Our tactical pick for this week is Navin Fluorine International, which is one of the largest chemical companies in the fluorine value chain. It has exhibited sequential improvement in its topline numbers for the quarter gone by, with a positive commentary on the pricing of its specialty chemicals and improving prospects in its CRAMS (Contract Research and Manufacturing Services) business.
Following are the key aspects that keep us constructive on the business:
Firstly, its specialty chemicals business posted a strong growth in both in the pharma and agrochemical end markets in its recent quarterly results. Sequentially, the company's margins improved in this segment backed by price hikes taken across product lines.
Secondly, Navin Fluorine is the only company in India with a fluorine-based cGMP plant (FDA’s Current Good Manufacturing Practice regulations). Here, it partners with innovators in early stages of R&D which makes it a high margin opportunity. The company’s capex plans (Rs 115 crore) for an additional cGMP facility in Dewas is on track and is expected to be on stream by July 2019. Further, its joint venture (JV) with Piramal Enterprise in the CRAMS space has turned profitable on account of the recent performance of its Dahej facility
Thirdly, its legacy business – Inorganic fluoride — show signs of improvement due to a better demand from the domestic steel industry.
Key risk: Among the key concern for the company is the outlook for the refrigerant gases business. The 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. In the domestic market, various air conditioner manufacturers are already shifting away from R-22 to next generation gases. Here, the company is hopeful of maintaining current revenue levels in this segment in near to medium term. This would be achieved through higher demand from the international (middle-east nations) markets and increasing usage of derivative products of R-22 in the pharma industry along with other non-emissive applications.
Outlook:
We are positive on the prospects of specialty chemicals in Navin Fluorine, which is expected to grow in high teens in FY20. Further, as per management, raw material prices seems to have stabilized, and the coming quarters might see a positive impact of product price hikes undertaken in recent times.
In a medium term, improving the product mix in favour of high margin CRAMS and specialty chemicals are likely to compensate weak pricing particularly in refrigerant business. Here, we take note of Navin Flourine's management's confidence in the ability to sustain EBITDA margin of 22-24 percent in the medium term.
Overall, the company remains a beneficiary of strong barriers to entry in the fluoro-chemical value chain and going forward, it should gain from the formidable expertise in delivering complex chemical intermediates for the pharmaceuticals industry. We therefore remain constructive on the stock which is trading at a reasonable P/E of 17x FY20 estimated earnings.
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