Taking Stock: A Deeper Look at Navin Fluorine

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Taking Stock New


In a new series for 2017, we look at analyzing one stock on a regular basis. These are often stocks we like, but don’t necessarily come into a Capitalmind Portfolio. The first one for 2017 was the gold loan company: Manappuram Finance followed by Sunil Healthcare and Phillips Carbon Black.

The focus of our Momentum Portfolio is to be long stocks that are seeing strong momentum while having basic fundamental foundation. Navin Fluorine was included thanks to the consistent momentum we saw in the stock. When it lost the positive momentum that is crucial for it to stay in our momentum portfolio, we had no option but to take a Exit Call. But that doesn’t mean that the stock is bad. Here we look at the bigger picture with emphasis on what is driving the company’s growth and the outlook for the future.

Navin Fluorine which started off with manufacturing refrigerants has slowly created itself a nische market in terms of fluorine products. Navin fluorine has slowly expanded itself in fluorine business with its compounds ranging from inorganic fluorides to specialty flurochemicals. Currently it operates in four business units viz. Refrigeration, Inorganic Fluorides, Speciality Chemicals, CRAMs.

Refrigeration

Refrigeration business is the major segment where Navin Fluorines expertise lies. It has been the milking cow for Navin Fluorine for decades. Its sells its compounds under Mafron brand and R22 is the major product it offers. This business unit generated 31% of the total firms revenue for 9MFY17. 30% of the revenue in this business unit (BU) was generated by exports in  9MFY17. the major exports being to the middle east countries. The sale of refrigerant is seasonal with major sales happening between Feb to July. Lately the segment has seen a lower growth due to the import quota limit by the gulf countries. Most of the quota for refrigerant exports are completed by Oct-Nov and new quota opening up only in Jan. This lacuna can be only compensated by getting into newer markets or domestic markets expanding.

Specialty Chemicals

Navin Fluorine develop and manufactures fluorine based compounds in this segment. This BU operates mainly in two segments agro chemicals  and pharmaceuticals. Navin Fluorine manufactures intermediaries in both the segments. Nearly 43-46% of the revenue comes from exports. It is also highest revenue generating business unit for Navin fluorine. Though specialty chemicals is the trend for the current year, due to slow down in China, but Navin Fluorine has not been able to take advantage due to its limited scope towards fluorine compounds. Slowing pharma sector coupled with pricing issues and lower demand in agro chemicals has plagued the segment in current year. But they have been investing in R&D and they are in process of diversifying their product portfolio.

Inorganic Fluorides

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This segment supplies fluoride compounds like Anhydrous Hydrofluoric acid, Ammonium bifluoride, Potassium fluoride etc to industries. Most of the products manufactured are for domestic industries except some 7-8% being exported. Major application area being  Inorganic fluorides has given a significant contribution towards the firms top line growth.

Contract Research And Manufacturing Services (CRAMS)

This segment has been operational since 2013, when Navin Fluorine thought of utilising its in house R&D section for developing and manufacturing new molecules for the clients. Currently the firm takes in contracts to develop molecules which are yet to commercialize and post approval they intend too manufacture the same product in large scale with the clients brand name. This generated 14 Crs revenue in FY13 and for current 9MFY17 it has generated 92 Crs. All the revenue generated is from foreign sources. This segment has seen a CAGR of 57.89% in terms of revenue.

Key Raw Materials For Navin Flourine:

The key raw material for the company being Fluorospar, which is generally imported by the firm. It imports mainly from China and also has tie up with domestic mining companies for unrestricted supply of the ore. Apart from fluorospar, Sulphur, Chloroform, Boric Acid and Bromine act as key raw materials for the firm. Cost of power and pricing of natural gas also are important factors in enhancing the operating margins.

Financials:

Revenue has grown at a CAGR of 7.90% for last six years. The top line growth has mainly been propelled by CRAMS post 2013. Specialty chemicals has grown at a CAGR of 8.49%.CRAMS and Specialty Chemicals have been doing outstandingly well and still have lot of potential to unlock. Margins have improved in 9MFY17 with respect to FY16 due to softening of key raw materials. The average dividend payout percentage stands at 27%.

 

Navin Fluorine has generated 43% of its total revenue from exports. The major export area of specialty chemicals and refrigerants being Middle East and South East Asia.

The good part is, Navin Fluorine doesn’t have any long term borrowings on its book.

 Other Notable Points:

  • Dahej Project with Piramal is under USFDA approval, once approved the production might start immediately.
  • Dewas plant will be achieve full capacity by FY2017.
  • Its wholly owned subsidiary Manchester Organic Limited (MOL) has not contributed any profits to the firm in FY16. But for the current year the management is positive on significant cash flows from the subsidiary.
  • The JV with Honeywell will may start production by the end of Q1FY18.
  • Growing urbanization with increased middle class coupled with increasing global temperatures might put refrigerant segment back to growth path.
  • The temporary demand and supply gap of specialty chemicals created in China might well be over, as the industry is picking up.
  • Steel turnaround and supply constraints have increased the fluorospar prices by $10/ton in China during late Feb 2017.
  • Montreal protocol, which governs climate change issues can bring down the scope of cholo fluoro carbons in refrigeration.
  • CRAMS might turn out to be the milking cow for Navin Fluorine as log as they are keep developing new pharmaceutical intermediaries.

Subsidaries and Joint Ventures:

Manchester Organics Limited (MOL)

Navin Fluorine which initially held 51% stake in Manchester Organics Ltd has acquired the remaining stake to make it a wholly owned subsidiary. MOL is based in Runcorn U.K.   MOL has its own in built R&D segment and works on fluorination chemistry and synthesis.

Convergence Chemicals Private Limited

Navin Flourine has formed a joint venture of Piramal Enterprise Limited. Navin flourine holds 49% stake in the above said firm. CCPL has been the extended part of CRAMS for Navin Fluorine. CCPL is formed to develop and manufacture pharmaceutical products. As of now the product developed by the firm is waiting for approval. Once the approval is obtained the manufacturing may start immediately.

JV with Honeywell

Honeywell has jointly partnered with Navin Fluorine to develop new generation refrigerant gas to be used in vehicle air conditioning system. The plant is still under construction, production might start happening by end of Q4FY17 or Q1FY18.

Stake In Swarnim Gujarat Fluorspar Private Limited (SGFPL).  

Navin Fluorine has bought 25% stake in SGFPL. It is a joint venture between Gujarat Mineral Development Corporation and Gujarat Fluorochemicals Limited. The basic purpose of the investment in this JV is to ensure the long term supply of Fluorospar to its firm. Apart from SGFPL, Navin Fluorine has also invested in China to de-risk itself to concentrating on a particular geography for supply of its basic raw materials.

Clients:

Refrigeration: Voltas, LG, Samsung, Blue Star

Agrochemicals: Bayer Crop Science, BASF, Syngenta

Pharmaceuticals: Lupin, Dr Reddys, Piramal, Aurobindo

Other Industries: Steel, Solar, Petrochemicals, Electronics etc.

Growing Share Price.

While the stock has been trading on the Bombay Stock Exchange since 2003, its only since 2007 that it was listed and started to trade on the National Stock Exchange. While earnings have been growing steady for quite some time, the valuation of the company in itself did not see much change over time. The financial crisis resulted in price earnings ratio dipping to single digits.

It was only in late 2014 that the sentiments changed for the stock and it finally broke above its all time high of 560 which was last seen in 2005. The stock has since rapidly moved higher and valuations wise is now at par with pre-crisis levels.

Shareholding Pattern

The firm is run by Maftalal group, with promoter holding 38.68% of the shares. 9.37% of the promoters holding in the company is pledged for an loan amount of Rs 91.41 Crs.

Our View: High Price, But Good Stock

We like this stock. It’s a little pricey right now, but we might add this to our longer term portfolio if the stock corrects. We’ll post in #actionable when that comes about. Right now, it’s more about the structure around the stock and we hope it’s been informative.

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Holdings: Analyst and family do own some of the positions listed above. Please assume we are biased.