Prabhudas Lilladher has recommended an “Accumulate” stance on Navin Fluorine International (NFIL) with a current market price of Rs. 3,307 and a target price (TP) of Rs. 3,523. The company's strong growth in certain segments, combined with substantial capex plans and revenue visibility, offers a promising long-term opportunity for investors. While certain areas like Specialty Chemicals have experienced recent softness, key operational expansions and an expanding CDMO pipeline keep the company poised for continued success.

Target for investors: Rs. 3,523
Investment Horizon: Medium-term to long-term accumulation recommended.

Key Summary of the Report

Navin Fluorine International (NFIL) has demonstrated mixed performance across its business segments in Q2FY25. While overall revenue stood at Rs. 5.18 billion, reflecting a YoY growth of 9.9%, certain segments faced challenges. However, the company’s future is supported by strong order visibility and upcoming launches in its Specialty Chemicals and Contract Development and Manufacturing Organization (CDMO) divisions. Investors should note the significant capex investment scheduled for new molecules and expanded capacity. Long-term growth is intact, especially in the High-Performance Products (HPP) and CDMO segments, which reported YoY growth of 23% and 42%, respectively.

Performance of Key Business Segments

1. High-Performance Products (HPP)
The HPP segment performed exceptionally well, recording 23.1% YoY growth. This growth was driven by higher realizations in the R-32 and R-22 operations. Key highlights for investors include the expansion of R-32 production capacity, which is scheduled to go live by February 2025. The expansion will contribute to further growth and solidify NFIL’s position in this segment.

2. Specialty Chemicals Segment
While the Specialty Chemicals segment experienced a 15.1% YoY decline, the future outlook remains positive due to strong order visibility for the next two quarters. Navin Fluorine introduced one new molecule at its Surat facility, with plans to launch two more in Q3FY25. The management remains optimistic about recovery in this segment, driven by product innovation and expansion in production capabilities.

3. CDMO Segment
The CDMO segment has shown 42% YoY growth, with a slight 16% QoQ decline. NFIL has secured significant orders for H2FY25 and set an ambitious revenue target of USD 100 million by FY27. A key development is the construction of the cGMP4 plant, with Phase 1 set to be operational by Q3FY26. This facility is expected to serve European clients, offering significant revenue potential as it ramps up operations.

Financial Performance Overview

Revenue and Profitability
In Q2FY25, consolidated revenue reached Rs. 5.18 billion, reflecting a modest 9.9% YoY growth but falling short of expectations by 17%. The HPP segment, buoyed by optimal R-32 and R-22 operations, was a major contributor to growth. However, the company's Specialty Chemicals division saw a sales decline, attributed to weak demand.

EBITDA Margins
The company reported EBITDA of Rs. 1.07 billion, with margins improving 150 bps sequentially to 20.7%. Gross profit margins stood at 56.8%, slightly up from the previous quarter, due to lower raw material costs. Despite a challenging environment in certain sectors, the overall profitability metrics remain stable and indicate room for margin expansion as the company’s strategic initiatives come to fruition.

PAT Margins
NFIL reported a PAT of Rs. 588 million, down 2.9% YoY, though 14.9% higher sequentially. The improvement in PAT margin to 11% in Q2FY25 from 10% in Q1FY25 reflects lower tax rates and better operational efficiencies.

Outlook and Expansion Plans

1. Capacity Expansion in HPP Segment
Navin Fluorine has set in motion several expansion plans, including the commissioning of additional R-32 capacity by February 2025 and the AHF capex project, expected to be completed by FY25-end. These expansions are crucial for sustaining the high growth rates seen in this segment and increasing market share in critical fluorochemical products.

2. Upcoming Molecule Launches in Specialty Chemicals
Investors should look out for the Q3FY25 molecule launches in the Specialty Chemicals division, which are expected to reinvigorate growth in this segment. The management has indicated strong visibility for orders in H2FY25, especially with enhanced capabilities at its Surat and Dahej facilities.

3. Growth Pipeline in CDMO
The CDMO division remains a cornerstone of NFIL’s growth strategy, with a focus on high-value custom manufacturing for global pharmaceutical and chemical companies. The expected revenue from this division is poised to reach USD 100 million by FY27, and the cGMP4 plant is set to play a pivotal role in achieving this target. This expansion is aimed at capturing increasing demand from European clients, positioning NFIL as a key player in the global CDMO market.

Investment Risks

Despite the positive outlook, NFIL faces risks including global economic uncertainty, fluctuations in raw material prices, and currency volatility. Additionally, while the Specialty Chemicals segment is set for recovery, any delays in product launches or demand rebound could pose challenges to near-term growth. Investors should also monitor the execution of the capex plans, as delays could impact revenue and profitability projections.

Valuation and Recommendation

At 38x FY27E EPS of Rs. 87, NFIL is valued at a premium relative to its peers. However, Prabhudas Lilladher justifies this valuation based on the company’s strong growth outlook, especially in the HPP and CDMO segments. With a target price of Rs. 3,523, the stock offers a modest upside from current levels, making it a solid accumulation candidate for medium- to long-term investors.

Investors are advised to accumulate the stock gradually, considering the company's strategic initiatives, strong order book visibility, and the favorable market environment in specialty chemicals and custom manufacturing.