Navin Fluorine International Limited (532504) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Navin Fluorine International Limited Q1 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs and opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Radhesh Welling, Managing Director of Navin Fluorine International Limited. Thank you, and over to you, Mr. Welling.

Thank you. Good afternoon and a warm welcome to all the participants. I'm joined by our CFO, Mr. Ketan Sablok; and Strategic Growth Advisors, our Investor Relations advisors. I hope everyone got an opportunity to go through our financial results and investor presentation uploaded on the Stock Exchange as well as on our company's website. We hope you all are doing well. And all your loved ones are safe. To start with, due to COVID-19 and nationwide lockdown, we had to temporarily suspend our operations in month of March and April. During this period and thereafter, the team has worked diligently to develop and implement strict operating guidelines and protocols to ensure safety of our staff and workforce. We have set up a special risk management office, which meets every day to review the situation across our businesses and take whatever decisions are required to be taken on real-time basis. We believe the performance of this Q1 FY '21 does not represent normal quarter's operations. Revenue for Q1 FY '21 was down 15% on a year-on-year basis and by 23% on a Q-on-Q basis. Our efforts towards increasing revenue contribution from high-value businesses and some of the decisions made on product pricing and cost management helped us maintain operating EBITDA margin at 25%-plus even in this challenging quarter. Our high-value businesses, which are primarily Specialty and our CRAMS business, they grew by 18% on Y-on-Y basis to INR 131 crore. It contributed 64% of the total revenue in Q1 FY '21. On a Q-on-Q basis, it was down by 17%, largely impacted by the plant closure. Now I'll go through each of the businesses that we have. On Specialty business, grew by 13% on a year-on-year basis to INR 97 crore on the back of well-balanced growth, driven by life science, crop science and industrial segments. On Q-on-Q basis, we lost revenue for approximately 15 days in the month of April due to shutdown of plant operations, which resulted into revenue been down by approximately 7%. Project flow continues to be extremely strong, and now we are in the process of strengthening our technical and commercial capabilities to be ready to capture and realize the growth opportunities in this particular vertical. Moving on to CRAMS. The business grew by 35% on a year-on-year basis to INR 34 crore. We started this financial year with strong order book position, which should help us deliver strong future growth in this particular business. We saw some impact in Q1 FY '21, primarily again because of the lockdown. But on a longer-term basis, we remain very positive about this business on the back of strong inroads we have made, and we continue to make into global pharma majors. Coming to our legacy business, that is Ref. Gas and Inorganic Fluorides. Revenue was down by 43% on a year-on-year basis to INR 74 crore. On Q-on-Q basis, it was down by 31%. The performance was impacted due to weak demand from the end users due to lockdown and plant closure. Legacy business contributed to 36% of the total revenue. On Ref. Gas, revenue was down by 41% on a year-on-year basis to INR 46 crore. The impact was largely due to weak demand from the OEMs as well as in the trade market. On Q-on-Q basis, we were down by 18%. In international markets as well, the demand remained quite soft, primarily due to destocking. Moving on to Inorganic Fluorides. The business was down by 46% on a year-on-year basis and by about 45% on Q-on-Q basis to INR 28 crore. This was mainly due to significantly lower demand from stainless steel and glass industries compared to last year, as many of the end users closed their operations during this lockdown. Coming to our new business vertical, high-performance product, the work is progressing well, and we remain on schedule for completion of the project by Q4 FY '22. To sum up, we believe our business will benefit from strong tailwinds in the coming years. We are very confident to navigate through these tough times and emerge much stronger and leaner. That's it from my side, I'll now hand over to Ketan to give you brief on the financial performance of the company in this quarter. Ketan, over to you.

Thank you, Radhesh, and a very good afternoon to all the participants. I hope all of you are safe and in good health. I'll just share the highlights of our financial performance, following which we will be happy to respond to your queries. On a Y-o-Y basis, the performance has been as follows: Company has reported net revenue from operations of INR 205 crores in Q1 FY'21 as against INR 242 crores in Q1 FY'20, it's down by about 15%. As Radhesh already mentioned earlier, due to the COVID-19 and the nationwide lockdown announced by the government, Navin had temporarily suspended manufacturing operation at the facilities during March and in early April. Therefore, the Q1 FY '21 performance doesn't represent a normal quarter of operations and it's strictly not really comparable with the previous period. The operating EBITDA stood at INR 52 crores in Q1 FY '21 as against INR 61 crores in Q1 FY '20, down about 14%. Operating EBITDA margins stood at 25.4% in Q1 FY '21. The increased share of high-value business helped us to maintain these EBITDA margins in spite of business challenges and the plant shutdown. To add to this, the product mix and some of the price increases that we had taken during this quarter helped us sustain these EBITDA margins. The operating PBT stood at INR 42 crores for Q1 FY '21 as against INR 53 crores in Q! FY '20, down by about 21%. The margin -- operating PBT margins stood at 20.5%. The profit after tax stood at INR 52 crores, while the margin was at 25.2%. Coming to unit-wise performance for quarter 1 FY '21, the legacy business was lower by 43%, whereas the higher value business grew by 18%. The legacy business showed a downtrend due to a fall of about 46% to INR 28 crores in Inorganic segment and about 41% to INR 46 crores in Refrigerant Gas business Y-o-Y basis. The Specialty segment grew by 13% to INR 97 crores and the CRAMS segment grew by 35% to INR 34 crores. I'll just update you on the Q-on-Q basis or the performance on the stand-alone basis. On Q-on-Q basis, the revenue was down by 23%, again, impacted by company's suspension of operations. The operating EBITDA was down by 23%, in line with the sales drop, however, we were able to maintain the operating EBITDA margin at 25.4%. During the quarter, towards our ongoing commitment to support the central and the state government in their mammoth task of fighting with the COVID-19 pandemic, in the month of April, the company made an aggregate contribution of about INR 5 crores to the PM CARES fund and the Chief Minister's relief funds of the 3 states of Maharashtra, Gujarat and Madhya Pradesh. The impact of the same is visible in the financials of Q1 FY '21 and is included in the other expenditure. There has been significant increase in the other income on the back of interest income from tax refunds, which came in this quarter, the interest element was about INR 26 crores. Operating PBT was down about 26%. And profit after tax, strictly not comparable due to the tax adjustments, which we had done in the last quarter of FY '20. Coming to the unit-wise performance. The legacy business was lower by 31%, while the high-value business was low by about 17%. So that's all from my side. I'll now open the floor for Q&A, and we'll be happy to respond to your queries. Thank you very much.

[Operator Instructions] First question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Sir, my question is on this legacy business, which has been sharply down. And if we are talking about -- I understand that the domestic -- there's complete lockdown, it was basically seen in the month of March, April, May, et cetera. But with the lockdown coming out, and basically in several states in India as well as several countries, I mean can you give some thread across how you are seeing Inorganic demand? And demand improving for the Ref. Gases? I mean how has the traction been from the low point?

Yes. So when we got into this particular financial year, lot of our customers were completely closed down, both for Ref. Gas as well as for Inorganic. So the stainless steel plants that we supply to were completely shutdown, et cetera. They remained shut for a majority of the month April, and May is when they actually started their operations back. And they still continue to operate at very low capacity. And the reason that we are getting from them is primarily because from their side, they're actually seeing demand being very slow. And for them, there is a lot of destocking that is happening. So today, if I look at Inorganic business, the demand has not come back for our customers to the pre-COVID levels because of which they are not operating their plants at the pre-COVID level. We're expecting that in Q2, they should be back to pre-COVID level. And once the things start normalizing, then we should be able to start seeing 2 things: one, destocking of a lot of that -- sorry, restocking of a lot of that inventory that had got -- that has got destocked and also impact on the demand for our product because of their demand going up. So we expect that some of that demand lost, we should actually be able to cover up in the following quarters in this year. On Ref. Gas, there is a slightly different story. Not only did we actually lose the volume, but we lost the volume in typically the seasons, which are typically considered to be high-demand months or high-demand season. So that is where we believe the impact will be a lot more going forward. Again, there, some of the OEMs have again started operating. They are not yet to the pre-COVID level. The trade market has started operating from June. Again, initially, they are basically just consuming all the stock, on the inventory that they had. And we expect that from beginning of next month that the demand for Ref. Gas should be relatively similar to what was at pre-COVID level.

And as far as the pricing, how are they, sir? I would understand that if the demand comes down, you would have had a whammy from the pricing side as well?

No. We -- the pricing has actually remained fairly stable. In some cases, we actually managed to take the pricing up. The reason being a lot of what we were seeing on the demand side, had nothing to do with the pricing. It was primarily because demand for their products just wasn't there. So I don't think, during this time, there was any impact on the pricing. In some of the cases, in some of the segments, we were actually able to take prices up for some of our products in Inorganic and Ref. Gas.

Sure, sir. Sir, then you talked about the plant being shut down for a period of time because of this lockdown, and despite of that, if I look at -- the high-value business has grown by 18%. So can you give some color -- if the lockdown was not there and the plant was running I mean there we -- I mean, how much of additional sales we could have done? I mean can you give some clarity? Because when we started off, we were very buoyant on both CRAMS and Specialty as well too this year. So do you think that things will accentuate in the second quarter, given that we will be operating full quarter instead of probably 10, 20 days being shutdown?

Yes. So the answer is going to be different for these 2 businesses within the high-value category. On Specialty, we lost almost INR 10 crores to INR 12 crores of sales because of this shutdown; so because for the first 15 days, we were just not able to produce anything. And after that, even after the manufacturing started, we had to actually bring the production up in a very phased manner. So totally, if you look at what we had estimated versus what we did in this particular quarter, there was a delta of about INR 10 crore to INR 12 crore. Having said that, a significant portion of that is actually lost because even at pre-COVID level, we were actually running the plant to almost full capacity. Even post COVID, we actually continue to run the plant now at full capacity. So going forward, if the capacity -- so on Specialty, it's primarily the capacity, which is the constraint, it's not so much of a demand. So as I mentioned earlier, the overall demand continues to be strong on the Specialty side. But would that INR 10 crore to INR 12 crore actually move into Q2? The answer is no. Not all of it is actually going to move into Q2. But overall, we feel positive about the foreseeable future of the Specialty business, as we have been giving in the commentary. On the CRAMS side...

So you'd still look at that, the 25% kind of a growth this year, that's right, 20% to 25% growth?

Yes. Whatever we have indicated earlier, we have strong reason to believe that we should basically be ballpark around the same number. On CRAMS, we started the year with pretty strong order book. So let's assume, I mean, we're just comparing the order book on 31st March or, let's say, 1 April 2020 versus 1 April 2019. The order book position was significantly better, which also means that overall this year is going to be better than what we had last year. Now because of this -- in CRAMS, what happens is, your typical manufacturing cycle, it's a lot longer than in most of the other businesses that we have. So some of that -- the cascading effect we will actually see in the following quarters, in terms of sales bunching up. So unlike in Specialty, where there clearly is going to be some business loss because of shutdown, in CRAMS, there is no business that will be lost because of that shutdown. It will basically just accrue in the following quarters.

Sir, one final question from my side on the cost. I mean if I look at the other expenses, we have seen a considerable cut. I mean if I remove this INR 5 crores of donation -- I mean, the contribution that we have done, I mean almost from INR 47 crores on a Q-on-Q basis, we are down to INR 30-odd crores, but I am not able to see a similar kind of a benefit on the employee cost. So number one, can you illustrate the kind of cost-cutting that you've done on the other expenses, whether we can see more cost-cutting in the second quarter? And a little bit color on the other -- the employee cost as well. I mean it really is not reflecting as far as the cost is concerned as much as what we are seeing on the gross margins and the other expenses side?

Yes. So as you know, other expenses actually has a component of the variable piece as well. So there are a lot of utility costs, et cetera, that actually sit in there as well. And some of those other expenses actually have come down in proportion to the sales coming down. There is one, where we've actually done some cost rationalization, which is primarily on your repairs and maintenance. Because almost for one month, the plant was shut and then for some of the following weeks, we -- the plants are not operating to the full capacity. So we used that as an opportunity to relook at our R&M cycle, et cetera, and we have identified a few opportunities for cost rationalization there. So some of that is what is getting reflected in the other expenses. As far as the employee cost is concerned, we have not behaved differently because of COVID. So for -- so first of all, there has been no reduction in the workforce. We've actually gone ahead with the increments, et cetera, as if it were a normal year, primarily because we are trying to invest in the future. Also some of new recruitment, etc., that we had planned for, let's say, Q4 as well as Q1, we have actually gone ahead with all those recruitments. As a matter of fact, we have actually been lot more aggressive on recruitment, on new recruitment than we would have otherwise be because of the situation, we actually had access to really good talent available in the market. So given our growth plan, we have actually gone aggressively in terms of hiring, et cetera. So because of that -- and that is actually getting reflected in the other expenses -- sorry, in the employee benefit that you are seeing there, especially versus Q1 of last year.

[Operator Instructions] Next question is from the line of Abhijit Akella from IIFL.

Yes. Congratulations on a good quarter in challenging times. First, just an update on the CapEx outlook for this year and maybe even in the future. So we had plans to, for example, consider projects in Specialty Chemicals this year, in particular. So now how does this whole environment, sort of, change those plans, if it does at all? And what kind of time line or what kind of CapEx budget should we expect for this year and maybe next year?

Yes. So as far as the overall plan is concerned, especially related to Specialty, nothing has changed from what it was pre-COVID. So what -- the CapEx plan that we have been working on, in this particular BU, we continue to work on, as we have indicated in our earlier commentary. As soon as we are ready with our plan, we will be presenting it to the Board. And once we have the approval from the Board, we would be happy to share with all of you, and that should happen in the next few months on the Specialty. One thing that we are clearly seeing is that the overall project flow has significantly gone up. So which means that we will actually have follow-through CapEx plans, especially on the Specialty, as we move ahead. Will all of that happen within this financial year? Maybe, maybe not. Specifically on the question you asked related to CapEx budget, we typically don't work on any preset CapEx budget. So we look at each of the opportunities on its own merit, and once we feel that we have strong enough business case where we have ticked all the commercial, legal, financial and technical boxes, then we take that business case to the Board. So we don't actually start a year with any preset CapEx budget per se, especially for the new opportunities.

Got it. That's helpful. And then just with regard to your comment regarding significantly increased project flow. If I may just request you to elaborate a bit more on that? Is this arising because of the COVID environment and the kind of anti-China sentiment prevailing globally? And if so, or even if not, is this largely in the Specialty Chemicals, BU in agrochemicals? Or are we seeing it in any other segments as well of our business?

Yes. So when I talk about project flow, let me differentiate between number of inquiries coming and number of projects flow. When I talk about projects flow, I'm talking about qualified and projects typically emerge out of engagements with select few customers. So if you generally see the inquiry flow, which part of that is actually happening because of China, et cetera, is significantly up. But that doesn't really mean much. And that is not what I was referring to when I was talking about project flow. The increase in the project flow, let's say, in Q1 versus, let's say, Q4 of last year or Q1 of last year, it's primarily because of 3 factors. One is basically because of the strategy that we made in terms of the 3P framework that we developed last year and the overall approach to market that we came up with last year, et cetera. And some of these engagements actually started last year itself, and what we are seeing today in terms of project flow is a result of those engagements. So that's basically part number one. Part number 2 is some of the projects that we had earlier got or earlier received, so those we have actually executed quite well because of which we got opportunity, we had opportunity to go back to the same set of customers and ask for more number of projects, which has also started happening, both on the pharma side as well as on the agrochemical side. And the third point, which is something that I have mentioned earlier also, we continue to see very good set of opportunities beyond these 4 business units that we have, so which are typically from either of the segments that we currently play in. So that continues to be pretty good. And some of these projects are actually outside -- are coming from outside of the segments that we typically play in.

Next question is from the line of [ Siddharth ] from [ Equirus ] Securities.

Sir, first one was on the molecule that we are supposed to commercialize in CRAMS in 1H FY '21, any updates on that?

I think you are basically talking about the end product, which our customer was supposed to commercialize in this year.

Correct. Yes.

Yes. So that product has been commercialized. And the initial feedback that we have received from the customer has been extremely encouraging. The products seemed to be doing quite well on the market.

And sir, secondly, on the highest performance product, and you had recently spoken about electronic chemicals and semiconductors as well as new opportunities in fluorine. So could you throw some color on the opportunity size in that industry?

No. I think it will be a little premature to talk about the overall opportunity size, et cetera. There are 2 things that we can, however, say, is that, one, as I mentioned earlier, we are clearly seeing opportunities outside of these 4 traditional segments that we play in. And in these areas that we are talking about, lot of demand for fluorine molecule is basically in terms of substitution of the other molecule. It's not basically market share gain. It's basically new market creation, which is what is happening there.

So I mean, this typically will be a higher-margin business for us? Or it will be a moderate-to-low business margin?

I think -- as I said, I think it's a little too early because margin is a result of not only what the market views, but also you decide to execute on a particular opportunity. Obviously, from our side, the areas that we select will be such that will actually give us overall margins -- overall higher margin than our existing business. I mean that will obviously be our intent, but what would the exact margins be, how much would those be higher by, et cetera, is something that I think it's too early to talk about.

Next question is from Karthi Keyan from Suyash Advisors.

I'm following up on the same point you just made. I just wanted to understand this slightly better. When you talk about substituting fluorine for other molecules, would this be in the nature of a patent extension or a completely new chemical entity and therefore, how does that change the patent life cycle -- addressable opportunity for us? Some thoughts on that, please.

Yes. So some of these are actually going to be new chemical entities, and that is where we are actually working with our customers, et cetera. So there are a lot of joint development efforts going on there. But majority of those are existing chemical entities, but developing newer applications in this newer segment probably. So there is lot of know-how, et cetera, that comes in here. So specifically related to patent, I think it's difficult to say because molecule to molecule is going to be different, but one thing I can definitely say is that most of what we are doing here is extremely proprietary.

And therefore, how close would these be to the commercialization state? Would they be a 1- to 3-year kind of a thing? Or do you think the time lines could be much drawn out?

No. Again, some of these opportunities are -- I mean, obviously, they will not be 1 year because if it's 1 year out, then we need to be currently constructing the plant. So, it will all be 1 year plus. But there are some opportunities which are relatively closer, whereas some of them are slightly farther away because especially the ones where the development work is still going on, those are, let's say, 3 to 5 years out. But the ones where the development work is already completed or almost completed and the application piece is going on, are I would say, about 1 to 3 years out.

[Operator Instructions] Next participant is [ Hasmukh Gala from Finvest ] Advisors.

Congratulations for a good set of numbers. I think very elaborately you have explained. Sir, can you give us some flavor on this HPP contract, which we have got? I think it's still quite far away, you will be doing it in Q4 FY '22. And you also said that the products that you will be dealing will be totally different than what you are existing doing. So in terms of the user profile, whether they are the same, maybe product will be different, but the user profile of different industries to which we cater, will it be the same?

So I think related to HPP, I think we have already given out a lot of information. So this is a proprietary product. Now this is a highly patented product. And this is basically a contract that we have signed with our customers. So the entire product will actually be supplied to them. This product actually goes into a number of applications. It doesn't go into one single application. And hence, there is a significant diversification in terms of application basket. And there are newer applications, which are being developed for this end product. The interesting piece here is also that some of the intermediates, which get generated, while manufacturing the end product, could also have very nice applications and that is what we are also working on. Some of these we are working on independently, some of these we are working on with the same customer on.

Okay. So are there any more such deals in the offing?

No. So we continue to talk to various customers for these kind of opportunities. I mean this was a $410 million contract, so, of course, it's not like there are many $400 million contracts, some of them are smaller, some of them are significantly smaller, et cetera. But eventually, the goal is that whatever opportunity we work on, even if it is small today, it will eventually lead to that particular deal. That could actually happen because that product scales up or that relationship with that particular customer scales up.

Okay. Okay. And sir, can you tell us that you are, say, not having any budget for the project CapEx, but what will be your routine CapEx? And whatever project [Audio Gap] FY '21 or '22, just to understand the cash flows?

No. So I think the routine CapEx is just in terms of your normal plant upkeep, et cetera, which is typically, we typically have in the vicinity of about INR 50 crore plus/minus. And every year, we tend to take a few, kind of, a debottlenecking project. So depending on the scale of the debottlenecking project, the number could go down or go up. We're actually looking at a few such debottlenecking projects, both in Surat as well as in Dewas, so we currently are working on those projects. So I think in the next few months, we would probably finalize this, and then we would be happy to share the exact number.

The next question is from the line of Ritesh from AMBIT Capital.

Just one check I wanted to do. I mean while you say that there's a lot of project demand coming in, I do see a lot of increase in the competitive intensity as well. I mean because I know that, let's say, a lot of your listed peers are expanding capacities, one of the unlisted peer has almost doubled the capacity. So in that context, I just wanted to check with you, is it the flow of projects to India itself is increasing? Or is it that within the fluorine space, you are getting more projects versus some of your competition? And are you also expanding your chemistry capabilities to move beyond fluorination? So if you could just clarify that, that will be helpful.

Yes. So I think what is important to understand is the distinction between inquiries and project flows. So clearly, the number of inquiries coming into India have really gone up. And that has benefited everyone, including the Navin Fluorine. But what I was talking about was qualified projects, okay? So what we are trying to do is some of these projects require very basic chemistry. Even within fluorination, they require very basic kind of home fluorination, et cetera. And we have decided that we will not play into any of those basic chemistries. So there are 2 things that we are looking to do. One, within the fluorination, so though a lot of times, we tend to think fluorination as one basket, fluorination is like an ocean. So right from very basic halides reaction, you can go into a very, very complex piece within the fluorination piece. So we are trying to migrate towards the high-value piece within the fluorination space. And as you very rightly indicated, we are also looking at some other adjacent difficult chemistries to get into. So a lot of these projects that we are now focusing on are based on these 3 criteria: a, do we have the building block? So are we able to control the value chain or own the value chain in that particular product category? Second, is this -- does this require a simple me-too chemistry, which anybody can do? And the third piece is that, is there any other bolt-on chemistry that we can develop expertise in through this project delivery? So if -- and typically, if the project has to take at least 2 of these 3 boxes for us to say yes to our project.

And just on the competition bit, like I know that there is the whole tailwind of given how Europe shift to India, et cetera. But then you see lot many Indians there also trying to aggressively ramp up on some of the capabilities. So do you see a sort of margin pressure? May not be today, maybe 2, 3 years down the line, could there be a margin pressure kind of a thing? I know you're talking about specific capabilities and market capabilities. But is there a -- like, could there be a chance as the revenue size grows bigger for the project, the margins may actually see some bit of compression? Even let's say for your CRAMS business as things get commercialized, probably margins may get compressed?

Yes. So these are 2 different questions. Let me address the CRAMS piece first. On CRAMS, as we have indicated, that as the projects scale up, and the products either get ready for commercialization or the product's net commercialization, your contribution margin or your gross margin will go down. But because the scale will go up, and hence, that will actually be able to absorb the significant fixed costs that we have invested in that particular business, your EBITDA will continue to remain all -- more or less same, okay? So on -- that is the story on the CRAMS side. On Specialty, what we are seeing that these inquiry, there is almost like a natural selection that happens in India, okay? So there are -- these projects are, let's say, A type, then they typically go to company A. If they are B type, they typically end up going to company B. There are seldom any project where we will be directly competing with, let's say, another company, either a listed or unlisted company within India. So a lot of that natural selection actually happens as a part of the conversion from inquiry to project. So to answer your question...

Yes, yes, yes. That's very helpful, sir. The last one, I -- yes, please go ahead.

Yes. So to answer your question, would margin get compressed? That is difficult to tell, but the margin compression will not be directly proportionate to the inquiry flow into India.

Next participant is Dhaval Shah from Girik Capital.

Sir, my question is, I mean, continuation of the competition scenario, which you explained to the previous participant. So this is about India, but on a global scale, when our client is -- we get a business from our client, then how does our client do the selection vis-à-vis any other company in their own geography or all over the world? So how does the selection happen? So does our cost play a very significant role? Or it's our chemistry skill, which we want to cater to the higher end of the fluorination pie? And is it based upon that?