Navin Fluorine Research Report By Centrum Wealth Research

Navin Fluorine International Ltd
Outperformer
Target Price: Rs2,900
CMP: Rs2,541
Upside: 14.1%

Fluorinating the way ahead

Navin Fluorine International Ltd (NFIL) a pioneer in Fluorochemical industry has over 45 years of experience in fluorine chemistry and refrigerant science space. Leveraging on its dominance in the sector NFIL diversified into specialty chemicals segment in the year 2000 and used windfall from carbon credits to venture into Custom Research and Manufacturing Services (CRAMS) in 2010. Both these segments are high value businesses with significant entry barriers. NFIL has also entered into Joint Venture (JV) with Piramal Enterprises Ltd (PEL) and partnership with Honeywell (US), these ventures will enhance future growth. Going ahead, we expect revenue and PAT CAGR of 15% and 27% respectively over FY16-19E and EBITDA margins of ~22% in FY19E. Given its dominance in fluorination business and favourable growth outlook, we initiate coverage with target price of Rs2,900, valuing the stock at 18x its 12M Sep’18E PE.

Reshaped business model through systematic capital allocation: NFIL generated windfall income of around Rs400 crore over FY11-13, which it used to enter into the CRAMS segment. It also fully acquired Manchester Organics Ltd (UK) for Rs93 crore in FY16 to further strengthen its CRAMS business. Further, to secure future source of key raw material (Fluorspar) NFIL entered into a JV with Gujarat Mineral Development Corporation (GMDC).

Surge in share of key segments to drive growth: Scaling up the value chain NFIL entered into specialty chemical and CRAMS segments. These segments have relatively higher margins and mainly cater to the pharmaceutical, agro chemical, crop protection and specialty chemical sectors. In the CRAMS segment, the company commenced operation at the new Dewas facility in FY16 and at its peak can generate revenue of around Rs180 crore.

Investment in new avenues to further boost growth: NFIL entered into a JV with PEL (holds 51% stake) in 2014 to manufacture fluorinated intermediate exclusively for PEL. The products are in validation stage and will soon start commence large scale production. In Mar’16, NFIL entered into a partnership with Honeywell (US) to manufacture ‘HFO 1234 yf’ gas which is a near replacement for R-134a (used in vehicle air conditioning systems).

Strong balance sheet and healthy return ratios: NFIL’s revenue and PAT has increased from FY13-16 at a CAGR of 7% and 24%, respectively. EBITDA margin has expanded by 230 bps to 17% in FY16. Going ahead, we expect revenue and PAT CAGR of 15% and 27% respectively over FY16-19E and EBITDA margins of ~22% in FY19E. The company has minimum debt on balance sheet and RoIC and RoE’s are expected to increase further from 19% and 14% respectively in FY16 to 31% and 20% in FY19E.

Risk factors: 1) Lower utilization of new CRAMS facility; 2) Change in phase out plan of R-22 gas; 3) Stiff competition from Chinese players.

Valuation: We believe traction from CRAMS and specialty chemical segment along with commercialization of Piramal JV and Honeywell partnership will be the future growth drivers. Given NFIL’s dominance in the fluorination space and favourable growth outlook, we initiate coverage with a target price of Rs2,900, valuing the stock at 18x its 12M Sep’18E PE.