India’s Specialty Chemicals Industry: A Growing Opportunity for Fluorination

A recent Jefferies report on the specialty chemicals industry highlighted significant opportunities in India. The report attributes this potential to investor interest in the “China + 1” strategy, as well as a drop in EU production following the Russia-Ukraine crisis.

According to the report, Indian companies made a total of $91 billion in new project investments in FY23. Over the past six fiscal years (FY17 to FY23), total blocks have grown 2.7x, revenue has grown 2.8x, and EBITDA has grown 3x.

One particular segment highlighted in the report is fluorination, a segment of the specialty chemicals industry that has experienced growth in recent years. Fluorination is a complex chemistry and only a few players have the technical expertise to produce fluorinated molecules.

Fluorine chemicals are used in various industries such as cooling, refrigerants, dyeing, automotive, electronics, agriculture, pesticides, herbicides, insecticides, textiles, electronics, and pharmaceuticals. The pharmaceutical sector in particular is an important consumer of fluorinated products.

The use of fluorine in the pharmaceutical industry has steadily increased over time. From zero contribution in the 1940s, it rose to 17% in the 1950s, fluctuating between 11% and 20%, and rose sharply from 32% in the 1980s to 79% in the 2010s.

Fluorination also plays a vital role in agrochemicals, with 53% of agrochemicals currently containing fluorine. Therefore, fluorine chemistry is clearly widely used in these two major segments.

In addition, emerging industries such as electric vehicles, fuel cells, and printed circuit board coatings are increasingly adopting fluorine to enhance their electrical properties, with huge growth potential.

Discussions about the chemical industry inevitably involve China. Revenues of Chinese fluorochemical companies have been declining due to various factors, including factory closures due to a vigorous push to clean the environment. As a result, Chinese companies have weaker growth numbers, or underperformed, compared to Indian companies.

Chinese fluorinated players reported a decline in growth in FY16, rebounded in FY18, but have not shown strong growth since then. The growth rate in FY23 is only 20%.

In contrast, several Indian companies such as SRF, Navin Fluorochemicals, Gujarat Fluorochemicals have been delivering revenue growth. For instance, SRF showed a 7% revenue growth in FY17, followed by a gradual decline in FY20 and FY21. However, the sector has staged a comeback, ending FY23 with an impressive 57% growth after growing 44% in FY22.

Apart from these three companies, Anupam Rasyan has also shown great interest in fluorination which currently contributes 15% to their total revenue. On the other hand, Laxmi Organic acquired Miteni, a company specializing in fluorine specialty, in 2019, enabling Laxmi Organic to enter the highly profitable fluorine business.

Looking ahead, SRF sees fluorochemicals as one of its many business segments but has announced capex of Rs 600 crore to cater for solar PV, EV batteries and automotive segments.

Navin Fluorine expects its high-performance products plants to be running at full capacity in 2023, an important trigger for inventories.

Additionally, R-32 capacity for refrigerant products is expected to generate annual revenue of Rs 200 crore and will be operational.

Now looking to the future, SRF Fluorochemicals is part of many businesses that the company is engaged in but they have announced capex of Rs 600 crore which will cater to the solar PV, EV battery and automotive segments.

For Navin fluorine, HPP or high performance products plants will be running at full speed in 2023, which is a major trigger for inventory, another refrigerant product R-32 capacity will increase annual revenue by Rs 200 crore and will be completed in 24e Started production in the second half of the fiscal year.

Gujarat Fluorochemicals Company spoke about the growing demand from emerging industries in the field of new fluoropolymers, and new fluorochemical factories are gradually ramping up production due to increased demand.

The final valuations are that Navin Fluorine is the most expensive in the fluorination segment with a P/E ratio of 42 times, followed by SRF with a P/E ratio of 34 times and Gujarat Fluorochemicals being the cheapest at a P/E ratio of 20 times.