Navin Fluorine International Ltd

NSE:NAVINFLUOR

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Navin Fluorine International Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to hand the conference over to Ms. Rasika Sawant from Orient Capital, Investor Relations partner. Thank you. And over to you, ma'am.

[Rasika Sawant]

Thank you, and welcome to the Q1 FY '23 Earning Conference Call. Today on this call, we have Mr. Radhesh Welling, Managing Director of Navin Fluorine International Limited, along with senior management team.

This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations as of today. Actual results may differ materially. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. A detailed safe harbor statement is given on Page #2 of the company's investor presentation, which has been uploaded on the stock exchange and company's website as well.

With this, I now hand over the call to Mr. Radhesh Welling for his opening remark. Over to you, sir.

[Radhesh Welling, executive]

Hello, everyone. Good morning to you. I hope you all and your families are doing well. Warm welcome to all the participants. I'm joined by Mr. B.K. Bansal, the Chief Financial Officer of Navin Fluorine; and Orient Capital, our Investor Relations partner.

I hope you all got an opportunity to go through our financial results and investor presentation, which have been uploaded on the stock exchange as well as company's website.

Before I move on to discuss the quarterly performance, let me take you through some of the key highlights and developments in the company. As Navin Fluorine, one of our overarching responsibilities is execution excellence and comprises the ability to commission new capacities, plan projects towards desired outcomes. I'm happy to report that we inaugurated manufacturing plant for Honeywell International at Dahej on July 12th. Trial supplies have already started and commercial supplies will commence soon. As you all know, we received Board approval of this project on February 25, 2020. And the entire country went into lockdown from March 2020 onwards. Also, this was a complete greenfield project where we had to first get the land ready and then start working on specific manufacturing plants.

We have managed to successfully complete this large and complex project through 3 tough phases of COVID-19 pandemic. Setting land in around 2 years is demonstration of our strong technical capabilities and our commitment to growing our partnership with Honeywell. The next generation product out of this facility has a very low global warming potential, GWP, and no ozone depletion potential, thereby helping customers lower their carbon footprint and improve energy efficiency without sacrificing end product performance.

From this financial year, we have redefined our business units and implemented a new organization structure with very clear 3 BUs, each headed by operating CEO, with full P&L responsibility. The 3 business units would be High Performance Products; CDMO that is Contract Development and Manufacturing Organization; and Specialty Chemicals. High Performance Products business would include erstwhile Inorganic Fluorides, Refrigerant Gas, and High Performance Products.

I'm also very happy to inform you all that we have appointed Mr. Partha Roy Chowdhury as CEO of our HPP business. As some of you might know, Partha worked with Navin from 1995 to 2016, and was the CFO in his last role. He understands this company and business very well, and I'm very happy that he is back at Navin Fluorine.

Let me now take you through the operating performance for Q1 FY '23. And then Mr. Bansal will update you on the financial performance. Operating revenue stood at INR 386.8 crore, a growth of 23% on Y-o-Y basis. We recorded highest ever quarterly sales in Specialty Chemicals of INR 176 crore. Operating EBITDA is INR 99.9 crores, growth of 28% on Y-o-Y basis. Despite several headwinds, we managed to achieve operating EBITDA margin of around 26%. Operating PBT stood at INR 88.1 crore, with a growth of 32% on Y-o-Y basis.

Now moving on to discuss the operating performance of each business unit. Our Specialty Chemicals business continues to deliver strong performance driven by strong partnerships. We achieved record quarterly revenue in this business unit in the last quarter and reported revenue growth of 32% on a Y-o-Y basis at INR 176 crore for Q1 FY '23. The growth of this business is driven and will continue to be driven by significant improvement in new business pipeline. This segment has very strong pipeline of growth opportunities, in line with our 3Ps principles: Product, Platform and Partnerships. The revenue contribution from international business is about 48% and 52% is from our domestic operations.

Our HPP business grew by 33% in Q1 FY '23, which is INR 152 crores compared to same period last year. From this quarter onwards, we have merged our erstwhile Inorganic Fluorides and Refrigerant Gas business and the new HPP business into new High Performance Product business vertical. The growth in this unit for this quarter was driven by higher volumes as well as strong pricing in Inorganic as well as Refrigerant Gas business.

We are working on identifying new opportunities in our Inorganic as well as in the Industrial Gases portfolio. Revenues from the newly inaugurated plant for Honeywell will start from Q2 FY '23. The international business contributed about 22%, whereas balance 78% is from our domestic operations. Board has approved debottlenecking of INR 80 crores for a new molecule in this business unit at Surat. Manufacturing of this product will start from July 2023.

Our CDMO reported revenue of INR 59 crore in Q1 FY '23. As we have already highlighted in the past, it's unfortunately difficult to assess performance of this business on a quarter-on-quarter basis. Our focus in this business continues to be on expansion of new project pipeline and further diversifying customer base. In this regard, we successfully completed an important plant audit for one of our large U.S.-based companies and have already received first orders from them. Work on the c-GMP-3 plant capacity expansion is scheduled to be finished on schedule in Q3 FY '23, and we are working on preparing business case for c-GMP-4.

Now let me give you a quick update on our ongoing CapEx programs, which we have announced in the last many months. All our projects in the Dahej, the MPP, the one for dedicated client for agrochemical customer, and one for the important building block are progressing well. Our plan is to commission MPP in stages from Q2 onwards, the dedicated agrochemical facility by December 2022, and the final project by December 2023. We have also undertaken a large infrastructure upgradation project in Surat wherein we are investing in our R&D and pilot plant piece. All these investments are clear demonstration of the confidence Board has in the operating team and also of the operating team in the sustainable and profitable growth prospects for Navin Fluorine.

I will now hand over the line to Mr. Bansal to give you brief on the financial performance of the company. Thank you.

[Basantkumar Bansal, executive]

Thank you, Mr. Radhesh, and a very good morning to all the participants. I will say the highlights of our performance in Q1 FY '23, following which we'll be happy to take questions from you all.

On the performance of Q1 FY '23, as Mr. Radhesh has said, the company has reported net revenue from operations of INR 386.80 crore as against INR 313.9 crore in the same quarter of previous year, showing a growth of 23%. Our EBITDA margin is INR 99.9 crore in Q1 as against INR 78 crore in Q1 FY '22, a jump of 28%. It reaffirms our pricing power. Despite increasing input cost, we have been able to outperform on the margin front. Despite several headwinds, we achieved operating EBITDA margin of 25.8% as against 24.8% in the same quarter of previous year, an increase of 100 basis points. Operating PBT increased by 32% to INR 88.1 crore for Q1 FY '23 as against INR 66.7 crore in Q1 '22. Profit after tax stood at INR 79 crore for Q1 FY '23 and the PAT margin stood at 20.4%.

Getting to BU wise performance for this quarter, in Specialty Chemicals, we registered a growth of 32% to INR 176 crore as against INR 133 crores in Q1 FY '22. In HPP business, we registered a growth of 33% to INR 152 crore as against INR 114 crore in Q1 FY '22. In CDMO business, we reported revenue of INR 59 crore as against INR 67 crore in Q1 FY '22.

So that's all from my side. Now I open the phone for questions and answers. Thank you.

[Operator]

[Operator Instructions] We have a first question from the line of Nirav Jimudia with Anvil Research.

[Nirav Jimudia, analyst]

Congratulations on excellent numbers, sir. I have 2 questions. So sir, I was just going through your annual report where you have mentioned some of the advantages of the R&D, right. One was you have developed some 10 new products which will be commercialized in FY '23. The second was with respect to the challenges with respect to one product where the capacity was 10 tonnes per month, but we were facing initially in terms of utilizing those full capacities, and through process and engineering, we could ramp up these capacities to 10 tonnes per month, which you have mentioned in your annual report. .

One more benefit which you have mentioned in the annual report is the revenue derived from the new products in CRAMS, which have been developed over the last few years. And the contribution has reached to now almost 50%. So if you can just elaborate in terms of which are the products which we have developed or which segments these products qualify for. And what could be the size of the opportunity for these products what we have developed? So this is question number one, sir.

[Radhesh Welling, executive]

Yes. So thank you very much for the question. So I will not be able to, for confidentiality reasons, give you the exact names of the molecules. But these molecules primarily -- and these are across the 3 business verticals. In Specialty, they are primarily in agrochemicals. CDMO, of course, they're all in pharmaceutical, and these are primarily for innovative drug companies. For the first category, which is for Specialty agrochemicals, it's primarily happening out of our R&D facility in Surat, which is where we have now invested in a significant upgradation in the facilities. The CDMO piece is actually out of Devas, which is targeted towards the innovative pharma companies. And there is limited work that is actually happening on the HPP side. So there are 2 molecules that we are working on; one of which, the work is already over, and the second one is continuing.

[Nirav Jimudia, analyst]

Got it. Got it. But sir, can you just give us some glimpses about the opportunity size of these products given we have already gone quite ahead in terms of now the commercialization of these products? So do you have -- can you give some understanding about what can be the opportunity size? Some rough understanding of the same would also help, sir.

[Radhesh Welling, executive]

Typically, we don't like to talk about the opportunity size on a product basis unless it's a large building block. Then obviously, because the building block then typically goes into multiple products, et cetera, one of which we have actually invested in setting up of a plant, which is going to get commercial. Individually, we don't typically like to talk about, for the obvious reasons. .

[Nirav Jimudia, analyst]

Got it. And sir, like what you have mentioned that we have been investing significantly in the R&D, probably the annual report talks about, initially, we are putting up INR 40 crores in that R&D block. And even if we see on a yearly basis, we are investing now more than 10% to 15% of our profits into R&D, which is visible in the disclosures that have been made. So just wanted to understand like, given the new players also are entering the fluorination space, what could be the challenges for us in terms of upping our R&D capabilities with respect to the new recruitments probably our competitors would have been doing, or in order for us also, because now we have been investing significantly. So what challenges we could face in terms of recruiting and retaining those top-level employees at Navin?

[Radhesh Welling, executive]

Yes. So if you actually look at specifically related to this particular space, which is fluorination, our focus has been to continuously upgrade our capability in fluorination. So wherein we actually started from a simple Halex-based chemistry, then thereafter we went to HF-based chemistry. Now if you look at the chemistries that we typically handle within fluorination or in the adjacent spaces, these are extremely complex chemistries.

So we believe that, as you rightly said, in the next few years, our internal assumption is that some of these new players will be able to handle the Halex or HF chemistries as well as some of the incumbents today do. So it's very critical for us to ensure that whatever that gap exists today, the capability level between us and some of these new players continues to remain. And hence, we are continuously focusing on upgrading our capabilities. Now when I talk about capabilities, these are chemistry-based capabilities, these are engineering-based capabilities, and then there are infrastructure-related capabilities and talent-related capabilities.

As far as the talent retention is concerned, see on the chemistry side, our ability to retain talent across the site is relatively higher. And that's primarily because of the kind of opportunities that we present to some of these people to work on. The issue that we typically face is on the engineering side, where we believe that there could be fun. And hence, what we've done is we've actually just recently ran, internally, it is called as STAR program, special talent recognition program, where we identified high-potential as a critical roles and worked on specific programs around that. And this is actually across the company, not only limited to chemistry and engineering. That's basically towards ensuring that the talent remains with the company for the foreseeable future.

[Operator]

[Operator Instructions] We have next question from the line of Sanjesh Jain with ICICI Securities.

[Sanjesh Jain, analyst]

First of all, congratulation on starting the first large project, HPP. On the HPP side, I just wanted to understand, how has been your initial days experience on running the plant? And more so on the raw material sourcing? Now that we have started, which are the key raw materials in this product? And where are we sourcing for these products? That's my first question. Second, on the HPP side, it looks like there is a slight underperformance in erstwhile Inorganic Fluoride, because ref gas is a seasonally strong quarter and R22 prices have gone up. So is that industry dynamic weakening hurting us also inorganic fluoride? And the related question to that is that the margin expansion we have seen this quarter, quarter-on-quarter, can it be attributed to the stronger sale of domestic ref gas, which we have earlier quoted as one of the reasons for why our margins were weak when this fell? So these are my initial questions.

[Radhesh Welling, executive]

Yes. I think you have asked about 3, 4 questions. Let me try and take each of them. If I miss answering it, just let me know, then I can again come back. As far as the HPP plant is concerned, our initial experience has been extremely heartening. I think as I have indicated earlier, we have actually 2 main plants. So the first plant actually manufactures the intermediate that then goes as an input to the second plant. The first plant is a little tricky. And our technology supplier had indicated to us it could actually take us anywhere between 3 to 6 months to stabilize that plant.

Our team has actually managed to stabilize that plant in less than 4 weeks, which is also seen in the fact that we have already started supplying the trial quantities from the second plant. So I think our initial experience has been extremely heartening. What our tech supplier expected us to do in 3 to 6 months, the team has really achieved in a record time.

As far as the raw materials is concerned, one of the important raw materials is HF, which is currently being supplied by Surat to HPP. We are also currently working on possibility of setting up a new large HF facility in Dahej itself. But currently, it is being supplied by Surat. There are some other raw materials, all of which have been locked into long-term agreements, which actually mirror our long-term agreement with the customer. On the performance between inorganic and ref gas this particular quarter, we've actually seen a pretty strong performance on both inorganic as well as refrigerant gas. And on both the parts, it's been because of both through volume as well as pricing actions.

I would say, on the refrigerant gas, it has been more on the volume than on pricing. In inorganic, it has been more on the pricing than on the volume. But even on inorganic, we have seen pretty strong growth. And a significant part of that is because of the volume. Have I answered all your questions? Or is there anything that is...

[Sanjesh Jain, analyst]

No, no. I was more looking from the sequential perspective, Radhesh, on this last one.

[Radhesh Welling, executive]

Yes. On the sequential, see our business, you cannot look at it from the sequential perspective, because a lot of it is very seasonal. Even in the inorganic business, within that there is a lot of seasonality, because as you know, a lot of our molecules actually go into agrochemicals, et cetera, even on the inorganic side. So we've always maintained that the right way of looking at our business is on a year-on-year basis.

[Sanjesh Jain, analyst]

And the reason for the margin expansion sequentially, is it more of domestic ref gases? Is that the right understanding?

[Radhesh Welling, executive]

So on the ref gas, our volume has actually grown across the 3 segments, which is domestic MSA, domestic non-MSA, as well as international. And we have seen margin improvement in each of those 3 areas. As well as on the Inorganic and Specialty, Specialty, it is primarily the product mix, this one. And again, on the Inorganic, some of the higher-margin molecules have actually seen volume growth.

[Operator]

We have next question from the line of Chintan Modi with Haitong Securities.

[Chintan Modi, analyst]

So my first question is with respect to the pharma CDMO business, where we have seen some degrowth this quarter. Would you kind of allude those 2 issues in Europe that we are seeing? And do you maintain your guidance of about 30% growth this year? That's my first question.

[Radhesh Welling, executive]

First of all, I don't think I have given a 30% growth guidance. We typically don't give any guidance as such. The issue that we see, and as you know, you might recollect, I had already indicated that for this particular year, our H1 might look softer, H1. H2 is looking pretty strong because we are actually seeing pretty strong business pipeline for calendar year '23.

So to your first question, is this softness because of some of the issues that we are seeing in Europe? The answer is no. And on an annualized basis or even directionally, do we believe that we'll continue to see strong growth in the CDMO business? The answer is yes. And that is also demonstrated in the fact that we've already started working on c-GMP-4. And we should soon be actually taking that particular business case for approval. And that confidence is basically coming because of the strong business pipeline, opportunity pipeline of the CDMO side.

[Chintan Modi, analyst]

Okay. Sure. So I was just -- it was my mistake, that 30% guidance. I think I was referring to the annual report where you have mentioned about 25% growth. So yes, but I got your answer. Secondly, coming from, again from annual report, you have mentioned about the fluoropyridine platform in the Specialty Chemical section. So 2 things there, if you could talk a little bit more about this, because you are expecting to launch a new product by 2023. And is this the same CapEx that we are doing, like INR 540 crores which we announced recently, the last CapEx?

[Radhesh Welling, executive]

So as I mentioned before, there are multiple platforms that we are currently working on and already some of those have got converted into CapEx. Some of them are still in the pipeline and built into CapEx as we speak. This particular one that you talked about, fluoropyridine, again, there are multiple platforms in that. There are at least 3 specific platforms under fluoropyridine, one of which has been converted into CapEx. There are 2 more that we are currently working on. Working on, as in those are the 2 where the R&D work is almost done, the pilot currently happening, and then those will get converted into CapEx.

[Chintan Modi, analyst]

Okay. But the INR 540 crore CapEx has nothing to do with this? That's a different...

[Radhesh Welling, executive]

I will not be able to comment on that because then that will basically mean that I'm correlating to specific product. For competitive reasons, it will be difficult for me to comment on that.

[Operator]

We have next question from the line of Naushad Chaudhary with Aditya Birla.

[Naushad Chaudhary, analyst]

Just some clarification, sir. Firstly, what was the rationale behind redefining your inorganic and ref gas as an HPP segment? Because if I remember, we used to indicate that HPP will report separately, that's one. And secondly, in terms of your HPP initial teething issues, so has that risk from the plant resolved now? And if there was any teething issue, can you quantify how much it was?

[Radhesh Welling, executive]

Yes. So I'll address your second question first. I think I already spoke about that in my earlier commentary. I wouldn't really say that there were any big issues. As I mentioned, our technology supplier had actually talked about 3 to 6 months to actually get that plant stabilized and start getting the molecule. And our team has actually been able to do that in less than 4 weeks. So we're really not seeing any significant teething problems. There are some usual typical issues which are there, but those are not really of material significance.

On the second part, the rationale for combining. As you know that earlier, about 4 years back, our primary focus was on CDMO. And we were really focusing on growing the CDMO piece, which was then called CRAMS, whereas we didn't really have very strong growth plan in some of the other businesses. And I've maintained that each of our business verticals has very strong growth prospect. And very soon, one by one, they will all start finalizing their growth strategies, and they will be on their individual growth plan. Now what we have tried to do is that for each of these, that is inorganic, ref gas, as well as on HPP, we have actually developed very clear growth strategy. We have a plan on refrigerant side, we have a clear plan on HPP. And on inorganic, it's still a little work in progress. But we are very confident that each of these 3 will actually have its own growth trajectory.

What we've tried to do -- but again, there is a lot of synergy between these 3 businesses. For example, the product which is produced by one is a raw material for another, et cetera. So we felt that if you actually combine it -- because otherwise, it will be misleading the external stakeholders, so we combined these 3 business verticals, and they look at in combination what the growth in the vertical is.

And the third reason is that some of these businesses are almost like single molecule or limited molecule businesses. So when we actually declare the results of some of these businesses separately, it's very easy for the competition to really understand what the revenue is of that one specific molecule or those limited number of molecules. And for confidentiality reasons, we didn't want all of that to be so transparent. So these are the 3 reasons we decided that we will actually combine these 3 businesses into one business vertical, which will be called High Performance Product going forward. And we will see each of these 3. Also, we decided to rename the CRAMS business into CDMO business because that truly reflects what we do. We are not really into CRAMS business, but we are more into CDMO business.

[Naushad Chaudhary, analyst]

Understood. Makes sense. And lastly, in terms of your HPP plant full utilization, as we had indicated earlier also, and the plant has now started, so do we remain confident that within next 1 or 2 quarters, we should reach to full utilization of this plant?

[Radhesh Welling, executive]

So if you see my commentary, when we got the Board approval and I had responded to this particular point, I had mentioned that from year 2 onwards, we expect the plant to start operating to the full capacity. There will be a ramp-up in year 1. But year 2 onwards, we expect that the plant would more or less be running almost to full capacity. We expect that from Q4 onwards itself. So that is the first quarter of the calendar year '23, we should start seeing relatively full capacity, if not 100%, close to full capacity.

[Operator]

We have next question from the line of Vivek Rajamani with Morgan Stanley.

[Vivek Rajamani, analyst]

Congratulations on a very good set of numbers. Two questions from my end. Sir, if you could just share some qualitative information in terms of how your plants have run this quarter and how you see this evolving over the next few quarters. And I guess the second question would be, from a management perspective, is there any 1 or 2 particular issues that you are currently focused on which you think would be critical over the next 3, 4 months? That will be really helpful as well.

[Radhesh Welling, executive]

So now commentary around the plants, you were asking?

[Vivek Rajamani, analyst]

The plant runs, correct, sir. Utilization or just optimally, if you could just give some qualitative comments, that will be really helpful.

[Radhesh Welling, executive]

Sure, sure. So I think HPP -- your erstwhile HPP, I think I've already spoken about. The plants in Surat of HPP are running to almost full capacity. Refrigerant gas plant, of course, there is a capacity headroom and we are working on some options there. In Specialty, in most of the SKUs, we are running almost to full capacity or close to full capacity. As you know, in Specialty we have, some of them are dedicated blocks like the ones for the -- or there are some multipurpose plants there. So multipurpose plants there are running to almost full capacity. Of course, product by product, depending on the product that we run, it looks specific, it could vary slightly. But Specialty, we are actually running to almost optimum capacity because of the need for a lot of these new projects in Dahej. As you know, we have already announced 3 for Specialty in Dahej. This is primarily trying to address that capacity utilization issue on the Specialty.

On inorganic, we have some capacity headroom available in some of our smaller molecules like NF, et cetera. But on the larger molecules like HF, et cetera, we are running the plant to actually more than full our capacity. On the CDMO side, in Q1, we had the capacity headroom available, but we expect that from August onwards the plant will again start operating to almost optimum capacity.

[Vivek Rajamani, analyst]

Very, very useful. And sir, any comments on how you see this shaping up over the next 2, 3 quarters?

[Radhesh Welling, executive]

Are you talking about specifically plant capacities?

[Vivek Rajamani, analyst]

If you could just focus on the Specialty segment, that will be great as well.

[Radhesh Welling, executive]

So I think the other question that you had asked was priority for the next 3 to 4 months, I missed to answer. I think there are clearly 2, 3 priorities: one, which is the ongoing priority, which is around talent management. The second priority would be to ensure these plants which are started or which will be starting in Dahej to ensure smooth operation of these 3 plants, so HPP, and there are 2 plants that will be commissioned in the next few months. So to ensure that, that happens. And the third important point would be, given that we will be manufacturing a lot of these molecules for the first time, we have to lock the raw materials for all of them. So what we are currently working on as an organization is to lock all these critical raw materials for calendar year '23, either through contracts or to actually ensure that we actually position these raw materials in India, so that we don't face any disruption as these plants start getting commissioned. So I would say these would be the 3 high-level priorities.

[Operator]

We have next question from the line of Abhijit Akella with Kotak Securities.

[Abhijit Akella, analyst]

First question is with regard to the INR 80 crore debottlenecking CapEx announced under the HPP business. If you could please help us a little bit with what category or what product this is in and the financial sort of outlook for this. I mean, how much revenue, et cetera, it can generate.

[Radhesh Welling, executive]

Yes. So I think it will be difficult for us to give you the category or the name of the molecule because we are still in the process of locking the raw material, et cetera, for the same. Obviously, as you can guess, one of the critical raw materials is AHF, but there are some materials as well. On the financials, as I've mentioned that we expect the production -- the plant to get commissioned by July, and then we'll start from there on. And we expect that year 2 to year 3, we should actually see the plant running to full capacity and us actually getting a full annual revenue from year 2, year 3 itself. And we expect annualized revenue to be around INR 150 crore plus/minus.

[Abhijit Akella, analyst]

Okay. That's helpful. And the second thing was just with regard to the refrigerants business, any final decision taken on the possible foray into HFCs? And also, the annual report has a mention of supplying R22 PTFE as a large opportunity as a non-Chinese supplier. So I just wanted to clarify whether that is for the gas that you'll be supplying or for the polymer also, the PTFE also?

[Radhesh Welling, executive]

Yes. So on your question on foray of HFCs, we are evaluating various options there. On the second point, it was specifically talking about supplying R22 for PTFE manufacturing. We are actually looking at either supplying R22 assets or supplying the downstream of that, but that is primarily a point of view of capacity utilization. It's not going to be a kind of a long-term strategic reason. We are actually looking at some other strategic options for, a, converting R22 ourselves into some other potential value-added molecules, or retrofitting that plant to manufacture some other molecules. So we are looking at those 2 as long-term strategic options. So this one piece is more going to be an interim option till we actually get that other piece done.

[Operator]

We have next question from the line of Ankur Periwal with Axis Capital.

[Ankur Periwal, analyst]

Congrats for a good set of numbers. First question on the capital allocation side, especially when the business rejig from a reporting perspective is already behind us. And you did allude to dedicated CapEx for the respective businesses subject to opportunities. So at the company level, how should one look at, from a capital allocation perspective, CDMO, because you did mention CDMO -- c-GMP-4 as well under discussion now? So your thoughts there.

[Radhesh Welling, executive]

So in each of the 3 business verticals, Specialty, CDMO, and HPP, we have very clear growth plans. At an organization level, we don't start by having a very clear capital allocation strategy in terms of, you know, this percentage should go to this business, et cetera. It's more bottoms up, where each of the business is actually responsible for developing their own strategy and growth plans. And then accordingly, we decide the capital allocation piece. But currently, if I look at it, all the 3 businesses, we have growth plans. In the immediate future, as you can see from the CapEx that will probably be announced in the near future, Specialty will clearly take a large portion of the overall allocation. But as I mentioned, we are working on c-GMP-4 business case for CDMO. And also, we are working on some other opportunities around the HPP side. .

[Ankur Periwal, analyst]

Sure, sir. That's helpful. And just a clarification, the healthy growth that we saw in the Specialty business this quarter. And I'm trying to connect your comments on the R&D side as well for the new products commissioning, et cetera. This is largely led by the existing product portfolio and the incremental contribution from the newer products, which are largely agrochem, is yet to play out. Will that be fair understanding?

[Radhesh Welling, executive]

Yes. So there is one molecule we launched in this particular quarter. So some of that growth has actually happened through this. But primarily, I would say, it has happened through a higher volume of existing molecules.

[Ankur Periwal, analyst]

Great, sir. And just one clarification. The incremental expansion, whether in HPP or in Specialty, the working capital over here, how should one look at it? Because if I look over the years, there is slight increase there because of that expansion. So your comments there.

[Basantkumar Bansal, executive]

Yes. So the cycle is generally of 90 days, and we hope that it will be maintained. Maybe in the short time, it can go some here and there a little bit. But otherwise, it will be around 3 months only.

[Operator]

We have next question from the line of Ishmohit Arora with SOIC LLP.

[Ishmohit Arora, analyst]

Congratulations for a great set of numbers. Sir, my first question was, as the management processes, I just wanted to understand that when it comes to the agro business and the pharma business, we are mainly into the intermediate strategy. Especially for agro business, do we have plans to get into active ingredients? And especially for pharma, do we have plans to get into API manufacturing as well? And if not, then what are the reasons for not getting it there?

[Radhesh Welling, executive]

Sorry. Your voice wasn't very clear. I understood one part of that question where you asked if we have any plans to get into API business. What was the other part of that question?

[Operator]

[Operator Instructions] Mr. Arora, you audio was not coming very clear. Can you please repeat your question, Mr. Arora?

[Radhesh Welling, executive]

So let me respond to the question that I heard, which was around API piece. We don't have any immediate plans of getting into APIs. Our immediate plan, and which we have already started working on, is to actually get into doing more of advanced intermediates. But no immediate plan of getting into API because we feel that the API piece is actually more of a commoditized piece.

[Operator]

We have next question from the line of Tejas Sheth with Nippon India AMC.

[Tejas Sheth, analyst]

On the HPP, so when we signed the contract, the food cost economics, and the logistics cost economics, even the power cost economies were very different. So once we ramp up this full capacity, would the margin profile of this project be very different? Or how the pricing contract is signed in this molecule?

[Radhesh Welling, executive]

No. So as we had indicated earlier, the margin profile of this business is going to be pretty in line with our overall company, slightly higher than the overall company. And the way the agreement was structured, it was basically on a cost-plus basis. So increase in the input cost, et cetera, there will be a clear pass-through.

[Tejas Sheth, analyst]

And secondly, what is the potential of the 2 new molecules in the downstream HPP? Is that something which can up the investment potential? Or is it something which is some kind of add-on and hence the investment potential will be miniscule?

[Radhesh Welling, executive]

No. Those -- see typically what happens is -- if you look at the 3 businesses, right, HPP, CDMO and Specialty, Specialty, typically, there are 2 kinds of CapEx programs. One is in form of MPP, which is typically a multi-product, multi-process plant, or there could be a dedicated facility. So dedicated typically tends to have a non-incremental CapEx or non-incremental impact. On the CDMO side, it's always on the NPP side. But on the HPP side, unless it's a small debottlenecking project, there's always a non-incremental impact, both in terms of capital investment, also the impact on the business.

[Tejas Sheth, analyst]

Okay. [indiscernible] opportunity can be sizable gain?

[Radhesh Welling, executive]

That's correct.

[Operator]

We have next question from the line of Bharat Shah with ASK Investment Managers.

[Bharat Shah, analyst]

Radhesh, 2 questions. One, when we're looking at Europe, in general, it seems that Europe is destined to face a long winter. Generally, lack of innovation, society's work ethic is somewhat poor, the incompetence in the way they have handled the inflationary situation, and generally, inability to really clear the ground for future by doing more innovative work. Do you think this will have impact on your business and on your plans over long term?

[Radhesh Welling, executive]

So you're absolutely right. This is something that we are trying to make an assessment on. We believe that the issues that we are seeing in Europe will clearly have an impact on 2 businesses. We are trying to understand what the potential impact could be on the HPP side, both from the opportunity perspective as well as challenge perspective. But we clearly understand that it will have an impact on the CDMO side, which is why we are accelerating our move into at least the advanced intermediate, so that -- because earlier, some of our intermediates were going to Europe for conversion into advanced intermediates and then the API. So we want to actually move that advanced intermediate piece also in-house, so that from the challenge perspective, our business doesn't get impacted.

From the opportunity perspective, we have actually started having a lot of conversations with the customers wherein we are positioning ourselves as an alternative to Europe as to their own manufacturing, some of their own manufacturing, which was happening in Europe. Also in Specialty, we are seeing the same dialogue currently happening on the agrochemical side. So clearly, on a mid- to long-term basis, we believe that it's going to be net positive for our CDMO business and on our Specialty business.

One more point that I would just like to highlight here is that on the Specialty side, you know that a lot of dialogue has currently been happening, or in the past also has happened, primarily on the agrochemical side. Now as some other Indian companies are also trying to catch this space, et cetera, we have consciously started working on a lot more opportunities within the Specialty side on the Performance Materials side. If you look at 3 of our businesses, HPP, CDMO and Specialty, the way we have configured that, Specialty is a service business. CDMO will be a service plus product business, and HPP will be product business. So on the service side, which is primarily Specialty, we have also started working on opportunities in the Performance Materials side. And again, there we are actually seeing a lot of traction. And we believe it will basically be significantly positive years to come for our Specialty business.

[Bharat Shah, analyst]

That's very useful. Sir, the second question. If you look at last few years, Navin has been transforming itself based on the tremendous strength in the fluorine and complex chemistry emanating from there. So we have struck some very good long-term contracts, people, capability building, infrastructure, investment in research. Generally, sharper focus on the way the business is being evolved and shaped. So bulk of I suppose a significant part of that transformation, I think, with some satisfaction we can say that it is in the base. Now if you take a look at next 3 to 5 years, what it will mean for Navin in terms of growth, scale, capability, customer relationships, depth, and in general overall long-term outcome in terms of Navin given the kind of significant changes which we have brought about?

[Radhesh Welling, executive]

So I think, Bharat, I think the question that you have asked really warrants a very long kind of -- I don't know if we will have time for that, but we can go into the details. But let me just address that question by summarizing it. One, we have to be completely focused on the execution, because if you just take the projects that we have already announced, actually ensure that the execution is absolutely good, something that we have already demonstrated in this HPP project. Despite all these headwinds, we have managed to actually complete that project in around 2 years, which is what we had actually told the market when we actually signed the contract and announced the contract. I think the first thing is just pure execution excellence. If we do that, you can actually just add up the numbers we already announced when we announced each of those CapEx. You will see a significant growth in the top line as well as bottom line. .

Also what will happen is, if you execute this well, because some of these projects are with very large customer, and we have just started scratching the surface in terms of their overall consumption base. So I mean, if you look in terms of share of the wallet, we will still be a very small percentage in terms of their total purchase basket. So just with these customers that we are executing this project, the size is significant. And hence, as I have always maintained that if we do this, the momentum effect will ultimately start coming in, and we'll start seeing a significant growth.

The second point, as I've said, we have brought in very sharp focus in terms of what we do and what we will do in each of the 3 businesses. And hence, as I mentioned earlier, service, product plus service, and product. So for example, in Specialty, we said that irrespective of what molecule we supply, we are basically a service provider or development service as well as manufacturing service. Today, most of what we do there is primarily for our agrochemical and pharma customers. There is no reason to actually start getting into the performance materials space. And as you know, the performance materials space is significantly larger than the agrochemical space. So we basically take the same set of capabilities, same set of building blocks, same set of platforms, but start appealing to or positioning that with a much wider set of audience. So that will actually give us a significantly larger growth opportunity.

And the third one would be in form of the product piece that we talked about. There are a number of new opportunities that we have identified, we are working on. Some in HPP, some outside of HPP, in new emerging segments. And again, there we are currently really trying to understand which opportunities we should really invest in for future growth because they are actually clearly nonincremental in nature, both in terms of investment as well as in terms of impact on top line and bottom line. So that would, at a very high level, summarize how we are looking at the business. But our clear focus is to ensure that, if you look at, by let's say, FY '25 or FY '26, in terms of size, we would be significantly bigger than what we were in FY '22. Also, the nature and the quality of business will be significantly different than what has been in the past or what it was in FY '22.

[Operator]

We have next question from the line of Jason Soans with Ashika Stock Broking.

[Jason Soans, analyst]

So just -- I know you did touch upon this. But just wanted to know, I mean, your gross margins here in this quarter have shown a good 220 bps improvement sequentially. Now at the last quarter, you did talk about the gross margin being impacted due to high prices, first, of commodity items, which are solvents, molten sulphur, which you have to procure from the spot market. So just wanted to know, in that perspective, have you seen those prices moderate? Or is it some impact more of a product mix impact or a price hike impact? Just wanted some color on this gross margin improvement, especially in the scenario where a lot of inflation is there already in the market. So just wanted your thoughts on that for this reason of improvement in the gross margins.

[Radhesh Welling, executive]

So it is a mix of 2, 3 things. One is we have been able to take price increase. There is a little bit impact of the product mix also. Okay? So because of that we have been able to maintain our gross margin. In fact, I touched upon this in my opening remarks also.

[Jason Soans, analyst]

Okay. Sure. And my next question is, I just wanted to know -- congratulations on bringing Mr. Partha Roy Chowdhury on board. And I heard in your opening remarks that he'll be the President of the HPP segment. Now if you could just highlight some -- of course, there is this rejig which you have done. So if you could just highlight a broad outlook of the strategy or the vision you have for the HPP segment going ahead with Mr. Partha Roy Chowdhury at the helm. If you could just broadly outline that, that would be really helpful.

[Radhesh Welling, executive]

No. Sorry. I didn't understand the question. Outline what? The strategy?

[Jason Soans, analyst]

Yes. The broad level strategy of the HPP segment. Now you rejigged it as well with bringing ref gas and IO also in the fold, plus the HPP segment. And you'll have Mr. Partha Roy Chowdhury as the President of the HPP segment. I think that's what I heard in the initial commentary. So I just wanted to -- if you could just highlight a broad outlook for that segment going ahead, for the HPP segment.

[Radhesh Welling, executive]

Yes. So I think, obviously, there is a detailed strategy that we are actually working on for that particular segment. I think the clear -- if you look at Step 1, Step 2, Step 3. In Step 1, we have already got some projects. We wanted to ensure that we execute them and ensure that these projects reach their potential, including, as I had mentioned earlier, on HPP there is some debottlenecking possibilities which we are looking at. And we will probably implement that later in the current financial year. .

Second is inorganic and ref gas business. We have actually -- in both, we are kind of trying to broaden the definition, and in inorganic, trying to look at some opportunities, going into similar set of customers, requiring similar set of capabilities, but nonfluorinated inorganic compounds. And on the ref gas, rather than trying to define that as ref gas, we're trying to see if we could actually define it a little broadly in terms of industrial gases. And we started identifying some opportunities there, which some of them are with some of our existing partners, some of them will be with new partners, some of them will be done separately by us. So that would be, I would say, the second piece.

And the third piece is, in some of these new emerging segments, we have -- as I have indicated earlier, we've actually got clear set of opportunities that we've been taking on. Now the question is, should that be part of HPP or should that be outside of HPP? So that's a decision we will take soon. But I would say, at a very high level, these are the 3 set of opportunities we are working on in HPP. But of course, there is a detailed strategy piece that we are currently working on in HPP.

[Jason Soans, analyst]

Sure, sir. And sir, just one question what I want to ask you. I mean, you have quite a lot of times mentioned that the quarterly run rate for CRAMS is around $10 million. And in this quarter, we are in short of that. So is there some spillover to the next quarter, or like it did happen in the quarters before that? Is there some spillover? I would just want your thoughts on that. And just a broad overview on the Specialty Chemicals segment demand outlook as well. You did mention that the ARV segment is seeing some slowdown. How is that impact? Or any other points which come to your mind in terms of the Specialty Chemicals demand outlook? And the CRAMS piece, which I just asked.

[Radhesh Welling, executive]

Yes. So on the CDMO side, as I have indicated earlier, H1 is likely to be soft. So we will not see Q2 actually taking care of that gap in the run rate. But we are actually seeing H2 to be extremely strong. So whatever gap we see in H1 will be more than taken care of in H2. That is how we are currently seeing this particular business, and similarly, the next year, because as I mentioned before, our calendar year '23 is looking extremely strong.

On the second question, which is around Specialty, ARV continues to remain extremely soft. About 2 years back, as you might know, our dependence on ARV, both on the top line as well as bottom line, was extremely high. But what we did was very quickly we identified some alternate opportunities to put in that plant where the ARVs were getting manufactured, and we've been pretty successful in doing that. So today, our overall dependence on ARV has come down significantly. But we are not really seeing that demand in ARV actually come back to where it was during the pre-COVID era. But it doesn't really today affect our Specialty. Our Specialty will continue to grow despite ARVs.

[Operator]

We have the next question from the line of Dheeresh Pathak with WhiteOak Capital.

[Dheeresh Pathak, analyst]

Congratulations for early stabilization of the HPP plant. I just -- taking forward an earlier question on the raw material being a pass-through in most for these contracts. But you also mentioned that one of the priorities will be securing raw material. So just trying to again clear my understanding that both on the raw material side as well as on power and fuel and steel and the other logistic costs, all of those would be passed through in large contracts? Or they would be passed through after certain threshold increases?

[Radhesh Welling, executive]

No, no. So let me make it very clear. Thanks for asking that question. So when I talked about securing raw material, I wasn't talking about securing raw material for HPP. I was talking about securing raw material for the new projects which will be coming on later in the year. So the MPP, and MPP will actually get commissioned in phases, and then the dedicated agro block which will come by December 2022. So I was primarily talking about that. I was not talking about HPP. HPP is already [indiscernible]. On the input costs, there is a pass-through. Because of the way the agreement is structured, some of it could happen with some lag effect, but there will be a complete pass-through.

[Operator]

We have the next question from the line of Sunny Roy, an investor.

[Sunny Roy]

I have one question on the CDMO side. Can you quantify approximately how much percentage of the last year's revenue of INR 97 crores CDMO is contributed by the top 20 big pharma companies? And what are we doing on the business development front to get more business out of the big pharma companies in CDMO?

[Radhesh Welling, executive]

No. So in terms of revenue, I would say a significant portion of that was with top 20 biopharma companies. There used to be some business with the smaller biopharma companies. But fortunately or otherwise, they have also been -- now as the molecules are growing, they have been actually purchased by the large biopharma companies. So a significant percentage of that revenue is actually coming from the top 20 biopharma companies. Now what we are doing in terms of business development, we are increasing the number of BD people in the market. So we have actually hired new Business Development people, both in Europe and in U.S.

And as I have indicated earlier, our focus is, a, to expand our customer base to actually bring in more of these new biopharma companies which exist both on the East Coast as well as the West Coast in U.S.; two, develop deeper engagement with our existing customers, so that we get more number of inquiries and possibly some non-flouro inquiries from existing customers. So basically, focus more on the partnership piece. And the third is, with some of these customers or some of the other larger biopharma companies, to try and see if there are any late-stage opportunities that we can develop and start supplying to.

In terms of order of difficulty, they actually go -- I mean, the 3 that I mentioned, they are basically in the respective order of difficulty. The first one is relatively easy, the third one is relatively harder to do. But those would be, at a very high level, some of the business development initiatives that we have undertaken.

[Sunny Roy]

Right, sir. And out of these top 20 biopharma companies, do they include the companies which make NCEs, the patented NCEs, the innovators, like Abbott, Pfizer, Johnson & Johnson, do they -- I mean, I'm not talking about the name, but do they include all the chemical companies as well who are making the NCEs.

[Radhesh Welling, executive]

No, no. None of this actually includes any chemical companies, all of the customers there are only the large biopharma companies, like Mercks of the world or Pfizers of the world or Gilead of the world, both European as well as American. .

[Operator]

Ladies and gentlemen, in the interest of time, that was the last question. I'd now like to hand the conference back over to Mr. Radhesh Welling for closing comments. Over to you, sir.

[Radhesh Welling, executive]

I would like to thank everyone for joining on the call. I hope we have been able to respond to your queries adequately. If you have any further queries, you may reach out to our Investor Relations partner, Orient Capital. Thank you very much, and have a good day.

[Operator]

Thank you very much, sir. Ladies and gentlemen, on behalf of Navin Fluorine International Limited, that concludes this conference. Thank you for joining with us, and you may now disconnect your lines.