Navin Fluorine International Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Record Specialty revenue, HPP surges 76%: Specialty Chemicals delivered its highest-ever quarterly revenue, while the HPP segment grew 76% YoY, boosted by the newly commissioned HFO plant at NFASL.
• NFASL margin drag masks standalone strength: The new HFO subsidiary faced raw material and utilization headwinds that crushed its margin, dragging consolidated operating margin down even though standalone NFIL gross margin was extremely strong.
• CDMO inflection point is visible: A soft H1 was expected, but a \$16 mn late-stage order, successful plant audits by two large pharma innovators, and a confident \$100 mn revenue ambition signal that the long-awaited CDMO ramp is now materializing.
• Pricing power activated in HFO: Management expects a 15–20% upward price revision for the HFO contract from January 2023, with discussions now moving to a quarterly or semi-annual pass-through mechanism to protect margins.
• What to watch next quarter: The pace of the HFO plant ramp-up to full capacity, the \$11 mn of CDMO invoicing expected in Q3, and the commissioning of two new Specialty plants at Dahej.

HFO Plant: The Margin Headwind and the Fix

• Three problems hit at once: The NFASL plant could not run at full capacity, impairing fixed cost absorption; utilization was suboptimal; and the company was forced to buy raw material at significantly higher spot-market prices because a supplier's new plant was delayed by nearly a year.
• The damage: These three factors caused a significant impact on NFASL's operating margin, which dragged down the consolidated margin for the company.
• The fix is imminent: The supplier's plant is now ready, so NFASL expects to receive all required raw material from December onwards and ramp production to close to full capacity fairly quickly from the end of Q3.
• Pricing mechanism upgraded: The original 2019 agreement had an annual September price revision on a pass-through basis. Given the changed world conditions, the company is now discussing a quarterly or six-monthly revision cycle, with the next pricing discussion set for November 2022.
• Pricing power confirmed: Management expects an upward revision of probably about 15% to 20% for the pricing period starting January 2023.
• Margin floor is non-negotiable: The company has a commitment to its Board that, irrespective of raw material movement, it will earn a certain margin over the life of the project, and it insists on that expectation with the customer.

Welling: "Because of these 3 factors, we actually saw a significant impact on our operating margin in NFASL, which is basically for this particular molecule, which is what dragged the overall operating margin for the Company down."

CDMO: The Inflection Arrives

• Soft H1 was telegraphed: The CDMO business recorded revenue of Rs. 39 crores through H1 FY23, with Q1 and Q2 relatively soft due to order bunching, a pattern management had indicated earlier.
• The \$16 mn signal: A large purchase order for a late-stage clinical trial molecule was received, with supply planned over two quarters in CY2023, and delivery dates are currently being discussed with the customer.
• Audit logjam breaks: Two large pharma innovators successfully completed plant audits this quarter, ending a two-year drought caused by COVID-related travel restrictions and a focus away from non-COVID programs. Queries are already coming in, and there is positive movement on each of those three accounts.
• Q3 invoicing visibility: Management expects around \$11 million of invoicing in Q3, with Q4 expected to be very strong as the business moves into CY2023.
• The \$100 mn ambition: The company believes it can touch \$100 million in CDMO revenue by FY25 or the year after, and the confidence from the Q4 ramp is driving work on the cGMP4 business plan, which is expected to go to the Board around the end of this financial year or the beginning of the next.
• Structural gap being filled: The company has three cGMP plants but lacks a large cGMP plant of the scale it has in Specialty, which is why it is working on cGMP4 to smooth out the lumpy, flat-then-jump revenue pattern inherent in the CRAMS business.

Welling: "Q4 onwards which is when we move into the calendar year 2023, we are expecting a significant growth to this baseline number, which is also giving us confidence to continue to work on this large cGMP4 business plan which we hope to take to the Board by end of this financial year or beginning of the next financial year."

Specialty Chemicals: Record Quarter, Capacity Building

• Record revenue across all verticals: The Specialty business delivered its highest-ever quarterly revenue, with crop science, pharma, and industrial verticals all performing well, driven by strong partnerships and a rich pipeline of differentiated opportunities.
• Two plants commissioning now: A Rs. 125 crore dedicated facility for a single molecule and Phase-1 of the Rs. 195 crore MPP project are both scheduled to start commercial production in Q3 FY23.
• Third plant in the pipeline: One more plant is scheduled toward the end of the next calendar year, adding to the three projects already announced for Dahej.
• Debottlenecking still has legs: The Surat site, which four to five years ago was thought to have no capacity headroom, has continued to grow significantly through debottlenecking, and that process continues alongside new builds.
• ARV divorce complete: The historically important ARV pharma segment slowed, but the company successfully retrofitted those assets for other applications and products, decoupling overall business performance from ARV performance.

HPP & Refrigerants: Growth Beyond the HFO

• Legacy business also strong: The 76% HPP growth includes NFASL revenue, but the legacy business also saw strong growth and price increases.
• R32 plant on track: The R32 plant will be ready for production from April 2023, with revenue of about Rs. 200 crores plus/minus, some production and sales in CY2023, and full ramp-up in CY2024.
• R32 raw material tailwind: MDC, the key raw material, has started to soften as new chloromethane plants come online. The project economics assume current high MDC prices persist for two to three years, so any softening is upside.
• Capacity expansion already in view: The company is already looking at further expansion of R32 capacity and other opportunities, with a similar timeline of about one year plus/minus, and will take proposals to the Board when ready.
• HF capacity build-out: A small debottlenecking project at Surat will add 15–20% additional HF capacity from next quarter, while a large new HF plant at Dahej is planned for Board approval before the end of the current financial year, supporting R32 and all other unannounced projects that require HF.
• Capital allocation philosophy: The company will make smaller investments in refrigerant gases and reap the benefits, but will reserve large CAPEX for opportunities where it has a clearly differentiated play and a sustainable, profitable business proposition, avoiding me-too investments.

Welling: "We don't want to be a second fiddler... what we don't want to do is just blindly follow someone and just become a me-too player, where we will actually be a #2 or a #3 player."

Margins: The Standalone vs. Consolidated Story

• Standalone NFIL margin was ~25%: Gross margin was extremely strong due to product mix and price increases in HPP and Specialty, but fixed costs like employee cost increased because of investments in growth-related opportunities.
• Other costs also bit: Higher energy costs from elevated coal prices, high freight costs, and a timing mismatch in CSR expenditure booking added pressure.
• NFASL was the drag: The HFO subsidiary was impacted at both the gross margin and operating margin levels, and that is what pulled the consolidated number down.
• Recovery path: From Q3 onwards, a significant improvement is expected on the gross margin side for NFASL as raw material supply normalizes and utilization ramps up.

Organization & Governance

• Three-CEO structure in place: The business has been divided into three verticals, each headed by a CEO: Partha Roychowdhury for HPP, Ravi Venkataramanan (ex-CEO of Dr. Reddy's CDMO arm, 30+ years in pharma) for CDMO, and Amrit Singh (with the company 2.5 years, agrochemicals background) for Specialty.
• ESOPs for the top layer: 155,000 ESOPs were announced, primarily for four people: the Managing Director and the three CEOs. The charge is non-cash, will flow through the P&L, and has a tax break.
• Working capital build is project-linked: The increase in government authority balances reflects accumulation of deposits for new facilities and GST spent on CAPEX, which will get utilized as capacities ramp up.

Guidance & Commitments

Key Metrics