Navin Fluorine International Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Supply-side hit, not demand-side: Revenue and profitability missed expectations because of production issues at Dahej and slower R32 stabilization, not because the order book weakened. Deferred sales of ~INR52 crores will land in Q3.
• Specialty business absorbed a double shock: Two new molecules faced production teething troubles in MPP, while two legacy domestic pharma/agri molecules saw weak demand, costing ~INR15 crores. The quick molecule swap in MPP shows the model's flexibility.
• HPP plant is back online and ramping: An unexpected June-July breakdown is resolved; production rose QoQ and will rise again in Q3. The order book remains robust, and management expects sizable revenues from next quarter.
• Working capital turned strategic: The cash conversion cycle compressed from ~135 days to ~90 days, releasing ~INR275 crores of cash. Management called the focus "no longer transactional."
• What to watch next quarter: Whether the ~INR52 crores of deferred sales actually convert, the pace of the R32 export customer tie-up, and any sign that the two weak domestic specialty molecules recover.

Production Disruptions & Recovery

• Dahej specialty issues: Two new molecules faced production-related problems. One was a scale-up from Surat to commercial MPP volumes; the other was entirely new to MPP. Both issues are resolved and production has started.
• HPP plant breakdown: An unexpected breakdown during June and July at Dahej hit the HPP business. The plant is now operational, the order book remains robust, and management expects it to run at optimal capacity going forward.
• R32 stabilization delay: Sales were impacted largely because the R32 plant took longer than expected to stabilize. Approximately ₹20 crores of R32 sales moved from Q2 to Q3; the plant is now running at optimal capacity, so those volumes will be covered in Q3.
• Deferred sales recovery: Most deferred specialty sales (~INR34 crores) and CDMO deferred sales (~INR18 crores) will be incremental in Q3. Had those sales been done in Q2, the EBITDA margin would have been significantly higher because their fixed costs were already in the P&L.
• One-off cost: A corrective-measures cost of ~INR6 crores at Dahej also weighed on the EBITDA margin, alongside lower operating leverage.
• HPP ramp trajectory: Q3 production will be more than Q2, and Q2 production was more than Q1. Management says the plant is moving in the right direction but declines to give a specific target for when full capacity will be achieved.

Welling: "We will continue to focus on businesses which are backed by long-term contracts and then invest in dedicated plants for specific customer for specific products. We will also have investments done in MPPs, which will make molecules for multiple customers and multiple segments."

Specialty Chemicals: Mix Shifts & Demand Signals

• MPP molecule agility: The original MPP plan was built on four molecules. Demand softness on one agri product prompted a quick replacement with two new molecules, one of which is a scale-up from Surat and the other entirely new to MPP.
• Agri demand is bifurcated: Newer molecule demand remains robust, while older generic molecules from Surat are seeing softness. Navin is not seeing as much demand dip as other players because of this balance.
• High-margin agri molecule recovery: The high-margin agri molecule from Surat that had low demand in H1 has seen demand return. Supplies were made in Q2 and will continue; a good forecast has been received for the following year.
• Domestic specialty weakness: Two molecules in pharma/agri generics, supplying the ARV sector, had very weak demand, losing about ₹15-odd crores of revenue domestically.
• Export/domestic mix shift: One molecule traditionally exported was supplied domestically on customer request, about ₹40 crores, changing the export/domestic mix for the quarter.
• Performance materials: Doing quite well but still limited as a percentage of sales. Most specialty business comes from agro, where supplies are intermediates to AI manufacturers. [13-14]

Welling: "We've actually seen the demand softness on one of them, which is the agri product. And hence, we have actually moved very quickly to bring in other new opportunities and put them in MPP."

CDMO: Lumpy Progress Toward the \$100 mn Target

• Revenue composition: CDMO revenues in the quarter came entirely from new molecules. Repeat orders operate on a campaign basis, typically once every two years for scaling molecules, so quarter-to-quarter influence is not possible.
• Customer-driven deferral: Had to defer significant sales of one campaign from Q2 to Q3 due to a last-minute change made by the customer in product specification and method of analysis.
• \$100 million target: Management directionally expects to achieve this around FY26-FY27. The path will be gradual, not a step jump, and the business will remain lumpy.
• Fermion agreement: Work on the three molecules is ongoing and forms the basis for cGMP-4. Progress is being made but management says it is difficult to give quarter-on-quarter updates. [14-15]

Welling: "It will be difficult for us to specifically project if it will be in one year or other. But directionally, we should be able to achieve that given the strength of our pipeline, the way we are looking at it."

Capex Pipeline & Capacity Building

• Agro specialty capex (Dahej): Progressing well, estimated to commission at the end of this financial year. 50% of dedicated capacity is covered by confirmed purchase orders for calendar year 2024, with take-or-pay contracts. The aim is to achieve peak annualised revenue in about two years after commissioning.
• AHF project: Adding 40,000 metric tons of hydrofluoric acid capacity in Dahej, progressing as per schedule.
• Surat new capability: INR30 crores capex toward a new capability in Surat is on track, expected to generate revenue from FY25.
• cGMP engineering: Detailed engineering of cGMP is as per schedule.
• HF plant utilization strategy: Three opportunity sets: HF for own use in existing three projects as they scale up, new opportunities beyond the three business units, and increasing merchant sale of HF, which is currently significantly reduced due to constraint. [17-18]
• Capacity headroom: With Dahej fully operational and multipurpose plants available, plus product rationalization opportunities in Surat MPP, there is enough capacity headroom for immediate quarters and years.
• New molecule launches: Expected to launch two new molecules from Dahej and three new molecules from Surat in the coming quarter.

R22, R32 & the Honeywell Partnership

• R22 demand split: Demand for R22 in international markets was muted. Non-MSF R22 demand for pharma and agrochemicals remains strong. Management expects demand to start picking up from end-January onwards.
• R32 export discussions: In discussion with two customers for potentially tying up 2024 volumes. The intention is to lock with at least one in the next few weeks.
• Honeywell discussions: Ongoing on both the technology and commercial side. The initial focus for this year is to stabilize the plant. Commercial discussions on debottlenecking are in process, but management declines to give specific timelines.
• Building block derivatives: Navin will supply the building block molecule to customers and also utilize it for downstream derivatives. It already manufactures and sells one downstream derivative to one customer.

Balance Sheet & Capital Allocation

• Working capital transformation: The cash conversion cycle was reduced from ~135 days to ~90 days, releasing ~INR275 crores of cash. Management will not give further guidance beyond the 90-day level.
• Net debt comfort: Net debt-to-equity of 0.34 is described as very comfortable. Management declines to give guidance on debt levels or forecasts.
• Fundraise plan: The fundraise plan is "pretty much in play"; timing will be a matter for the Chairman and Board to decide.
• Special dividend: The Board approved a one-time special dividend of INR3 per share in commemoration of the founder's centenary birth year, in addition to an interim dividend of INR5 per share.

Ganatra: "Our focus on working capital and cash flow is no longer transactional, It's more strategic in nature."

Guidance & Commitments

Key Metrics