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.
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.
- Legacy Business Segment.
- Houses the company’s iconic brand, MAFRON, which is a HCFC22 (R22) refrigerant. It has over 120 distributors globally for MAFRON. It also undertakes the trading of HFC134A.
- One of the largest manufacturers of Boron Trifluoride gas.
- The segment is largely commoditized in nature and is prone to competitive pressures from China, and highly susceptible to raw material price fluctuations.
- The segment is further divided into,
- Refrigerant Gases come under this subsegment.
- Following the Montreal Convention, R22 and other HCFCs are undergoing a phase out due to their detrimental effects on the environment. They are to be replaced by HFCs, and eventually by HFOs. Currently, the developed economies have completed the phase out of HCFCs and are moving towards HFOs, while developing companies continue to use HCFCs due to lax environmental regulations.
- Since 2015, Navin Fluorine has been a manufacturing partner for Honeywell, undertaking the manufacturing of HFO 1234yf.
- R22 is increasingly being used as a feedstock in pharmaceutical and agrochemical industries.
- It contributes to roughly 20% of total volumes of the segment.
- Legacy Business Segment.
- Navin Fluorine has one of the largest Anhydrous Hydrofluoric and diluted Hydrofluoric Acid facilities in India. It has a multiproduct portfolio with over 10+ key products.
- This segment too is commoditized in nature and is susceptible to slowdown due to cyclical end user industries. However, despite lacking product differentiation, the company has been able to pass on costs to the customer thanks to long standing relationships.
- It has engaged with one of India’s largest stainless-steel brands.
- Navin Fluorine had a Joint Venture (no longer a JV as Piramal now owns 100%) with Piramal Pharma for the supply of a key raw material for Piramal’s anesthetic’s portfolio. The company will continue to supply this key raw material, but more importantly gets access to proprietary hexafluoro chemistry platforms.
- Going forward, the company is attempting to bolster their portfolio with value-added products as well as hunt for new applications. It has added two new key customers this year.
- Priority Segment.
- Navin Fluorine manufactures niche fluorine-based molecules predominantly for global agrochemical majors.
- Products in this segment tend to have pricing power due to their unique value addition and criticality to the customer.
- The company is working on developing a healthy product pipeline and streamlining molecule commercialization processes.
- Over the past 1-2 years, the segment has benefited from some supply going offline in China (stringent clampdown by the Chinese government on non-complying companies due to environmental reasons).
Contract Research and Manufacturing Services:
- Priority Segment.
- Navin Fluorine’s newest business segment.
- It works with the customer right from early-stage research to commercialization of the molecule.
- Caters predominantly to Pharmaceutical Innovator companies in US, Europe, and Japan. It specializes primarily in small molecules with a focus on development of advanced intermediates. Currently, the company has around 20-25 molecules in the pipeline with another 15 molecules being recognized as good viable opportunities. Today, the top 3 molecules contribute 60%-70% of revenues for the segment.
- Manufactures value-added complex fluorochemical intermediates on a multi-hundred kilos to multi-ton capacity.
- This segment can be though of as the product of the synergies between two entities, namely,
- Manchester Organics Ltd (UK) (MOL) – Contract Research Organization
- Navin Fluorine acquired 100% stake in MOL.
- It is a research-oriented organization with a vast product portfolio that is at the forefront of developing new molecules and identifying new areas of fluorine application.
- Navin Fluorine – Contract Manufacturing
- Navin Fluorine through its fully owned subsidiaries set up multiproduct plants with multistage batch and product process technologies at Dewas and Dahej.
- It also set up NFIL USA to explore business opportunities in the US.
- Manchester Organics Ltd (UK) (MOL) – Contract Research Organization
- This segment continues to perform well with very few hiccups, largely due to strong customer relationships and multiyear contracts. Many of their customers are now repeat customers.
- As a strategy, the company intends to,
- De-risk CRAMS portfolio by adding several new products.
- Establishing relationships with new customers, thereby reducing customer concentration risk.
- Vie for a higher share of the customer’s wallet.
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.
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.
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.
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.
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.
- India is the 2nd largest fluorochemical hub globally (China is 1st). Indian Fluorochemical companies are seeing increasing interest from global players as they look towards alternative supply chains.
- Multiple Industry Wise Growth Drivers
- HF is widely used in the manufacturing of Aluminum via electrolysis.
- Automobile demand is returning.
- Semiconductors & Electronics
- Fluorine’s exceptional dielectric properties make it highly relevant for these industries.
- Fluorine boosts the efficacy of the drug, makes the drug more selective, makes it easier to administer.
- Roughly 20% of all drugs today contain some compound of fluorine.
- The industry has come back strongly over the past few months.
- Refrigerators & ACs
- Low penetration (in India) in both products will allow for high growth going forward.
- New Greenfield Capex coming up at Dahej for Specialty Fluorochemicals. It is expected to be completed by 2023.
Navin Fluorine does not have any debt burden.
Increasing share of high value businesses has led to margin expansion and this trend is expected to continue.
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
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!
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