Navin Fluorine Has Strong Growth Chemistry: Axis Securities

Strong Growth Chemistry

We initiate coverage on Navin Fluorine International Limited (NFIL) with a BUY recommendation and a Target Price of Rs 3,930, implying a 17% upside from the current levels. Navin Fluorine International Ltd., a Padmanabh Mafatlal group company, is one of the largest Indian manufacturer of specialty fluorochemicals. Since inception, the company has built a niche for itself in the fluorine chemistry and is now moving up the value chain and entering the high margin businesses such as Specialty Chemicals, Contract Research and Manufacturing (CRAMS), and multi year long-term High Performance Products (HPP) contracts with global players. Industry tailwainds like increased usage of fluorine based molecules in pharma and agrochemicals business is expected to drive the higher margin business. NFIL has been a preferred choice in the fluorine chain on account of attributes such as 1) Higher R&D investment, 2) Step up in innovation/new launches, 3) Strategic acquitions, 4) Focus on expanding high value business, 5) Superior Pricing, and 6) Long-term relations with clients. Moving forward, the expansion in the high value business having superior margin profile than the legacy business which is expected to augur well for NFIL’s operational performance and profitability. We expect NFIL to report 25%/28%/27% CAGR in Revenue/EBITDA/PAT, respectively over FY21-24E. At CMP, the stock trades at 58x/39x/33x of FY22E/FY23E/FY24E, respectively. We initiate coverage with a BUY recommendation and value the stock at 38x of its FY24x EPS with a target price of Rs.3,930/share, implying an upside of 17%.

INVESTMENT THESIS

Rising demand for Fluorochemicals in Agro and Pharma Industries

Rising temperatures coupled with increasing demand for cold storage systems across the globe and climate control systems (a system able to affect and regulate the internal temperature of a vehicle in any weather condition) have stimulated the demand for Heating, Ventilation and Air conditioning (HVAC) and refrigeration systems, which in turn are driving the fluorochemicals market. Apart from air conditioners (ACs) and refrigerators, demand for fluorochemicals have risen significantly in other end-user industries such as Automotive, Construction, Personal Care, Agrochemicals, and Pharmaceuticals. The total number of fluoro-pharmaceuticals (191 drugs) accounted for 18% of the total pharmaceuticals (1,072 drugs) and 22% of small-molecule drugs (839 drugs). Almost ~50% of agrochemical products developed contain fluorine due to its ability to enhance and improve results.

Broadening its capabilities in the fluorine value chain

NFIL has over 5 decades of experience in the fluorine value chain and has transitioned itself from a high volume commodity player to manufacturing specialty chemicals that are margin accretive.

Having started with refrigerants, the Company moved up the fluorination value chain through introduction of inorganic fluorides, specialty fluorochemicals and CRAMS. The High Value Business share has increased to 60% in FY21 from 42% in FY15 as its top-line grew at a CAGR of 20% over last 5 years, while the Legacy Business grew by 7% over FY15-20. Notably, EBITDA Margins also have seen an expansion by 1400bps between FY15-21 given the shift to High Value Business that have high entry barriers and also margins.

Focus on increasing share of non-emissive volumes in Refrigerant Gas segment

NFIL has been operating in the refrigerants industry for the past five decades and is a pioneer in this segment. It sells its refrigerants under the brand name ‘Mafron’ which has become a generic name for refrigerants in India. As the demand for R-22 from the ACs and automobile segment in the domestic market started falling, NFIL started exporting to South-East Asia, Middle East, Africa, and other developing countries where demand was growing. The company created an alternate revenue stream and started selling for non-emissive applications which is a high-margin and low volume segment. The non-emissive segment contributes about ~15-17% to the refrigeration segment and is expected to increase as the company is looking to add more customers for non emissive application of refrigerant gases.

Robust long-term growth outlook – Initiate with BUY

The high value businesses consisting of Specialty Chemical, CRAMS and Navin Fluorine Advanced Sciences (NFASL) are expected to be the key growth drivers going forward. We believe NFIL is well placed in the fluorination space given i) Strong industry growth drivers; ii) Sharp focus on R&D and expanding in high-value business and iii) Well-nurtured long-term relationship with customers.

At CMP, the stock trades at 33x FY24E EPS. We assign a target multiple of 38x FY24E EPS and initiate coverage with a BUY rating on the stock with a target price of Rs 3,930/share, implying an upside of 17% from CMP.