Navin Fluorine International Ltd

Transcription

1 Q2FY11 Result Update Enhancing investment decisions

2 Explanation of CRISIL Fundamental and Valuation (CFV) matrix The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP). CRISIL Fundamental Grade Assessment CRISIL Valuation Grade Assessment 5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP) 4/5 Superior fundamentals 4/5 Upside (1-25% from CMP) 3/5 Good fundamentals 3/5 Align (+-1% from CMP) 2/5 Moderate fundamentals 2/5 Downside (negative 1-25% from CMP) 1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP) Analyst Disclosure Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. Additional Disclosure This report has been sponsored by NSE - Investor Protection Fund Trust (NSEIPFT). Disclaimer: This Exchange-commissioned Report (Report) is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this data / Report. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.

3 Issuance of carbon credits is a key monitorable October 25, 21 CFV MATRIX Fair Value Rs 3 CMP Rs 296 Fundamental Grade Valuation Grade Industry 2/5 (Moderate fundamentals) 3/5 (CMP is aligned) Chemicals Navin Fluorine Ltd s (Navin s) Q2FY11 revenues and PAT fell by 31% and 82% y-o-y, respectively, owing to lack of sales of carbon credits. The verdict on the issuance of carbon credits is expected by November 21. We believe it is too early to factor this in our estimates. The performance of the core business is in line with our expectations. Accordingly, we maintain the fundamental grade of 2/5 on Navin. Q2FY11 result analysis Navin s Q2FY11 revenues declined 31% y-o-y to Rs 784 mn. This was due to the lack of sales of carbon credits since May 21. Despite no contribution from the high-margin carbon credits Navin remained EBITDA profitable with margin of 11.5% due to the strong performance of core operations. The lack of income from this high-margin product affected the company s profitability and PAT decreased 82% y-o-y to Rs 55 mn (7.1% margin) in Q2FY11. Carbon credits delayed or denied? Navin has been unable to accrue carbon credits since May 21, owing to United Nations stopping the credit issuances post recommendations of CDM Watch to change the method of carbon credit issuance. CDM Watch alleges that manufacturers are gaming the system to earn carbon credits and have recommended a new method to cut 9% of carbon credit issuance. The allegations are being investigated, the outcome of which is expected to be revealed by the CDM executive board by November 21, along with a possible revised method. While it is difficult to predict the outcome, a revision in the method poses a downward risk to our earnings estimates for Navin. In our scenario analysis, Navin s fair value works out to Rs 24 per share as against the current fair value of Rs 3. However, we believe it is premature to factor this into our financials as of now and remains a key monitorable. Key developments Sale of land by Mafatlal Industries is at an advanced stage, whereby Navin may be able to recover its investment in group companies sooner than expected. Navin has announced share buyback (up to Rs 135mn) at a price of Rs 4 per share and aims to buy back 338,792 shares. Valuations: Fair value aligned with current market price We maintain our earnings estimates and continue to value Navin based on the sum-of-the-parts (SOTP) method. We also maintain the fair value estimate of Rs 3 and our valuation grade of 3/5, indicating that the current market price of Rs 296 is aligned with the fair value. KEY FORECAST Key forecast (Rs mn) FY8 FY9 FY1 FY11E FY12E Operating income 2,95 4,29 4,318 4,639 5,11 EBITDA 374 1,26 1,464 1,529 1,714 Adj PAT ,174 Adj EPS-Rs EPS growth (%) (96.3) Dividend yield (%) RoCE (%) RoE (%) PE (x) P/BV (x) EV/EBITDA (x) Source: Company, CRISIL Equities estimate N.M: Not meaningful; CMP: Current Market Price KEY STOCK STATISTICS NIFTY 6,16 NSE ticker NAVINFLUOR Face value (Rs per share) 1 Shares outstanding (mn) 1 Market cap (Rs mn)/(us$ mn) 2,9/66 Enterprise value (Rs mn) /(US$ mn) 2,266/51 52-week range (Rs) (H/L) 398/268 Beta 1.8 Free float (%) 64.7 Avg daily volumes (3-days) 1,83,816 Avg daily value (3-days) (Rs mn) 56.6 SHAREHOLDING PATTERN 1% Excellent Fundamenta Fundamental Grade PERFORMANCE VIS-À-VIS MARKET Returns 1-m 3-m 6-m 12-m Navin -2% -3% -18% 3% NIFTY % 1% 14% 17% ANALYTICAL CONTACT Sudhir Nair (Head) snair@crisil.com Niyati Dave Arjun Gopalakrishnan Client servicing desk Poor Fundamenta 9% 8% 7% 6% 5% 4% 3% 2% 1% % 44.9% 2.6% Strong Downside Valuation Grade Strong Upside 14.9% 11.5% 12.2% 13.1% 44.1% 43.4% 41.7% 6.8% 6.7% 7.4% 37.2% 37.2% 37.2% 37.2% Sep-1 Jun-1 Mar-1 Dec-9 Promoter FII DII Individuals Others ndave@crisil.com agopalakrishnan@crisil.com clientservicing@crisil.com CRISIL EQUITIES 1

4 Q2FY11 Result Summary Navin Fluorine (Rs mn) Q2FY11 Q1FY11 Q2FY1 q-o-q (%) y-o-y (%) Net sales ,144-9% -31% Raw materials cost % % Raw materials cost (% of net sales) 51.6% 39.% 35.2% 13% 16% Employees cost % 36% Other expenses % 6% EBITDA % -81% EBITDA margin 11.5% 29.2% 42.1% 18% 31% Depreciation % 23% EBIT % -88% Interest and finance charges % 9% Operating PBT % -89% Other Income % 24% PBT % -84% Tax % -87% PAT % -82% Adj PAT % -82% Adj PAT margin 7.1% 17.6% 27.1% 11% 2% Adj EPS (Rs) % -82% Source: Company, CRISIL Equities Revenue growth is backed by CER income EBITDA and EBITDA margins to grow FY1 (Rs mn) 6, 5, 4, 3, 2, 1, 2,759 2,559 2,98 4,178 4,29 4,593 4,961 5% 4% 3% 2% 1% % (Rs mn) 1,8 1,6 1,4 1,2 1, ,26 1,464 1,529 1,714 4% 35% 3% 25% 2% 15% 1% 5% -1% % FY6 FY7 FY8 FY9 FY1 FY11E FY12E FY6 FY7 FY8 FY9 FY1 FY11E FY12E REVENUE REVENUE GROWTH (RHS) EBITDA EBITDA MARGIN (RHS) Source: Company, CRISIL Equities Source: Company, CRISIL Equities Quarterly net sales and EBITDA margins 45% 4% 35% 3% 25% 2% 15% 1% 5% % (Rs mn) Quarterly PAT and Pat margin performance (Rs mn) 3% 35 25% % 2 15% 15 1% 1 5% 5 % Q1 FY9 Q2 FY9 Q3 FY9 Q4 FY9 Q1 FY1 Q2 FY1 Q3 FY1 Q4 FY1 Q1 FY11 Q2 FY11 Q1 FY9 Q2 FY9 Q3 FY9 Q4 FY9 Q1 FY1 Q2 FY1 Q3 FY1 Q4 FY1 Q1 FY11 Q2 FY11 Net sales (RHS) EBITDA margin PAT (RHS) PAT margin Source: Company, CRISIL Equities Source: Company, CRISIL Equities CRISIL EQUITIES 2

5 Share price movement Fair value movement since initiation 16 (Rs) 4 (in ') 1, ,4 1,2 1, Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 14-Sep-1 17-Sep-1 2-Sep-1 23-Sep-1 26-Sep-1 29-Sep-1 2-Oct-1 5-Oct-1 Navin Fluorine -Indexed to 1 KEY DEVELOPMENTS NIFTY Total Traded Quantity(RHS) SharePrice(LHS) Fair Value Land sale at advance stage: Mafatlal Industries Ltd s (MIL s) land sale at Byculla, Mumbai worth Rs 12, mn is at an advanced stage. Upon conclusion of the sale, Navin s advances to group companies and investment in preference shares are expected to be redeemed by MIL, thereby increasing Navin s cash levels by Rs 1,159 mn. Change in MD: Mr Shekhar S. Khanolker, who has been with Navin for the past three years, has been appointed the MD of the company with effect from January 1, 211. He will be taking over from Mr Satish D. Kakade. Mr Khanolker is currently the president of flurochemicals business at Navin. Share buyback: Navin s board, in September, approved a buyback of its shares to the extent of Rs 135 mn. The buyback would be conducted through the tender route at a price of Rs 4 per share and Navin aims to buy back 338,792 shares. CRISIL EQUITIES 3

6 CARBON CREDITS A KEY MONITORABLE Earlier this year, CDM Watch, an initiative of international NGOs, tabled a report to the CDM Executive Board claiming that there is evidence which proves that manufacturers across the globe (mainly from China and India) are gaming the CDM (Clean Development Methodology) system. They argue that this undermines the carbon markets as manufacturers produce more greenhouse gases so that they can get paid to destroy them. The CDM Executive Board is currently investigating the matter and is expected to table its findings by November 21. Pursuant to reviewing the findings, the CDM Executive Board is expected to review its method of both approving a project and issuing of credits. The World Bank, on the other hand, has defended its investments in two of the largest HFC-23 incineration projects. The World Bank has accused CDM Watch of conducting analysis based on a narrow and simplistic approach. It has advised that the current method should not be put on hold. With respect to these developments Navin (and its five other Indian and international peers) has not been issued carbon credits since May 21. We believe that these developments could pose a threat to Navin s profitability in the medium term. Scenario analysis Scenario 1 - Status quo maintained: In this scenario, we assume that the investigations, which conclude in November 21, are inconclusive or do not find evidence of manufacturers gaming the system. Accordingly, all the companies which are being investigated will be allocated their respective carbon credits. We do not believe the company would face any difficulty in selling its carbon credits as there would be adequate pent-up demand. Hence, we retain our estimates in this scenario. Scenario 2 - Methodology revised as per CDM Watch recommendation: The Executive Board accepts CDM Watch s recommendations for a new method wherein carbon credits allocation reduces by 9%. We believe this would hit Navin s carbon credits income in the same measure. However, in this scenario we believe two factors are bound to play out: 1) without the incentives of carbon credits the realisations of refrigerants are bound to improve worldwide and 2) with an increase in realisation the overall volumes would decline marginally. On an overall basis, we believe Navin would return to pre-27 net margin levels of ~7% (excluding interest cost). CRISIL EQUITIES 4

7 SOTP valuation as per above scenarios: Nature of non-operating Status quo Reduction in CER Reasoning asset (Valuation -Rs per share) income (Valuation - Rs per share) Cash (excluding core business) - FY A ~9% reduction in CER income over the current period will adversely affect the cash position as on FY12 Residual real estate assets in Sulakshana Interest bearing advances to group companies Equity investments in MDL Preference shares in MIL Total without core business Core business valuation 4 99 An improvement in margins owing to better realisations will results in a better valuation for the core business Total value of Navin 3 24 Source: Company, CRISIL Equities estimate CRISIL EQUITIES 5

8 VALUATION We continue to value Navin based on the SOTP method; we have valued the core business operations by the P/E method and the non-operating assets on a case to case basis. Currently, we value Navin at Rs 3 per share. At this value, the implied P/Es are 3.x FY11E and 2.6x FY12E earnings. One-year forward P/E band (Rs) One-year forward EV/EBITDA band (Rs) 6, 5, 4, 3, 2, 1, Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 Oct-9 Dec-9 Feb-1 Apr-1 Jun-1 Aug-1 Oct-1 Jun-7 Aug-7 Nov-7 Jan-8 Apr-8 Jul-8 Sep-8 Dec-8 Mar-9 Jun-9 Aug-9 Nov-9 Feb-1 May-1 Jul-1 Oct-1 Navin Fluorine.75x 1.5x 2.25x 3x 3.75x EV.75x 1.5x 2.25x 3.x P/E premium/discount to NIFTY 6% 4% 2% % -2% -4% -6% -8% -1% P/E movement (x) Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 Oct-9 Dec-9 Feb-1 Apr-1 Jun-1 Aug-1 Oct-1 Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 Oct-9 Dec-9 Feb-1 Apr-1 Jun-1 Aug-1 Oct-1 Premium/Discount to NIFTY Median 1yr Fwd PE Median PE +1 std dev -1 std dev CRISIL IER Reports released on Navin Fluorine International Ltd Date Nature of report Fundamental grade Fair value Valuation grade CMP (on the date of report) 13-Sept-1 Initiating coverage* 2/5 Rs 3 3/5 Rs Oct-1 Q2FY11 result update 2/5 Rs 3 3/5 Rs 296 * For detailed initiating coverage report please visit: CRISIL EQUITIES 6

9 FINANCIALS Income statement Balance Sheet (Rs mn) FY8 FY9 FY1E FY11E FY12E (Rs mn) FY8 FY9 FY1E FY11E FY12E Operating income 2,95 4,29 4,318 4,639 5,11 Liabilities EBITDA 374 1,26 1,464 1,529 1,714 Equity share capital EBITDA margin 12.7% 24.4% 33.9% 33.% 34.2% Reserves 1,926 2,177 2,878 3,711 4,72 Depreciation Minorities EBIT ,351 1,47 1,571 Net w orth 2,27 2,278 2,979 3,812 4,821 Interest Convertible debt Operating PBT ,326 1,41 1,571 Other debt Other income (41) 37 (22) Total debt Exceptional inc/(exp) (51) (135) Deffered tax liability (net) PBT ,35 1,498 1,761 Total liabilities 3,91 2,976 3,33 4,28 5,37 Tax provision Assets Minority interest Net fixed assets 1,718 1,633 1,664 1,733 2,63 PAT (Reported) ,174 Capital WIP Less: Exceptionals (51) (135) Total fixed assets 2,8 1,914 1,942 1,873 2,23 Adjusted PAT ,174 Investments Current assets Ratios Inventory FY8 FY9 FY1E FY11E FY12E Sundry debtors Growth Loans and advances ,26 Operating income (%) Cash & bank balance ,588 2,27 EBITDA (%) Marketable securities Adj PAT (%) (.4) Total current assets 2,214 2,139 2,554 3,426 4,193 Adj EPS (%) (.4) Total current liabilities 1,456 1,34 1,359 1,438 1,525 Net current assets ,194 1,988 2,668 Profitability Intangibles/Misc. expenditure EBITDA margin (%) Total assets 3,91 2,976 3,33 4,28 5,37 Adj PAT Margin (%) RoE (%) Cash flow RoCE (%) (Rs Mn) FY8 FY9 FY1E FY11E FY12E RoIC (%) Pre-tax profit ,34 1,498 1,761 Total tax paid (18) (253) (441) (499) (587) Valuations Depreciation Price-earnings (x) Working capital changes (31) (151) 288 (14) (6) Price-book (x) Net cash from operations (85) 571 1,264 1,17 1,257 EV/EBITDA (x) Cash from investments EV/Sales (x) Capital expenditure (221) (33) (142) (53) (472) Dividend payout ratio (%) Investments and others Dividend yield (%) Net cash from investments (82) 63 (71) (53) (472) Cash from financing B/S ratios Equity raised/(repaid) - - Inventory days Debt raised/(repaid) (7) (391) (413) (18) - Creditors days Dividend (incl. tax) (47) (118) (165) (165) (165) Debtor days Others (incl extraordinaries) (16) (2) Working capital days Net cash from financing (7) (79) (536) (273) (165) Gross asset turnover (x) Change in cash posiiton (237) (75) Net asset turnover (x) Closing cash ,588 2,27 Sales/operating assets (x) Current ratio (x) Quarterly financials Debt-equity (x) (Rs Mn) Q2FY1 Q3FY1 Q4FY1 Q1FY11 Q2FY11 Net debt/equity (x).3.2 (.2) (.4) (.5) Net Sales 1, , Interest coverage ,876.1 Change (q-o-q) - -15% 25% -28% -9% EBITDA Per share Change (q-o-q) - -32% -52% 6% -64% FY8 FY9 FY1E FY11E FY12E EBITDA margin 42.1% 34.% 13.1% 29.2% 11.5% Adj EPS (Rs) PAT CEPS Adj PAT Book value Change (q-o-q) - -32% -85% 393% -64% Dividend (Rs) Adj PAT margin 27.1% 21.9% 2.6% 17.6% 7.1% Actual o/s shares (mn) Adj EPS Note: All ratios are computed on Adj PAT Source: Company, CRISIL Equities estimate CRISIL EQUITIES 7

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