Weekly Tactical Pick: Recent correction opens up an opportunity for this fluorochemical stock
Emerging growth opportunities are a big positive for Navin Fluorine, whose valuation premium is likely to sustain.
ur tactical pick for this week is Navin Fluorine (CMP: Rs 3,649; Market cap: Rs 18,085 crore; Nifty: 19,624). The stock of this fluorochemical major recently saw a sharp correction of about 18 percent on the back of the resignation of the company’s managing director (MD) Radhesh Welling. The outgoing MD had a successful stint of close to five years which creates a perception that there could be short-term repercussions due to a leadership change. While the company is looking for an external candidate, executive chairman Vishal Mafatlal will oversee the operations in the interim.
We believe investors’ concern in this regard is more than priced in. The company has separate CEOs to look after operations of each of the verticals – Specialty chemicals, HPP (high-performance product), and CDMO (contract development and manufacturing organisation). Further, we don’t anticipate any material change in growth/capex plans for the medium term.
Further, towards the end of CY23, a new plant at Dahej (Rs 540 crore investment) for a fluoro-speciality molecule is expected to get commissioned. Along with that, de-bottlenecking opportunities should aid near- to medium-term growth for the specialty business.
In the HPP segment, the company expects to finalise additional capacity expansion to supply to Honeywell. In addition, the company is exploring opportunities in the EV battery and solar energy space by incurring a Rs 450-crore capex to produce 40,000 tonnes of HF (hydrofluoric acid), the raw materail. On the refrigerant gas front, the new plant for R-32 is expected to contribute materially from next summer.
The key catalyst to watch is the supply agreement with Fermion, a Finnish CDMO player, for three years, starting CY2025. Navin Fluorine will be catering to three products, of which two are in late-stage clinical trials and one is already commercialised.
While the company is undergoing a heavy capex cycle, the debt-to-equity ratio is reasonable at 0.39x and it is not expected to go beyond 0.6-0.7x in the near to medium term.
Overall, what makes it a tactical opportunity is the recent consolidation in the stock price even though the long-term investment thesis is intact. Moreover, we believe the valuation premium (23x EV/EBITDA for FY25e) to sustain, given emerging growth opportunities in fluorochemicals.
Risk to the scenario: Recession in advanced economies of the world can clip both pricing and volume opportunities for chemicals. Further, weak domestic demand in China can lead to dumping across the border.
Bymoneycontrol
