Company remains a beneficiary of strong barriers to entry in the fluoro-chemical value chain and should gain from the formidable expertise in delivering complex chemical intermediates for the pharmaceuticals industry.
Sequentially, weaker performance across segments
Higher gestation period in the CRAMS is the key drag
Positive commentary on the pricing front, led by Speciality chemicals
Capex plan on track: Expected to contribute from H2 FY20
Management’s confident of sustaining EBITDA margin range of 22-24 percent
Navin Fluorine amongst the largest chemical company in the fluorine value chain exhibited a weaker set of numbers across segments, sequentially. However, its 9m FY19 performance suggests that all segments except for CRAMS have performed positively.
On like for like basis, excluding Dahej operations, sales improved by 6 percent YoY (year on year) while there was a margin contraction compared to same quarter last year (23.2 percent vs. 24.3 percent in Q3 FY18). Higher gestation period in the CRAMS (Contract Research and Manufacturing Services) business was one of the key reason for the growth moderation though management remained confident of medium term growth been led by high margin segments – CRAMS and Speciality chemicals.
Table: standalone quarterly result
Key takeaway from the conference call has been the positive commentary on the pricing front. Sequentially, there was an EBITDA margin expansion on account of price hike implemented for few of the customers. Management remains confident of sustaining the EBITDA margin range of 22-24 percent in the medium-term.
Specialty Chemicals segment (32 percent of Q3 sales) posted growth in the domestic front mainly in the pharma space. Exports for the agro space also improved, however sequential decline in segmental revenue was attributed to the seasonality in agrochemical industry demand. Margins improved on QoQ basis as the price hikes had been taken across the product line.
Within legacy business, in case of refrigerant gases business (25 percent of sales), improvement was seen for export markets while domestic growth was flattish. Management noted better pricing realisation due to supply constraints.
Among the key concern which caught our attention was the sequential decline in sales for Inorganic fluoride segment (21 percent of sales). Here demand from domestic steel industry flattened, though was partially offset by the demand growth in glass industry. Further, segmental margins contracted on account of higher cost of fluorspar. Having said that, company is trying to compensate this through higher exports. Company mentions successful trials by the clients from Korea and Japan.
Further, surging raw material prices remains an ongoing concern. Key raw materials like fluorspar prices have shot up about 40 percent YoY. Management expects raw material prices to remain elevated in the near to medium term.
Growth moderation in CRAMS business (22 percent of Sales) is expected to extend due to pushback of campaigns from the clients end to next financial year. Company is hopeful of returning to growth in FY20.
Further, company's capex plans (Rs 115 cr) for additional cGMP (Current Good Manufacturing Practice regulations as enforced by the US FDA) facility in Dewas is on track and expected to be on stream by June’19. Post this trials would start and company is hopeful that H2 FY20 would see incremental sales. Company updates that new customer acquisitions are already in place.
In case of Dahej JV operations, business normalised as the production issues are behind. Company expects the EBITDA margin to remain in line with the other segments.
Also noteworthy is that in case of refrigerant gases, company is working on ways to compensate for the decline in sales of R-22 gas. Company’s production quota for the R-22 gas as per Montreal Protocol (Phase out of ozone depleting Hydro Chloro Fluoro Carbons) would reduce by 25 percent in CY20. Hence company is looking for derivative products of R-22 for uses in pharma industry along with other non-emissive applications for R-22.
Overall quarterly result was below our expectations mainly on account of the growth moderation in CRAMS business and demand slowdown in steel end market and accordingly we tweak our revenue expectations. However, we are encouraged by the pricing led growth mainly in the specialty chemicals business. Further, though elevated raw material prices remain a key challenge, we take note of management’s confidence in the ability to sustain EBITDA margin of 22-24 percent in the medium term.
Having said that, the company remains a beneficiary of strong barriers to entry in the fluoro-chemical value chain and going forward should gain from the formidable expertise in delivering complex chemical intermediates for the pharmaceuticals industry. We therefore remain constructive on the stock (P/E at 18x FY20 estimated earnings) and believe that as the company weathers through transition it can be accumulated on every decline.Follow @anubhavsays