Navin Fluorine: Steep Correction due to resignation of MD is opportunity to buy for target price of Rs 5368 (40% upside)

Growth momentum to continue

Navin Fluorine International Ltd (NFIL) announced that Mr Radhesh Welling has resigned as the managing director (MD) and director on the board of the company for personal reasons. Mr. Welling will be relieved from the services of the company effective from the close of business hours on December 15, 2023. He shall continue to serve the company to facilitate a smooth transition. The board is looking for an external candidate who has the ability to handle large projects and has the requisite execution skills and technical expertise. Meanwhile, executive chairman Mr Vishal Mafatlal will be heading the company’s operations. The board has approved the appointment of Mr Sudhir Deo as a non-executive non-independent director of the company to further strengthen the board. Mr Deo has 44 years of experience and has retired as the MD of NOCIL.

We expect NFIL’s PAT to grow at a 30% CAGR over FY23-26E, led by a 33% CAGR in EBITDA. We retain our BUY rating on Navin Fluorine, with a target price of INR 5,368 (WACC 11%, terminal growth 5.5%) on the back of (1) earning visibility given long-term contracts in speciality chemicals and HPP segments; (2) a tilt in sales mix towards high margin high-value business; and (3) capacity expansion-led growth.

Growth is priority

In our view, NFIL is well-positioned across three business segments, HPP, speciality chemicals and CDMO, to capture the growth opportunities. The company’s operating model with each business vertical headed by respective CEOs, aided by senior management teams from various departments, will help NFIL maintain its growth strategy. The management will continue the ongoing capex intensity and R&D spending. However, future projects that are under evaluation may be delayed by a couple of months, owing to the current challenging global scenario.

Long-term contracts give earning visibility

The company has three multi-year contracts in the speciality chemical segment with a peak revenue potential of INR10.3bn. Commercial production for two contracts has started in H2FY23 while for the third contract, it would kick in from Q4FY24. We expect incremental revenue of INR9.4bn from these contracts by FY27, owing to a ramp-up in production over FY24-27E. The company has a multiyear contract with Honeywell in the HPP segment as well. We expect this contract with Honeywell to generate a steady revenue stream of INR4.2bn per annum from FY24 onwards. These four long-term contracts will contribute more than 30% in revenue from FY25.

Upcoming projects to help sustain growth momentum

NFIL has recently announced a capex of INR300mn at Surat for the development of new capabilities. Besides, the company is setting up a 40,000-tonne-per-annum (TPA) Aqueous Hydro Fluoric acid (AHF) capacity in order to cater to rising demand from pharmaceutical, agrochemical industries, and emerging areas like electric vehicle battery chemicals. The company has signed an agreement with Fermion for patented commercial stage molecules in the CDMO segment. NFIL is also in discussion with Honeywell for a further capacity addition of 25% of the existing plant. This capacity will be available from FY26. In our view, upcoming projects will help maintain the growth momentum.