When the Covid-19 pandemic began in March 2020, Navin Fluorine International (Navin Fluorine) was unfazed. Operations at the commodity chemicals company’s Gujarat and Madhya Pradesh plants were uninterrupted even during the lockdown. The management in Q1FY21 was confident of demand sustaining even with falling economic activity, but this was not to be as Navin Fluorine’s key demand drivers remained flat in the year.

Most chemical companies had a good FY21. In comparison, Navin Fluorine disappointed. This is because Navin Fluorine’s revenue streams are different from the three big revenue streams for most listed chemical companies - pharmaceuticals, agrochemicals, and packaging. Indian chemical makers became the preferred supplier for pharmaceuticals and agrochemicals due to global demand shifting from China. With at-home consumption increasing, packaging (FMCG and industrial) was in high demand.

Navin Fluorine’s customers are companies involved in making glass, electronic components, and cleaning metals. These industries’ demand for chemicals was minimal in H1FY21 due to muted economic activity.  As economic activity revived in Q3 the automobile and electronics industries’ chemical demand rose, boosting Navin Fluorine’s revenues. But the second wave of Covid-19 can complicate matters for the company. 

Net profit in Q4FY21 contracts sharply due to extraordinary tax items

In Q4FY21, revenues were Rs 336 crore, a rise of 8% QoQ. This was after a contraction of 3.1% QoQ in Q3FY21 and a large jump of 48% QoQ in Q2FY21. Navin Fluorine’s revenues jumped in Q2 as the metals and electronics industries began opening up. These companies expected demand in Q3 to be high and required chemical components for production.

Net profits grew by 27% QoQ to Rs 75 crore but were lower by 72% YoY in Q4FY21. This was because the company wrote back excess tax provisions worth Rs 140 crore in Q4FY20.

Navin Fluorine’s three main raw materials are fluorite, chloromethanes, and sulphur. These inputs have seen a significant spike in prices. This is the reason why operating expenses increased by 14% QoQ to Rs 160 crore.

Earnings before interest and taxes (EBIT) was Rs 123 crore, a 36% growth QoQ with EBIT margins of 36%, a 7.3% increase. Navin Fluorine’s EBIT margins were higher than Deepak Nitrite’s EBIT margins in FY21.

Specialty fluorochemicals receive a fillip in FY21

Navin Fluorine’s four business verticals are refrigerants, specialty fluorochemicals, contract research and manufacturing services (CRAMS), and inorganic fluorides. Refrigerants are used by the automobile and electronics industries to manufacture glass. Specialty fluorochemicals are used in the production of pharmaceuticals and agrochemicals. Navin Fluorine undertakes CRAMS for external pharmaceutical and biotechnology companies. Inorganic fluorides are used to produce fluorocarbons used by textile manufacturers.

Out of these four segments, Navin Fluorine’s legacy segments are refrigerants and inorganic fluorides. The news businesses have been generating higher revenue over the past few years. In FY21, these segments contributed 65% of total revenue at Rs 732 crore, a 32% growth over the previous year. 

The Indian specialty fluorochemical sector gained a boost in FY21 because several domestic and international pharmaceutical and agrochemical companies moved their supply chains away from China. This helped Navin Fluorine’s specialty fluorochemicals revenue. In Q4, the segment’s generated revenues of Rs 131 crore (40% of quarterly revenue), a 35% growth on a YoY basis.

The refrigerants and the inorganic fluorides segment revenues fell by 20% and 7% YoY in FY21, respectively, as demand from the automobile, electronics, and textile industries fell compared to FY20. With FY22 beginning the same way, brokerages expect these segments to see muted demand and revenue till Q3FY22.

With the specialty fluorochemical business generating the highest revenue for Navin Fluorine, the company is expanding capacity.

In the Q4FY21 earnings call, the management outlined a capital expenditure (capex) of Rs 195 crore to expand its specialty fluorochemicals division. This will be funded through a mix of internal cash flows and debt. However, the company’s free cash flows are running dry.

Operating cash flow for FY21 was Rs 295 crore, a 90% growth from the previous year. However, the company has no free cash flow, as it spent Rs 345 crore on capital expenditure (capex) in FY21. This capex was used to expand its specialty fluorochemicals and CRAMs output through debottlenecking at its plants. This is because the management expects the CRAMs segment to grow by 20% in FY22.

National lockdown could hurt export revenue

Navin Fluorine’s specialty fluorochemical business received a boost in FY21 as many Indian pharmaceutical and agrochemical companies looked for import substitutes de-risking their supply chain out of China. This helped the specialty fluorochemical segment report a 37% growth YoY in domestic revenues to Rs 271 crore in FY21. 

Radhesh Welling, the managing director of Navin Fluorine said in the Q4 earnings call that the import substitution from pharmaceutical and agrochemical companies is still providing “extremely strong momentum” to its specialty fluorochemicals segment. He added that the Indian specialty fluorochemical space is aware of the pricing power of Chinese suppliers, which were the dominant chemical supplier before the Chinese government shut chemical factories due to rising pollution levels. On a cautionary note, Welling said, “We will not let import substitution be the primary driver of our strategy.” 

Exports of refrigerants showed some revival signs at the close of Q3FY21. However, the company’s containers en route to North America were delayed due to the Suez Canal blockage in March 2021. Expecting no such supply chain issues going forward, and with stable demand from international automobile manufacturers, brokerages said the segment will register a 5-7% growth in FY22.

With exports accounting for half of annual revenue, the management is looking to shore up its supply chain in FY22. Welling said that despite the second wave of Covid-19, in April and early May 2021, no supply chain issues were witnessed. For now, the company’s containers are moving smoothly, but he said if there’s a national lockdown in June, the supply chain could take a hit.

Specialty fluorochemicals the saviour again?

The outperformer in the chemicals market in FY21 was specialty chemicals. This was down to the rise in demand from the pharmaceutical and agrochemical sector coupled with import substitution and a lower reliance on Chinese products. This helped specialty chemical companies like Alkyl Amines Chemicals and Deepak Nitrite.

Navin Fluroine’s specialty fluorochemicals and CRAMs segment continued the strong growth despite the pandemic which is a positive sign for the company. The company is looking to invest heavily in these segments. A capex of Rs 195 crore will augur well for the specialty fluorochemical division and the CRAMs segment. Further, clearing up the supply chain will ensure Navin Fluorine’s exports aren’t delayed as 50% of the company’s annual revenue came from the international market.

Heading into FY22, the company is switching product lines, favouring the in-demand specialty segment. This bodes well, as momentum for pharmaceuticals and agrochemicals is still strong. Once the automobile and textile industries recover, refrigerants and inorganic fluorides will also bounce back. But with the country reeling under the second Covid-19 wave, the company is banking on the continued success of its specialty fluorochemicals division. With so many pure-play specialty companies in the market, this demand could be plugged. The competition could pour cold water over its expectation of cashing in on rising demand.