Prabhudas Lilladher, in a recent report, initiated coverage on 3 fluorochemical companies on the back of strong growth potential in this space.
"We believe that Indian fluorochemical companies are well-placed to capitalize on growing fluorination demand in mass markets given 1) the global refrigerant market to expand at 6.4 percent CAGR over FY23-28E (to reach $9 billion by 2028) 2) remarkable 64 percent of New Chemical Entities (NCEs) approved by Food & Drug Administration (FDA) in CY22 made use of fluorination chemistry, almost double of 34 percent witnessed in CY15 3) 11 out of 15 new ISO assigned agrochemicals in 2022 had fluorination in their chemistry compared to 6 out of 17 in 1998 and 4) fluoropolymers finding applications in newer areas like battery membranes & solar films," it explained.
Considering strong potential upside and huge demand uptick in the industry, it has initiated coverage on Navin Fluorine International Limited (NFIL) with ‘Accumulate’ rating and a target of ₹5,064 (13 percent upside), valuing at 40x Sep’25 EPS of ₹127; Gujarat Fluorochemicals Limited (GFL) with ‘Accumulate’ rating at TP of ₹3,230 (5 percent upside), valuing at 25x Sep’25 EPS of ₹129; and SRF with ‘Hold’ at TP of ₹2,143 (9 percent downside).
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Navin Fluorine International: The brokerage believes NFIL presents an attractive investment opportunity led by 1) a growing emphasis in CDMO (contract design manufacturing organisation) with completion of cGMP4 by CY24-end, enabling the company to service larger quantities, 2) launch of new molecules from MPP (multi-purpose plant) and the dedicated ₹540 crore agrochemical plant, 3) growth in HFO (hydrofluoro olefins) with debottlenecking of 25 percent by CY24-end and the possibility of further expansion, and 4) possibility of venturing into fluoropolymers as new vertical.
It expects Revenue and PAT CAGR of 20 percent and 22 percent over FY23-26E. The company is tripling its 20,000mtpa HF (hydrofluoric acid) capacity over the next two years along with backward integration, thereby aiding expansions, added PL.
It also estimates an EBITDA CAGR of 21 percent over FY23-FY26E on account of increasing revenues from value-added businesses such as specialty chemicals business and CDMO business. EBITDA margins to expand by 50-100 bps to 27 percent over FY23-FY26E, given improving focus on margin accretive businesses. Return ratios are also likely to be stable at 18-20 percent over FY23-FY26E led by expansion across segments, it forecasted.
The stock has lost over 3 percent in the last 1 year but has gained around 11 percent in 2023 YTD.
Gujarat Fluorochemicals: GFL is a play on growth opportunities in fluorochemicals & fluoropolymers given 1) its market leadership in fluoropolymers amidst a high technological entry barrier, 2) capacity expansion coupled with ever-increasing usage of fluoropolymers (36 percent) in high-value applications like semiconductor industry and renewables, 3) foray in newer fluoropolymers such as PVDF (Polyvinylidene fluoride), PFA (per fluoro alkaoxyl alkanes) and FKM (fluoro elastomers) fetching 20 percent higher realization than PTFE and 4) addition of refrigerants like R142b and R225 with a view to launch HFOs (hydrofluoro olefins) post patent expiry, explained PL.
Further, fluoropolymers are extensively used in batteries for separators, wirings and battery casing due to superior performance. Similarly, PVDF sheets are used in solar panels and find use in 5G equipment too. “We believe these segments are likely to drive growth of the company, going ahead,” it added.
It expects Revenue and PAT CAGR of 10 percent and 8 percent over FY23-26E given the increasing share of new-age fluoropolymers and higher PTFE grades. It also estimates EBITDA CAGR of 8 percent over FY23-26E with EBITDA margins at 32-33 percent.
The stock has shed over 16 percent in the last 1 year and almost 4 percent in 2023 YTD.
SRF: SRF is structurally placed to maintain its leadership position in the chemicals business given 1) proposed capacity expansion of 35 percent in refrigerants by FY24E, 2) addition of 5,000mtpa PTFE capacity by H2FY24, 3) in-house process development of HFO to aid long term growth post patent expiry and 4) planned launch of 6-7 agrochemical ingredients in next 2-3 years, said the brokerage. The company has debottlenecked its South African packaging film capacity by 15 percent in FY23 and is adding 21,000mtpa aluminium foil capacity by Q3FY24. Additionally, a healthy balance sheet and strong financials (despite large capex) provide us further comfort, it noted.
The brokerage is optimistic on SRF given healthy performance from the specialty chemicals business, strong balance sheet and deployment of capex for high-growth specialty chemicals business over the next few years to tap opportunities emerging from agrochemical and pharma industries, it noted.
Going forward, it expects an 11 percent CAGR in the chemicals segment led by fluorochemicals capacity expansion and new product launches in the specialty chemicals business. Overall, the brokerage expects Revenue and PAT CAGR of 6 percent and 1 percent over FY23-26E. It also estimates a 5 percent EBITDA CAGR over FY23-26E, while EBITDA margins to remain stable at around 23 percent.
The stock has lost 12 percent in the last 1 year but has added over 1 percent in 2023 YTD.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
