Navin Fluorine: Unleashing The Reactivity of Fluorine!

Navin Fluorine is one of India’s leading fluorochemical manufacturers. As the name suggests, it is a pure play ‘fluorine chemistry’ based company.

Business Model:

Navin Fluorine’s business is segmented along four verticals as show below.

HPP yet to commence operations.

The Pharmaceutical, Agrochemical, and Industrial sectors contribute to 40%, 40%, and 20% of total revenues respectively.

Refrigerants:
Inorganic Fluorides:
Specialty Fluorochemicals:
Contract Research and Manufacturing Services:
High Performance Product:

Navin Fluorine entered into a 7-year long manufacturing contract with a global company for the supply of a fluorine based High Performance Product.

This project has the potential to become a new vertical for Navin Fluorine and involves royalty free access to the underlying technology. The intermediates and final product that will be manufactured in this project are not a part of Navin Fluorine’s existing product portfolio.

Competitive Advantages and Economic Moats enjoyed by Navin Fluorine:

Technological & Process Barrier along with High Switching Costs

Undertaking controlled fluorination reactions requires vast expertise in the subsequent manufacturing processes due to Fluorine being highly reactive in nature. Hence, the complex (and potentially hazardous) chemical itself provides a barrier to entry. Furthermore, the company is one of the few Indian cGMP (FDA) compliant fluorochemical companies which makes it a preferred partner for Pharma MNCs (the other company is SRF).

Pharma MNCs conduct a thorough inspection of the company, and any deal is contingent on their approval (especially in the CRAMS segment). Sometimes, the process can take a few years. However, once the customer is onboard, it is highly unlikely that they will switch vendors simply for better prices. This leads to high customer switching costs and allows for multi-year long term relationship building.

Vertical Integration

Nearly all fluorochemicals are derived from Hydrofluoric Acid (HF) which serves as the base feedstock. HF is manufactured by the Inorganic Fluorides segment of the company and thus Navin Fluorine is backward integrated to an extent.

Navin Fluorine has been one of the few companies that continues to stick to its core fabric, that of expertise in ‘Fluorine Chemistry’. This quality is more likely to ensure that integration, both forward and backward, is likely to come about naturally, rather than as a strategy.

I believe that the strategy of sticking to just ‘Fluorine Chemistry’ has allowed for natural vertical integration!

Well Experienced and Seasoned Management

The company’s original business model was centered primarily around Refrigerant Gases and Inorganic Fluorides which are low-moderate margin businesses and face regulatory hurdles today. (Following the Montreal Convention, Refrigerant Gases (primarily only HCFCs) are being phased out in a steady manner by 2030)

The company has successfully diversified its business by entering different verticals within the Fluorine space (playing to their strengths) – Specialty Fluorochemicals and CRAMS. These segments are expected to drive robust growth going forward.

Location Advantage

Navin Fluorine’s manufacturing facility in Surat is located extremely close to the port of Hazira. This location-based advantage has allowed the company to enjoy low transportation costs when compared to its peers, especially for their high-volume commoditized products.

However, the rapid urbanization of Surat has pushed residential areas in close vicinity to the plant. The company does see some risk arising due to this situation.

Risks Faced by Navin Fluorine:

Raw Material Availability and Price Volatility

The company’s key Raw Material is Fluorspar which is primarily sourced from China (China contributes roughly 55% of global Fluorspar supply). This Chinese supply has faced disruptions due to several smaller mining companies shutting down as part of an environmental clampdown by the Chinese Government. This has led to supplier concentration and lower supply, thereby pushing up prices drastically. Overall, fluorspar prices continue to rise annually due to a general scarcity of high-quality mines.

To ensure the supply of fluorspar at a stable cost, a Joint Venture was set up with GMDC for its extraction (a first in India), with the entire supply being consumed by Navin Fluorine and GFL. Further de-risking measures are being taken by establishing alternative supplies from Kenya and South Africa.

Some key raw materials for the CRAMS and Specialty Chemical businesses are being imported from China and have shown price volatility at times.

The other key raw materials are Sulphur, Chloroform, and Boric Acid, all of which have shown significant price volatility.

Adverse Regulations

The Refrigerants segment (emissive) is likely to face regulatory threats in the future. Currently, developing economies enjoy lax environmental policies and it is hard to say till when this would persist.

Competition

Chinese low-cost producers have been able to put pressure on the company’s price sensitive segments in the past. However, as Navin Fluorine migrates towards high value products, the price sensitivity of the customer tends to drop.

The key domestic competitors are SRF, GFL, and Laxmi Organics (they acquired fluorination assets recently) and the Top 4 global players control 40% of the entire fluorochemical market.

Fluorine Chemistry is still in its nascent stage in terms of application discovery and there is large potential for new avenues to open. With an increasing market size for fluorochemicals, competition is likely to grow too.

Opportunities:

Financials:

Navin Fluorine does not have any debt burden.

*The surge in ROIC in 2019-2020 is optical, it is being caused by a tax writeback.

Increasing share of high value businesses has led to margin expansion and this trend is expected to continue.

Valuation:

Margins are expected to climb in the future due to increasing share of high value business. Terminal Year Margins will be 23% (85th – 90th Percentile of Comparables).

Sales to Capital Ratio is expected to decline over the next 2 years due to large capex coming up. However, it will then gradually improve towards 1.6 (80th Percentile of Comparables).

Cost of Capital (Terminal Year) stands at 8.69% with an ROIC of 11.69%.

My estimates lead to a valuation of INR 1405.87 to INR 1759.83 per share, well below the current market price of INR 2961.15

Conclusion:

Navin Fluorine continues to perform well on the bourses clocking new all time highs. There has been a favorable shift in the company’s business model, but the stock seems to have gotten ahead of itself at this point of time!

If you are interested in reading about chemical companies, here are a few articles that you should have a look at,

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