Navin Fluorine is the pioneer of refrigerant gas manufacturing in India. It is the largest integrated specialty fluorochemical company in India and operates across four business units, refrigeration gases, inorganic fluorides, specialty fluorides and contract research and manufacturing services (CRAMs). 

The company’s share price rose 18% after its Q2 FY21 results, driven by strong growth visibility, healthy margin expansion and robust capex outlays expected in the next few quarters. FIIs have increased their holding to 21.1% in September 2020 from 17.1% a year ago. Over the past year, the company’s value has tripled.

Quick Takes:

• September 2020 quarter results were driven by higher than anticipated utilization of the cGMP3 plant at 80%

• High value businesses have grown at a CAGR of 18% over the past five years.

• The company announced a Rs 195 crore capex plan for its specialty chemicals vertical in Dahej

• Navin Fluorine has entered into a $410 million contract with a global company for manufacture and supply of a high-performance product (HPP) in the fluorochemical space.

• Navin Fluorine has sold its 49% stake in Convergence Chemical Pvt (CCPL) JV to Piramal Pharma for INR 65.1 crore.

Stellar September FY21

While the June 2020 quarter saw revenues fall 14.5% YoY, in the September 2020 quarter, Navin Fluorine beat street estimates by reporting stellar numbers. Revenue from operations stood at Rs. 319 crores in Q2 FY21 compared to Rs. 273 crores a year ago. Sequentially, revenues grew 48.4% in the September quarter. Operating profit rose 33% YoY, with margins coming in at 28.4%, expanding 349 bps YoY. Net profit (PAT) came in at Rs. 68 crores in Q2 FY21 against Rs. 47 crores in the same period a year ago. 

The September quarter performance was driven by robust performance of CRAMS division. This division reported a muted FY20, but bounced back after the commissioning of the cGMP3 plant in the March 2020 quarter. After a 35% revenue jump in the June quarter, revenues from the CRAMS vertical saw an impressive 111% YoY revenue growth in the September quarter. It contributed around 32% to revenues in Q2 FY21. 

Revenue growth during the September quarter was driven by higher than anticipated utilization of the cGMP3 plant. This plant operated at roughly 80% utilization levels in Q2 FY21.

The specialty chemicals division maintained its revenue run-rate of the past few quarters growing 9% YoY. It contributed  33% to total revenues. Out of the revenues of the vertical, the constituents were life sciences, crop science and industrial segment in the proportion of 40:40:20. Though life sciences and crop science witnessed strong momentum, industrial numbers were soft. 

CRAMs and specialty chemicals are together considered high value businesses by Navin Fluorine. These businesses earn a higher margin and are highly profitable. High value businesses together contributed 65% to total revenue mix in the September quarter and  32% YoY in H1 FY21. 

The legacy segment, consisting of inorganic fluorides and refrigerant businesses, saw revenues fall 6% and 17% YoY, respectively, in the September quarter. Inorganic fluorides revenues were impacted by lower demand from end-user industries. On the other hand, refrigerant business suffered due to a major dip in the trade market and softening of prices internationally.

Scaling the Fluorine Value Chain

Refrigerants and inorganic fluorides are the traditional/legacy businesses of Navin Fluorine which contributed 70% revenues till 2011. The company shifted gears by foraying into the specialty chemical business in 2000 by leveraging its fluorination capabilities and entering the CRAMS segment in 2011. Till then, the company’s business model was completely built around volumes. 

From 2015 onwards, Navin Fluorine began to focus on value-added products, betting on  the highly profitable specialty chemicals and CRAMs businesses. Both have grown at a CAGR of 18% over the past five years. In fact, revenue proportion has also shifted to these high-value businesses to 65% from 42% five years ago. The specialty chemicals division is driven by three constituents, low volume high margin pharma business, high volume low margin pharma business, and the industrial business, which is primarily project driven. The specialty chemicals division earns 44% of its revenues from international markets. CRAMs on the other hand serves pharmaceutical companies, and all revenues are from exports. The CRAMs vertical develops compounds on the back of critical fluorination processes and supplies to major global life science innovators. 

While high value business has been firming up over the past five years, the legacy segment has lost its lustre. The latter’s revenue contribution has fallen from a high of 70% in 2011 to 35% now. The refrigerant business has been impacted by the phase out of R-22 by 2030 keeping with the Montreal Protocol norms on substances that deplete the Ozone layer. Inorganic fluorides on the other hand are linked to macro-economic factors, catering to domestic steel, aluminium and glass sectors. As growth prospects of legacy businesses have dimmed, the management has tuned its capex plans accordingly, moving towards CRAMS, specialty chemicals, and its newest vertical HPP (high performance product).

Management Guidance and Capex Plans

According to the management, as the company scales up the high-value businesses, margins will also improve. Operating margins have improved from 11.63% in FY15 to 24% in FY20. 

Capital expenditure requirement for the  CRAMS vertical will be assessed at the end of FY21, the management said. This is because the order book visibility for FY 22-23 will be clear only by the end of the current fiscal.

Navin Fluorine has been creating capacity in the specialty chemicals segment by undertaking projects to remove bottlenecks. And due to capacity constraints, growth in FY21 will be similar to FY20. The management is working on a number of new specialty chemicals projects which will require standalone facilities and multi-purpose plants. The new plants for this vertical will kick in from FY22. 

The company has entered into a $410 million (7-year) contract with a global company for manufacture and supply of a high-performance product (HPP) in the fluorochemical space. The product is not part of Navin Fluorine’s existing product portfolio, and will be a new vertical. The company is investing Rs 436 crore capex for this, and the commencement of product supplies will be from Q4 FY22 onwards. The firm expects to garner revenues of roughly Rs. 400 crores per year over the next seven years from this project. And as new application areas open up, it is also working on projects in electric vehicles, 3D printing, battery chemicals and 5G in the fluorochemical space.