Navin Fluorine: What is the impact of MD’s exit?

Navin Fluorine announced on September 29 that its MD, Radhesh Welling, has decided to leave the company and the stock has corrected by 14 per cent since then. This is the second such departure from the company following CDMO division CEO Ravi Venkataramanan’s resignation last month. Prior to the news, the stock was valued at 48 times one-year forward earnings owing to its 30 per cent earnings growth expectation in next two years.

With such high expectations baked into valuations, the steep correction that followed was on expected lines. Investors now must monitor if the new leadership can sustain the same client relationships that have driven growth so far. The stock even now trades at 40 times one-year forward EPS. The executive chairman Vishal Mafatlal stepping in to ensure transition to new MD along with Welling (available till December-2023) should steady the ship meanwhile.

Relationship-driven business

Compared to basic or advanced intermediates business across other specialty chemicals, Navin Fluorine offers a high-value contractual business that involves a higher R&D and value addition. In the recent quarter, specialty sector faced revenue declines of around 8 per cent YoY for the top 25 companies (by market cap) as global inventories and Chinese glutting of chemicals markets were cited as reasons. Navin Fluorine was the exception, which reported 26 per cent YoY growth even in Q1FY24.

The 20 per cent revenue CAGR from FY19-23 for Navin Fluorine was driven by relationship-building skills of the leadership team. Its segments, led by contract with Honeywell for hydrofluoroolefin (HFO), niche specialty chemicals that are contracted to dedicated multi-purpose plants, and nascent CDMO division backed by dedicated raw material plant which is in the works are relationship-driven. The ability of new leadership team to maintain and add to these growing relations is a critical component of the company’s growth and valuation expectations.

The ongoing capex projects, which include capacity for refrigerant gas, AHF plant to feed into agri-pharma pipeline of products, and plant for specialty chemicals would need debt and even equity funding. The company moved from zero net debt in FY22 to a net debt to EBITDA of 1.44 by FY23 end. Also, the company may need QIP funding for which board permission is also in place. The equity capital raise with the new management team will also be a key monitorable for future growth.

The management on call after the news conveyed that all key projects and relationships are expected to progress as expected. Some projects might face 1-3 months of delay due to global factors. Also, the company installed three CEOs for its three divisions, which should ensure a strong second level of leadership.

Outlook

The nomination and remuneration committee is looking for a replacement along the lines of an external candidate with execution, leadership and continuity as priority skills. The chairman, who was involved with strategy so far, is at the helm for now and the chairman was also involved in relationship building with clients which should smooth over any concerns.

Investors should ascertain on-ground capex execution, contract growth in CDMO and speciality chemicals in the next few quarters before stepping into the stock. As mentioned, the stock still trades at 40 times one-year forward earnings, which discounts a higher growth and hence is not a ‘discount stock’. The sector tailwinds also seem to be on the horizon for now. While Navin Fluorine is yet to be impacted by such sectoral factors, it is a wait and watch for next two quarters as to whether, besides disruptions at top management level, sectoral headwinds too reach the shores for the company. These factors may weigh on the stock for the time being.

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