The Hindu Business Line : Navin Fluorine: Sell

Investors can exit the stock of Navin Fluorine (Rs 290) as the valuation level appears stretched. The stock quotes at 20 times its annualised earnings for FY-06. The price was driven by interest on carbon trading benefits as part of the clean-development mechanism (CDM) initiative, which is yet to take off. Marginal revenue growth in its larger products and dipping cash flows from operations act as dampers. The return on funds employed fails to justify the steep valuation that the stock commands.

Navin Fluorine makes fluorochemicals and depends largely on the aluminium industry. Growth in the aluminium industry has failed to translate into revenue growth for the company. Its synthetic cryolite business and aluminium fluoride have been growing at a sluggish pace. The refrigerants gases industry is the major user of hydrofluoric acid. Though the volumes of hydrofluoric acid have been growing at a fast clip, a drop in prices tempers revenue growth prospects.

Faced with low offtake for its commodity chemicals in the domestic market, Navin Fluorine has become dependant on exports, which generate about 40 per cent of its revenues.

Wider product base

To reduce its dependence on the bulk aluminium chemicals, Navin Fluorine has diversified into manufacturing organic chemicals and specialty fluorine chemicals. These chemicals intermediates are used by the drugs and agrochemical industries. This business, which faces competition at the global level, is yet to take off in a big way.

The outlook appears bright for the company's refrigerant gas business, as rising disposable incomes would heighten demand for consumer durables and cars. However, this business contributes only about 5 per cent to revenues and is unlikely to contribute to revenue growth in a big way.

On on the back of the phase out of chlorofluoro-carbon (CFCs) production initiated by the Montreal Protocol on Climate Change, Navin Fluorine has moved into manufacturing a substitute for CFC. The phase-out would entitle Navin Fluorine carbon emission rights; however, revenues from selling these rights are unlikely to make a significant contribution. Though the CDM project appears to be in the final stages of completion, the cumbersome process involved in obtaining these rights would delay cash flows from carbon trading.

Fundamentals

Navin Fluorine's earnings have been volatile over the past three years and its cash flows from operations have been showing a declining trend. Piling up of inventory and a burgeoning receivables position, which are reflective of a sluggish offtake, have placed cash flows under stress.

Though the operating margins have stabilised at the 15 per cent-mark, revenues have been growing at a slow pace. During the first three quarters of FY-06, Navin Fluorine recorded a marginal revenue growth of 4 per cent. Though it has posted a significant turnaround on the earnings front, sustaining these levels of growth are unlikely, as they have come on the back of one-time write-offs in the last quarter of FY-05.

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