Buy suggested for Navin Fluorine

Navin Fluorine has announced that Rs 1.95bn capex in agro and pharma is expected to be funded through internal accruals and debt to strengthen its specialty chemicals division and for growth. The multi-purpose plant at its wholly-owned subsidiary, Navin Fluorine Advanced Sciences, at Dahej, Gujarat, is expected to be commissioned in H1 FY23, with ~1.4x asset turnover. The expansion would help launch products of complex fluorinated chemistry and strengthening customer relations. We upgrade our rating to Buy with a higher target of Rs 3,000, valuing the stock at 34x FY23e EPS, earlier Rs 2,500.

With this multi-purpose plant, the company will have capacity to manufacture five products, specifically in agro. Of five products, three will be developed in-house and two with clients (according to their specifications). Navin has another seven products in the pipeline catering to pharma and agro. Management said the EBITDA margin would be higher than at present and the RoCE would be in a similar range. The expected payback period would be four years, with revenue of Rs2.6bn-2.8bn at peak utilisation.

Per management, of five products, three would be sold to domestic customers to produce final formulations; two would be exported. Based on progress and customer requirement, the company may look at forward integration and set up plants dedicated to such products. Further, it has, with environmental clearance, enough land for expansion.

Management said construction is expected to be complete by Aprril 2022 and take two months to stabilise. Hence, commercial production would start from Jun'22. We have raised our FY23e revenue and PAT ~7% and 8% respectively, considering the plant operating for about nine months in FY23.

We upgrade our rating to a 'Buy' with a higher target of Rs 3,000, at an implied multiple of 34x FY23e EPS and 26x FY23e EV/EBITDA.

The risks are- delay in capex implementation and a pick-up in its past business.

(Anand Rathi)