Working Out The Right Chemical Formula
Navin Fluorine International Limited
A rapidly growing demand for fluorochemicals due to increasing airconditioning and refrigeration systems in the industrial and domestic sectors along with a foray into a new product segment makes Navin Fluorine International Limited occupy a niche position with a clear vision about its growth prospects
Navin Fluorine International Limited (NFIL) is engaged in the chemical business. The company focuses on fluorine chemistry, thus producing refrigeration gases, some basic building block fluorides and specialty organofluorines. Its business units include refrigerants, which manufactures refrigerant gases under the Mafron brand; inorganic fluorides, which offers a portfolio of products that have applications in industries such as stainless steel, glass, oil and gas, abrasives, electronics, pharmaceuticals and agriculture; and specialty chemicals, which is engaged in manufacturing of fluorine-based molecules for applications in pharmaceuticals, agrochemical and petrochemical industries.
NFIL’s principal products include hydrofluoric acid and other fluorine chemicals, synthetic cryolite, aluminium fluoride and fluorocarbon gases. The company also offers contract research and manufacturing services for custom chemical synthesis of fluorinated compounds for the pharmaceuticals, agro chemicals and specialty chemicals industries.
Industry Overview
The Indian chemical industry is considered an important component of the Indian economy since it accounts for approximately 2 per cent of the GDP and 15 per cent of the manufacturing GDP in the country. One of the fastest growing industries in the world, currently it is ranked the fourth-largest in Asia and sixth in the world in terms of output after the US, China, Germany, Japan and Korea. The chemical sector in India is broadly classified into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers and fertilisers. With increasing industrialisation in developing economies such as China, India and other South East Asian countries, the demand for refrigerants is expected to boost up, thus assuming that the global fluorochemical markets is likely to grow at a CAGR of 5.5 per cent by 2024.
The Chinese fluorine industry is considered as one of the fastest developing chemical industries since it has one of the largest fluorine production and consumption areas globally. Since the Chinese government has been focusing on environment protection from 2016, China has deepened its regulatory investigations to enhance production safety and moderate environment pollution. As a result, the fluorspar industry was affected with many small and medium-sized enterprises closing down.
The Indian specialty chemicals sector witnessed a strong performance on the back of a continued increase in demand from end-user industries and tightened global supply owing to the imposition of stringent environmental norms in China. For the year FY19, the Indian chemicals sector was around USD 160 billion with specialty chemicals contributing up to 20 per cent. Thus it is expected that the specialty chemicals sector will grow at 10 per cent annually to almost double the market size by FY2025.
Business Performance Refrigerants : Started in 1967, NFIL has emerged as one the most preferred players in the refrigerant business. Its brand Mafron is a reputed refrigerant gas brand in the country. During the year 2018-19, the demand from OEMs was weak owing to planned phase-out of R22. The company reported a strong growth of 49 per cent in exports for FY19.
NFIL has been focusing on increasing its presence in the non-emissive feedstock segment catering to the pharmaceutical and agrochemical industries. This segment, which is expected to continue its growth trend, contributed up to 19 per cent to the segment’s sales for FY19. Q3FY20 witnessed a strong demand for air-conditioning and refrigeration equipment, leading to growth of 1 per cent YoY. The revenue for 9MFY20 was Rs. 205 crore, an increase by 4 per cent from Rs. 197 crore owing to overall increase in profitability as a result of better pricing and decrease in raw material costs.
Inorganic Fluorides : NFIL’s inorganic portfolio is responsible for catering to sectors such steel, glass, oil and gas, abrasives, electronic products, life science drugs and crop science, etc. Hence, the raw material prices are impacted by any slight change in the Chinese environment, implying that NFIL can pass price increases to its customers. Even though overall demand from the domestic steel manufacturers remained subdued, there was strong demand from the stainless and glass industry. It is expected that for this segment the exports business which has received responsive clients from East Asia will remain a key revenue driver for the future.
During Q3FY20, demand from end-user industry continued to be shy but volume growth in the domestic as well as export market was witnessed. The segment’s revenue for Q3FY20 is calculated to be Rs. 51 crore, clocking a growth of 9 per cent from Rs. 47 crore calculated for Q3FY19.
As a result of product mix and steady pricing, the company reported a 7 per cent growth in revenue for 9MFY20 to Rs. 156 crore from Rs. 146 crore in 9MFY19.
Specialty Chemicals : NFIL’s specialty chemicals business is engaged in manufacturing fluorine-based molecules for its uses in the field of life science, crop science and chemicals industries. Owing to overcapacity eroding margins and making products unviable, China was considered strong competition until environment issues forced the closure of manufacturing plants, thereby leading to rise in prices of specialty chemicals. This allowed the company’s new launches to gain positive traction as well, so as to receive longer contracts and generate more revenue. With such strong growth, the company expects to expand its presence in this segment.
For Q3FY20, the segment witnessed strong performance in the domestic and export markets as a result of higher volumes. The company undertook product portfolio expansion along with deepening its penetration among its existing customers. During the quarter, a strong project pipeline in life science and crop science continued to lead the segment towards growth. As a result, the company reported a 33 per cent growth in the segment’s revenue to Rs. 97 crore for Q3FY20 from Rs. 73 crore for Q3FY20. For the nine months, the segment’s revenue increased by 19 per cent to Rs. 277 crore for 9MFY20 from Rs. 232 crore for 9MFY19.
Contract Research and Manufacturing Services (CRAMS) : As part of its CRAMS business, the company offers services in critical fluorination processes to major global life science and crop science innovators. The Board of Directors had approved a capex for creating additional CGMP capacity and associated infrastructure. The manufacturing facility has been commercially operational. The company has already started building a customer pipeline for the new plant. For FY19, this segment of the company witnessed a decline in revenue, thus resulting into the company avoiding much of its marketing campaign to maintain healthy margins. NFIL tends to explore different fluorination processes in order to enhance its offerings.
For the future, the company plan to focus on strengthening its business through the effective interface of project management and delivery framework, deepening customer relationships and enhanced capacity utilisation. The new projects signed up for CGMP is expected to start contributing in the next few quarters. Despite a strong pipeline from European markets, the segment saw a decline in revenues of 5 per cent in Q3FY20 to Rs. 47 crore from Rs. 49 crore in Q3FY19. For 9MFY20, the company posted a decline of 12 per cent in revenues for this segment to Rs. 119 crore from Rs. 135 crore in 9MFY19.
Financials
On the consolidated financial front, for the third quarter of the current fiscal year, the company’s net sales were Rs. 2,605 crore, an increase of 11.4 per cent compared to net sales of Rs. 2,338.50 crore reported in the third quarter of the previous fiscal year. For the third quarter of FY20, the PBDT registered a growth of 22.24 per cent and stood at Rs. 74.63 crore as against Rs. 625.52 crore in the corresponding quarter of FY19. The company’s net profit rose substantially by 16.84 per cent to Rs. 451.32 crore for the third quarter of the current financial year from Rs. 386.28 crore gained in the same quarter of the last financial year. During the quarter, the company paid an interim dividend of Rs. 4 per share of the face value of Rs. 2 each.
On the annual front, net sales for FY20 increased by 7.63 per cent to Rs. 9,959.37 crore from Rs. 9,253.43 crore in FY19. For FY20, PBDT decreased by 30.84 per cent and was Rs. 275.12 crore as against Rs. 397.81 crore in FY19. The company’s net profit for FY20 decreased by 19.19 per cent to Rs. 1,474.47 crore from Rs. 1,824.58 crore gained in FY19.
Conclusion
The company has a state-of-the-art research and development centre – the Navin Research Innovation Centre located at Surat. A rapidly growing demand for fluorochemicals due to increasing use of air-conditioning and refrigeration systems in the industrial and domestic sectors will spur market growth for this product. Additionally, there is an increase in the use of fluorochemicals in various industries like HVAC (heating, ventilation and air-conditioning) as well as for applications in food and beverages, construction and pharmaceutical industries. NFIL has recently signed a seven-year exclusive supply contract with a global company for a high performance product having total potential revenue of Rs. 29 billion, probably starting from Q4FY22.
The product is expected to be manufactured at the recently announced greenfield plant located at Dahej. This product is technically and applicationwise completely different from NFIL’s current product portfolio, thus enabling the company to explore and diversify its product offerings as it forays into a new range of products within the fluorochemicals segment. This deal will further strengthen NFIL’s global presence and attract more global clientele, thereby leading to sustained long-term growth while protecting the company’s earnings from any fluctuations. The supply pact is expected to further boost the sales mix towards customised product supply as well.
With the huge contract that the company has received, its other existing contracts may further be extended as well and this shows growing confidence in the company. NFIL’s further plans to add more products to its current product portfolio will thus boost the company’s operational and financial efficiencies and lead to higher margins and growth opportunities. Considering that currently the company has reported promising quarterly financials and also has a healthy ROCE ratio of 22.37 per cent, we recommend a BUY for the stock.