ICICI Securities attended the analyst meet organised by Navin Fluorine International (NFIL) to provide update on growth opportunities. Company harbours capex ambition of >Rs18bn over CY24-CY25 in addition to the Rs17bn-18bn it is already implementing over CY21-CY23.

HPP segment faces a big opportunity in R-32 (NFIL’s announced capacity: 4ktpa). There is also big potential in HFO/blends in India and the Middle East in partnership with Honeywell. NFIL expects doubling of the Honeywell contract for which it will soon start discussions (from CY23).

Specialty chemicals will have the biggest opportunity on the back of NFIL’s deep relationship with three agrochemical companies, and emerging opportunities in niche chemistry with companies such as 3M. CDMO ambition of reaching revenues of US$100mn will find support from the upcoming cGMP-4 plant, which will have larger reactors, and likely late-stage CRO contracts.

Electronic chemical applications focused at India market are likely emerging opportunities from FY25 onward. NFIL has carved out a niche for itself, but valuations remain uncomfortable and we will wait for a better entry price. We maintain our TP at Rs4,000 based on P/E multiple of 40x FY24E

HPP segment: Honeywell 2.0 plant + HFC will drive growth in next few years.

· Honeywell contract revenues were at Rs600mn in Q2FY23; it was hit due to unavailability of a key raw-material (CTC). NFIL has a long-term contract with a supplier whose CTC plant commissioning was delayed, but has now been commercialised. Company expects full revenue delivery (Rs1.1bn per quarter) to start from Q4FY23. Honeywell contract margin should also improve as it was impacted due to the higher price paid for CTC (which NFIL had to buy from the spot market), and operating leverage from rise in plant utilisation.

· NFIL will start discussions with Honeywell on doubling its HFO (intermediate) capacity in CY23; the plant should take another 18 months to commercialise. Company has provisioned adequate land in Dahej for this purpose.

· HFC is an exciting opportunity for NFIL. Company has announced its R-32 plant commissioning by Q1FY24 with an initial capacity of 4ktpa. It has evaluated plans to add another 30ktpa capacity in R-32 using efficient liquid phase technology, but the plant may take 5-6 years to reach breakeven, due to demand-supply imbalance. The plan would involve an investment of Rs10bn and is now put on hold.

· HFO will remain a long-term opportunity for NFIL. Company is in discussion with Honeywell for supply of HFO blends in India and the Middle East markets where NFIL has strong presence / established distribution.

· Inorganic fluoride: Company does not have much on the anvil in inorganic fluoride segment in the immediate term.

Specialty chemicals: Deepening relationship with customers is expanding opportunities

· NFIL has been working closely with three agrochemical companies with which it has developed deep relationship. It is getting deeper into product supplies with them. It sees many more opportunities from these customers in the coming years. NFIL acknowledges the rising competitive intensity in agrochemicals and fluorine chemistry, but has created significant value through products, platforms and partnerships.

· Company anticipates earlier than planned commissioning of its MPP / agrochemical plants. Scope exists for shifting some of these products in MPP segment to a dedicated plant in the next few quarters. This should support revenue growth from the agrochemicals intermediate business.

· NFIL is working for the past nine months with a German agrochemical company to develop a new molecule, and has already started a pilot stage for the same.

· Pharmaceutical intermediates market has been volatile and troubled due to price erosions, which has made the space relatively less attractive. NFIL largely works with India-based generic manufacturers, but does not expect significant acceleration in the segment.

· Performance chemicals’ contribution is currently in low single digits in the specialty segment. NFIL is working with some of the large players, such as 3M, for development of specialty niche products.

CDMO: cGMP-4 should help drive higher revenues

·   Existing facilities are not designed for efficiently manufacture CDMO products in large quantity – such as an order worth US$16mn which NFIL received in Q2FY23. cGMP-4 plant will have large reactors to supply quantities in large batches to cater to expected rise in demand.

· CDMO business will continue to remain lumpy until it gains large scale. NFIL is also working on developing products under CDMO, particularly fluorinated reagents, and catalysts. This should help create a certain base business under CDMO.

· The product for which it has received the order worth US$16mn has been in CRO contract for past five years, and is now the product is close to commercialisation for which it is executing large order. NFIL anticipates these opportunities to grow as more products reach phase-3 in the R&D lifecycle.

· NFIL is also planning to work with innovators for late-stage entry in product development once cGMP-4 plant is commercialised.

· There is no competition for CDMO in India, and NFIL’s peers are Patheon (US), Toticon (Swiss), SK Pharma (Italy) and others.

· NFIL’s ambition is to reach revenues of US$100mn from CDMO by FY25.

Other highlights

· The company is working on its fourth business segment: electronic chemicals. This product-group will focus on application business in battery solutions, semi-conductors and solar industries, largely in the India market. NFIL plans to develop certain solutions in electrolyte salts, solutions and additives as well as cathode binders for battery solutions. Solar industry will have chemical application in cell-building (texturing solutions) and its application in semi-conductors is still some time away.

· Application business will require some solutions from global players to be introduced in India via the partnership route. Some of these applications are result of product development on existing platforms of NFIL.

· NFIL is also working on a few fluoropolymers, particularly PVDF. However, it is developing a technology different from popular PVDF manufacturing processes deployed by existing players. The new process is expected to deliver advantages such as better quality and lower cost of production.

· The company is currently implementing capex of Rs17bn-18bn targeted for completion by end-CY23. It expects a quicker pace of implementation of its capex outlay for CY24-CY25. This may include cGMP-4, HFO 2.0 and agrochemical intermediates in addition to other opportunities.