Navin Fluorine International Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Revenue milestone crossed, CDMO doubled: Full-year revenue exceeded INR2,000 crores and CDMO quarterly revenue doubled YoY to INR203 crores, surpassing the stated ~\$10 million quarterly run-rate guidance on an annualized basis.
• Three new plants went live: Commercial production commenced at HPP, MPP and the Agro-Intermediate plant, with HPP reaching optimal capacity faster than planned and the agrochem plant hitting near-full utilization by Q4.
• One molecule hit by inventory issues, impact fading: A blockbuster molecule saw inventory destocking that hit Q4 hardest; management expects the impact to reduce through calendar 2023 and is already working on capacity expansion and downstream intermediates for it.
• Margins on an improving annual trajectory: Annualized margins improved over FY22 and management expects that trajectory to continue as new plants ramp, though Q1 FY24 will see a sequential dip from planned shutdowns.
• What to watch next quarter: Whether the Q1 shutdown impact is contained to the guided one-month dip, the pace of CDMO's 20%-plus growth on the FY23 annualized base, and any Board approval for the two new projects (CDMO cGMP4 and a specialty sector project) expected in calendar 2023.

CDMO: The Quarter's Standout Performer

• Revenue doubled, guidance beaten: CDMO delivered its highest-ever quarterly revenue of INR203 crores, 106% YoY growth, surpassing the stated guidance of approximately \$10 million quarterly run rate on an annualized basis.
• Key accounts are deepening and broadening: Existing molecules are scaling well, and the business is winning new opportunities with key accounts, some even outside of fluorination, as these accounts now trust Navin for manufacturing and delivering products beyond its core value proposition. New opportunities include both fluorinated and non-fluorinated intermediates.
• Lumpiness is the nature of the business: H1 was softer and H2 stronger, exactly as indicated at the start of the fiscal year; management urges an annualized view rather than reading too much into any single quarter.
• Capacity expansion is being actively explored: The CDMO business is on strong footing and the company is actively exploring options for further capacity expansion to meet increasing demand. cGMP4 planning is underway, driven by positive customer projections for molecules currently being worked on that will require larger-scale plant for higher volumes.

Welling: "I'm happy to tell you that some of these opportunities are now even outside of fluorination because these key accounts have actually started trusting us for manufacturing and delivering products, which even outside our core value proposition."

HPP: The Honeywell Ramp and What Comes Next

• Revenue nearly doubled on volume: HPP business generated INR289 crores in Q4, 92% growth YoY, driven primarily by increased volume from NFASL, the subsidiary. The Honeywell product achieved optimal capacity faster than expected, reaching year-2 levels in year 1.
• Q4 was not an exceptional quarter: The plant was not running at full capacity in Q4 and management expects to run at similar capacity for the rest of the calendar year while working on debottlenecking, which will add at least 20% additional capacity from the next financial year onwards.
• New molecules with Honeywell are at a very early stage: A few newer molecules have been identified to work on with Honeywell, but these are Phase III priority and have made no material impact on Q4 numbers.
• Q1 FY24 will see a planned dip: The HPP plant in Dahej was shut for a month for its annual planned shutdown, and the HF plant in Surat was also shut for about three weeks. From Q2 onwards, sales are expected to return to a normalized level.

Specialty Chemicals: Agrochemical Tilt and One Inventory Headwind

• Highest-ever quarterly revenue and profitability: The specialty business delivered revenue of INR204 crores, 28% YoY growth, driven by strong partnerships, new technology platforms, and the introduction of new products. The dedicated agrochemical intermediate plant achieved optimal capacity utilization in Q4.
• The business mix is shifting toward agrochemicals: Pharma business, which primarily supplied Indian generic pharma companies, is being consciously reduced quarter-on-quarter, while industrial and agrochemical business keeps increasing.
• One molecule saw inventory destocking, with Q4 hit hardest: A blockbuster molecule experienced inventory issues at the customer end, with the maximum impact felt in Q4 FY23. Management expects some impact for the rest of calendar year 2023, but it will keep reducing, and new opportunities have been developed to compensate for the volume. The company is already looking at expanding capacity and doing downstream intermediates for this molecule.
• Pricing is protected by the innovator-focused model: Most specialty business is contracted and works primarily with innovators on molecules just launched or about to be launched, with very little exposure to the generic side, insulating it from pricing pressure.

Welling: "This is actually a blockbuster molecule. And as we speak, we are actually looking at opportunities to not only expand the capacity in this particular molecule, but also do the downstream AI for this particular molecule."

New Capacity and Capex Pipeline

• Three plants commenced, two more capexes announced: Commercial production began at HPP, MPP and the Agro-Intermediate plant in FY23. Two large capexes have since been announced: an agrochemical capex and a 40,000 metric ton per annum hydrochloric acid plant at Dahej (INR450 crores, expected onstream in two years).
• R32 plant commissioning on track: The INR80 crore R32 capex in Surat will be commissioned as per schedule, with sales expected to start from Q2 FY24. Management sees strong demand and limited capacity keeping R32 pricing robust over a 2- to 3-year horizon, with interest already from existing domestic customers and international partners on a long-term basis.
• Two more projects heading to the Board in calendar 2023: Apart from ongoing expansions scheduled for completion by FY25, the company is finalizing business plans for two projects: CDMO and cGMP4, and another project in the specialty sector.
• MPP is adding molecules: Commercial production of two new molecules at MPP began in Q4 FY23. A fourth molecule starts later this year, and a fifth new molecule (for another global agrochemical company, requiring small capex to modify MPP) will begin in H2 of the coming financial year. The pharma molecule has no immediate plan for MPP.
• HF capacity expansion will more than double output: The new 40,000 metric ton plant will take 24 months and will have significantly more than twice current capacity, adequate for own consumption but not enough for the merchant market, where more opportunities are being seen.

Financials: Depreciation, Working Capital and One-Offs

• Depreciation charge reduced by asset-life review: The company initiated an exercise with external technical consultants to assess the estimated useful life of assets at Dahej and Dewas. Consequently, the depreciation charge for the quarter and year-end is lower by approximately INR20.4 crores on a consolidated basis.
• Negative operating cash flow is a start-up working-capital story: Consolidated net cash flow from operations was negative INR63.6 crores, primarily reflecting the initial working capital outlay following the start-up of commercial operations at Dahej. No further infusion of working capital is expected during FY24; actions including vendor financing and supply chain financing are underway to reduce net working capital from current levels.
• Q4 had non-recurring expense items: A consulting assignment of approximately INR5 crores was expensed in Q4 and will not recur. Additionally, OSBL issues at Dahej resulted in two line items totaling about INR5 crores which came in Q4 and will not recur going forward.
• ESOP charge peaks in FY24: The ESOP charge was INR16.79 crores for H2 FY23, is expected to be approximately INR31 crores for FY24, and then will progressively decline significantly.

Ganatra: "All I can say actually is that, at this level, we are not looking to increase the working capital. So it will remain at this or go lower actually."

Guidance & Commitments

Key Metrics