Navin Fluorine International Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Record quarter, capacity-led: Consolidated revenue crossed INR 500 crores and operating PBT crossed INR 100 crores for the first time, driven by the ramp-up of three new plants at Dahej.
• All three segments firing: Specialty grew 22% YoY, HPP surged 64% YoY, and CDMO delivered its highest-ever quarterly revenue at INR 125 crores, up 73% YoY.
• Pricing power demonstrated mid-contract: HPP’s customer agreed to a significant price increase after raw material shifts made the original fixed price unviable, protecting margins without disrupting the partnership.
• Recession flagged as a second-half risk: Management sees no impact in Q3 or Q4, but warns that a prolonged recession could create softness in H2 calendar year 2023, particularly in HFO and select agro molecules.
• What to watch next quarter: Whether CDMO sustains its INR 120 crore+ run rate, the pace of MPP’s ramp-up as two more molecules enter production, and any early signals of demand softness heading into H2.

Segment Performance & Drivers

• Specialty Chemicals: Revenue of INR 186 crores, 22% YoY growth, driven entirely by volumes from two new plants that commissioned and sold material in December. Pricing played no role, and existing Surat plants saw a slight product mix impact.
• HPP Business: Revenue of INR 253 crores, 64% YoY growth. The new Dahej plant achieved close to design capacity in December and reached full capacity in January, so Q4 will show a clear ramp-up from Q3.
• CDMO Business: Highest-ever quarterly revenue of INR 125 crores, 73% YoY growth. The \$16 million contract started supply in December and contributed, but was not the main reason for the bump-up. Management reiterated the business remains lumpy quarter-to-quarter and advised investors to judge it on an annual basis.
• Agrochemical Intermediate Plant: A dedicated client contract; the plant achieved close to full capacity in December and is expected to run at almost full capacity in Q4.
• Operating expense pressure: On a 9-month basis, opex rose INR 60 crores, with energy alone accounting for INR 40 crores. Depreciation also increased due to the capitalization of three plants.

Welling: "Unfortunately, I mean, that's not our desire or intent. But this business from quarter-to-quarter, it continues to remain quite lumpy."

HFO Molecule & HPP Dynamics

• HFO (1233 series) positioning: The molecule has a wide range of applications independent of refrigerant gases and is not used to manufacture 1234yf. DuPont/Chemours is not in this molecule. It is at a very early stage of its life cycle and is expected to take market share from other HFCs.
• HPP pricing renegotiation: The fixed price originally agreed for calendar year 2022 became unviable due to raw material changes. The customer agreed to a significant price increase from the start of supply to protect margins. Calendar year 2023 pricing is almost similar to calendar year 2022.
• HPP raw material pass-through: No major challenge on raw material availability or cost; the company has been successful in passing on cost escalations to customers even mid-contract.
• HFO expansion path: Immediate priority is to run the plant at designed capacity and achieve desired norms and yields in Q4, then sustain that for at least a year to gain confidence. Only then will the company engage with the customer on doubling capacity, a project that would take about a year.

Welling: "Now given the relationship of our partnership, they agreed with what we were talking about, and we actually took a significant increase in the price from the start of the supply itself so that our margins otherwise would have got significantly depressed if we had stuck to the originally agreed pricing."

CDMO Trajectory & Visibility

• Annualized run rate: For FY23, the company will achieve the \$10 million to \$12 million quarterly run rate on an annualized basis, though Q1 and Q2 were soft. Q3 delivered about INR 120 crores, and Q4 is expected to be similar or larger.
• cGMP-3 expansion: Work on the cGMP-3 capacity expansion is on track.
• cGMP-4 planning: Management is preparing a plan for cGMP-4, a significantly larger investment than cGMP-3, signaling confidence in growth over the coming years even if quarter-to-quarter visibility remains limited.
• Customer audits: Four multinational customer plant audits were successfully completed in the quarter. One was an existing customer’s annual audit; three were new customers with small business looking to significantly ramp up the relationship. Two of the four are on the performance materials side.

Specialty Chemicals Mix Shift

• Deliberate pharma exit: The company is consciously reducing dependence on generic pharma within Specialty because the business is transactional and not sticky. Innovator pharma engagement is routed through CDMO, not Specialty.
• Target end-market mix by FY26: Approximately one-third agro, one-third performance materials, and one-third split between pharma and industrial. The shift is driven by better opportunities in agro and performance materials.
• MPP pharma molecule uncertainty: Management is not sure it will pursue the fifth, pharma-focused MPP molecule at all, and may instead map those assets to agro and performance material molecules.

Welling: "Doing business at a transactional year-to-year basis just takes too much out of the team. And on the other side, we are actually seeing pretty good opportunities on the agro and performance material side."

Capex Pipeline & Capacity Build-out

• Three large projects planned: Management expects to take three projects of INR 200 crores+ each to the Board by the end of FY24: a new HF plant, CDMO cGMP-4, and another Specialty project. Timing depends on readiness and comfort with the business case.
• New HF plant: A completely new plant with capacity almost double the total current capacity is being planned, signaling the demand management sees over the next few years given the project pipeline. One debottlenecking line is just getting done; a second line was moved from March to April to avoid a shutdown during strong Q4 demand.
• INR 540 crores plant: Ready by December 2023, but no contribution this year and none until the end of calendar year 2023. The major bump-up begins from calendar year 2024 onwards, with an annualized impact from FY26.
• Dedicated agro plant: Will hardly get a quarter this year; next year will get a full annualized run rate.
• MPP ramp-up: First molecule supply has started; two more molecules will start supply in Q4, bringing the total to three molecules in production. Ramp-up will be gradual, with optimum capacity utilization expected towards the end of FY24. Debottlenecking opportunities have been identified that could take total MPP revenue significantly higher than earlier committed.
• Surat asset reassessment: A project is underway for a complete asset reassessment of Surat to evaluate whether investment can be deployed there.

Welling: "That basically also is... basically can be a signal of the kind of demand that we are actually seeing over the next few years given the projects in the pipeline."

Margins & Cost Structure

• Margin trajectory: FY23 margin is the baseline. The base business aims to deliver 25% plus/minus EBITDA, while newer projects help the company get closer to 30%. The overall company target is to move from 25% plus/minus to 30% plus/minus.
• Q4 margin outlook: Margins in Q4 will be similar to or better than the current run rate.
• Fluorspar duty impact: Most fluorspar is used for export molecules, so the duty does not play a significant role. The maximum annualized impact on domestic consumption is INR 4 to 5 crores.
• HF captive requirement: After fulfilling captive requirements, volume will be available for merchant sales, but the captive requirement is going up significantly.

Welling: "Our aim is to ensure that the baseline, the base business continues to deliver 25% plus/minus EBITDA and the newer projects could actually help us start getting closer to 30%. So that's been our continuous goal."

Recession Risk & Demand Outlook

• Short-term risk flagged: In the second half of calendar year 2023 (July to December), the company might see some softness due to recession impact. Navin plays upstream, so it is not severely impacted by a deep recession, but could be impacted by a long one.
• Specific exposure areas: The HFO business could possibly be impacted. On the agro side, some molecules might get affected due to inventory build-up from the Brazil drought, but there is no immediate impact on sales.
• No impact visible yet: Q3 results show no recession impact, and management does not expect to see any in Q4 either.

Welling: "We get severely impacted by long recession. So there are some markets which have already started seeing impact of recession. You don't see that in our results for Q3. And I don't think you will see that in our results in Q4. But if it continues to remain for a longer period of time, there could be some impact in the second half of the calendar year '23."

Guidance & Commitments

Key Metrics