from ramp-up in three projects – HPP, dedicated agro-intermediate and MPP-2 plants. However, non-contract business was either flattish (HPP) or dipped (specialty chemicals) YoY on rise in captive consumption.

CDMO delivered a positive surprise, which was also aided by a contract won earlier. Though margins were very healthy in Q4FY23, NFIL has guided for FY24 margins to be only better than in FY23 (since Q4 margins are not representative of full year).

NFIL has efficiently executed projects within timelines, and achieved the targeted profitability. In FY24, it has two more projects, Nectar and R-32, to commission. It plans to take two projects for board approval: cGMP-4, and agro-chemical intermediate. Due to reduced depreciation rate, EPS is now lower on like-to-like basis. But, we have increased the target price because of higher implied multiple.

We feel the higher multiple is justified as in our opinion NFIL’s Dahej facility is among the best in the industry; and showcase its superior capabilities.

Strong revenue growth aided by execution of contracts while legacy non-CDMO business dips. Consolidated revenues rose 70.5% YoY to Rs7bn (+23.7% QoQ) driven by 91% growth in the HPP segment to Rs2.9bn, which also includes revenues from Honeywell contract. Specialty chemical revenues were up 28.3% YoY to Rs2bn helped by MPP-2 and dedicated agrochemical plant ramp-ups (NFIL has commercialised three molecules in the MPP-2 plant). Legacy specialty business dipped ~25% YoY to Rs1.2bn (I-Sec est.) due to: 1) one agrochemical intermediate being impacted by an unfavourable inventory situation; and 2) a product earlier sold to external clients is now consumed captive in Dahej facility. CDMO revenues are lumpy and have grown 2.3x YoY to Rs2bn.

Honeywell plant has reached peak utilisation, but provides 20% debottlenecking opportunity, which can materialise in FY24. R-32 project will commence in Q2FY24 (4ktpa capacity). Specialty chemical revenues will benefit from ramp-up to full utilisation in the agrochemical-dedicated plant, and MPP-2 will see addition of one molecule in FY24. Fluoro-molecule plant will be commissioned by end-CY23. Revenue growth, excluding projects, has been underwhelming with domestic revenues down 16% YoY in Q4FY23.

EBITDA margin expanded by 130bps QoQ. Gross margin expanded by 300bps QoQ to 59.3% benefiting partly from higher CRAMS revenue (29% vs 20% for FY23). Honeywell contract pricing was increased in CY22, which has also helped margins, and the company expects prices to be stable in CY23. Employee and other costs grew 54.4% and 96.2% YoY respectively. EBITDA increased by 114.1% YoY to Rs2.1bn and EBITDA margin came in at 28.9%. Net profit jumped 81.4% YoY to Rs1.4bn – benefiting from re-assessment of depreciation policy leading to cut in depreciation rates.

Other highlights

* Q1FY24 will be impacted due to maintenance shutdown of Honeywell plant (4weeks) at Dahej and HF plant (3weeks) in Surat

* Management does not expect pricing pressure in R-32

* Erstwhile ref-gas and inorganic fluoride revenues were flattish YoY

* NFIL has started executing US$16mn contract in CDMO, some of which will also flow into FY24. It expects 20% growth in CDMO in FY24. Company is seeing traction in non-fluorine chemicals as well

* NFIL does not expect a downcycle in agrochemicals to impact its products as the company deals only with innovators, and mainly in patented products

* Working capital has increased (by 8-10% on exit Q4FY23 annualised revenues), which the company expects to reduce in full-year FY24

* NFIL expects EBITDA margin in FY24 to be higher than in FY23; it will gradually add expand margins in the next few years.