Stock Fundamentals

Navin Fluorine: Why you should hold this speciality chemicals stock

Sai Prabhakar Yadavalli BL Research Bureau | Updated on October 16, 2021

Premium valuation of the company supported by improving margins and stable balance sheet

In the last five years, Navin Fluorine (Navin) transitioned into a high-margin business and is still expanding in that direction, all the while sticking to its fluorine-based niche business since 1967. The older revenue segments, Refrigeration and Inorganic Fluorides, are now grouped into legacy business (35 per cent of FY21 revenues) while the new business, Specialty Chemicals and CRAMS, is being further expanded. Building on its strong foundation, Navin has initiated a capex cycle starting in FY19-20 which is yet to commercialise, and the strong traction may necessitate further capacity expansion.

Value added segments

Speciality Chemicals (started in 2000s) and CRAMS (Contract research and manufacturing services, started in 2011) contributed 65 per cent to FY21 revenues and have grown at 16 per cent CAGR during FY18-21. The phase-out of environmentally hazardous product in the refrigeration segment coincided with the Covid impact, leading to FY18-21 growth at -1 per cent CAGR for the two legacy segments, comparing negatively to the value-added segment growth.

EBITDA margins improved from 18 per cent in FY16 to 27 per cent in FY21, driven by increasing revenue proportion from value added segments..

Specialty chemicals business addresses pharma, agrochem and industrial segments delivering fluorine-based intermediaries. The segment has a portfolio of around 25 products. The development of products done in close quarters to end industry has faster commercialisation and payback period. The margin potential is industry-leading, according to the company, owing to non-commoditised product profile.

Small molecules in pharmaceutical research increasingly adapting fluorine-based molecules have led to three of the ten drugs being approved containing fluorine. Navin’s CRAMS division serves pharma innovators (100 per cent) based out of the US and Europe. On eventual commercialisation, Navin stands to be the foremost supplier for the patent life. Currently, one molecule in the US and one in Europe are commercialised (generating high demand), while two more are on the verge of commercialisation.

The strong relationship aids client mining (multiple products with the same client) and attracts other such prospects too. Typical product cycle involves two-three years of client engagement, 5-6 years of actual development exercise ) before commercialisation. This acts as a strong entry barrier and restricts the activity to players with strong development history, as Navin has demonstrated.

HPP and MPP

CRAMS division’s facility cGMP3 (₹115-crore investment in FY19-20) reached peak utilisation in FY20-21 and the company would ideally further improve utilisation by debottlenecking, before unveiling plans for a cGMP4 plant in the next two years.

Specialty chemicals division expanded with a multi-purpose plant (MPP) with capex of ₹195 crore, which should be operational from FY23. This plant, catering to new opportunities in life sciences and crop sciences sectors, will sustain the growth in Specialty division and the next set of products are lined up.

Navin is on track to commercialise its big project towards the end of FY22. The company announced in February 2020 a $410-million multi-year contract where Navin has to invest ₹436 crore for capex in its own subsidiary and deliver a high-performance product (HPP) to the specific client for a period of seven years, with margins comparable to company-wide average.

Financials and valuation

The two projects involving capex of ₹630 crore can provide incremental revenue visibility of at least ₹630-750 crore per year, assuming a conservative asset turnover of (1-1.2x) when they hit peak utilisation. For comparison, Navin reported revenues of ₹1,179 crore in FY21. The cash-rich company (net cash at end FY21 of ₹541 crore)) is conservative in deploying its cash balance as it analyses a comprehensive business case for any product before investing. But capacity running at maximum utilisation and a steady stream of products, clients and partnerships should see a sustained capex cycle for Navin in the new divisions.

The opportunity for growth notwithstanding, the premium valuation of Navin Flourine at 47 times FY23 earnings (Bloomberg consensus) balances risk-reward in the stock. Investors can hence continue holding the stock of Navin till current plans are successfully commercialised and further direction is ascertained on the base of successful execution.

Published on October 16, 2021

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