The Hindu Business Line : Navin Fluroine: Buy

Navin Fluroine's Clean Development Mechanism project, scheduled for completion by middle of FY-08, will entitle it to about two million Certified Emission Reductions on a yearly basis till 2012.

In the light of more clarity over the timeline of the CDM (clean development mechanism) project, investors with a medium-term perspective can consider taking exposure in the Navin Fluorine stock.

It, however, is appropriate only for investors with a high risk appetite.

We are reversing our `sell' call made in March at a price of Rs 306.

Navin Fluorine, which is among a handful of refrigerant gases manufacturers in the country, has partnered with INEOS Fluor of the UK for its greenhouse gas (GHG) emissions abatement project.

Though the stock trades at a price earnings multiple of 43 times its trailing four quarter earnings, the opportunity arising from significant cash flows from its CDM project lends confidence to the stock.

CERs: The catalyst

In June, Navin Fluorine entered into an agreement with INEOS Fluor, a specialty fluorine chemicals producer, for a GHG abatement project.

The project, expected to be complete by the middle of FY-08, will prevent emission of HFC23 (hydro-fluoro carbons), a by-product in the production of HCFC22.

The company has applied for registration with the Government and is on course to filing its application with UNFCCC (United Nations Framework Convention on Climate Change).

Navin Fluorine plans to deploy funds that accrue from the sale of Certified Emission Reductions (CERs) to expand its specialty fluorochemicals business.

The company also proposes to use these funds to maintain its market share in the refrigerant gases business and move up the value chain by focusing on CRAMS (contract research and manufacturing services) in its core businesses.

Business profile

Navin Fluorine is among the larger fluorine-based chemical producers.

The company's products are used mainly by the aluminium industry.

The switch to cheaper raw materials by aluminium manufacturers appears to have affected its bulk aluminium chemicals (synthetic cryolite and aluminium fluoride) business.

To reduce its dependence on aluminium chemicals, the company has increased its focus on specialty fluoro chemicals. It has been increasing capacities in this business, which currently contributes about 35 per cent of its revenue.

It caters to the pharmaceuticals, agro-chemicals, textiles and polymer industries.

With the user industries in a growth phase, this business is likely to contribute a larger share of Navin Fluorine's revenue.

With a view to strengthening its bottomline, Navin Fluorine has been increasing its integration levels.

In FY-06, the company raised its sulphuric acid capacity to meet captive demand from its fluoro chemicals business. This capacity enhancement is expected to result in savings in energy costs.

Growing demand

Rising disposable incomes and expansion in the manufacturing and services sectors are likely to sustain strong demand for air-conditioners and refrigerators.

This, in turn, is expected to translate into higher volumes for the refrigerants gases industry.

Though the company has been facing declining volumes on the CFC (chloro-fluoro-carbons) front, its HCFC (hydro-chloro-fluoro-carbons) business is likely to more than compensate for this slow down.

Besides manufacturing refrigerant gases, Navin Fluorine also trades in it.

The company imports HFC 134a to meet the requirements of its customers in India.

Navin Fluorine is exploring the possibility of manufacturing this product in India that has been growing at a steady pace.

Concerns

The risks to Navin Flourine's CDM project stem from flow of CERs from the project, foreign exchange fluctuations and volatile price trends of CERs.

Among the three, the last represents a key concern as higher supply of CERs can drive prices lower.

In its core business, Navin Fluroine is likely to face margin pressure on the back of rising prices of raw materials.

Rising costs of fluorspar, a key input in the manufacture of fluoro chemicals accounts for about 25 per cent of its raw material costs.

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