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Last Updated : May 08, 2019 07:32 PM IST | Source: Moneycontrol.com

Navin Fluorine Q4 review: Improving margin profile in specialty chemicals a key positive

Anubhav Sahu @anubhavsays
 
 
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Highlights:

- Positive commentary on Specialty chemicals; improving pharma & agri end markets
- CRAMS business stabilising; Piramal JV adds to profitability
- Refrigerant gases biz in transition; weak global prices, low domestic demand
- Capex plan on track: Expected to contribute from H2 FY20

- Management confident of sustaining EBITDA margin in 22-24 percent range

Navin Fluorine, one of the largest chemical companies in the fluorine value chain, reported sequential topline improvement but weaker profitability in the fourth quarter of FY19. Positive commentary on Specialty chemicals pricing and improving prospects in the CRAMS business were key takeaways.

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Also read: Refrigerant gas plays get investment worthy as they re-position for fluorine chemistry

Table: standalone quarterly result

Navin

Source: company

Key positives

Speciality Chemicals segment (28 percent of Q4 sales) posted growth both in the pharma and agrochemical end markets, partially offset by demand in the industrial sector. Sequentially, margins improved in this segment backed by price hikes across product lines.

The JV with Piramal enterprise in the CRAMS (Contract Research and Manufacturing Services) space turned profitable on account of the recent performance of the Dahej facility. Standalone CRAMS business also improved in Q4. However, due to the pushback of select client orders, growth recovery is expected to be gradual.

There was a sequential improvement in legacy businesses – Inorganic fluoride and refrigerant gases. Refrigerant gases business benefitted because of higher exports partially offsetting weaker domestic demand. However, weaker international pricing compressed the margins. Inorganic fluoride business improved sequentially on better demand from the domestic steel industry.

Key negative

Gross margins dropped about 450 bps sequentially mainly on account of adverse product mix. Key raw material such as fluorspar prices remains elevated. As a result, EBITDA margin contracted which got partially offset by operating leverage.

Consolidated numbers were impacted due to inventory write-down in the subsidiary - Manchester Organics. Here, however, the company said it is past the transition phase following the acquisition in FY16 and the follow-up management changes. In the current fiscal, the company expects a positive contribution to bottom-line from the subsidiary.

Key observations

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/July 2019. After this, trials would start and the company is hopeful that H2 FY20 would see incremental sales. The company said new customer acquisitions are already in place.

The company continues to pursue various debottlenecking initiatives in the speciality chemicals space. One such initiative is expected to double the capacity of a specific speciality chemical.  Other than that, the company also has plans for a Greenfield expansion, details of which would be disclosed later in the current fiscal year.

Outlook

One of the key concerns for the company is the outlook for the refrigerant gases business. To reiterate the context, the company’s production quota for the R-22 gas, as per the 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.  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 the increasing usage of derivative products of R-22 in the pharma industry along with other non-emissive applications.

Growth momentum in speciality chemicals is expected to speed up. In FY20, growth in this segment is expected to be in high teens.

The management believes raw material prices have stabilised and coming quarters might see a positive impact from product price hikes undertaken in recent times. In a medium term, improving product mix in the favour of high margin CRAMS and speciality chemicals is likely to compensate weak pricing particularly in refrigerant business. We take note of management’s confidence in the ability to sustain the EBITDA margin at 22-24 percent in the medium term.

Overall, the company remains a beneficiary of strong barriers to entry in the fluorochemical value chain and in future, 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 18.5x FY20 estimated earnings) and believe, as the company weathers through the transition phase, it can be accumulated on every decline.

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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here

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First Published on May 8, 2019 07:32 pm
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