Jefferies recently published a report on the specialty chemicals industry, highlighting the significant opportunities in India. The report attributed this potential to investors' interest in the "China plus one" strategy and decreased production in the European Union following the Russia-Ukraine crisis.

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According to the report, Indian companies made new project investments totaling $91 billion in FY23. Over the past six financial years (FY17 to FY23), the gross block increased by 2.7 times, revenue rose by 2.8 times, and EBITDA increased by 3 times.

One particular segment that stood out in the report was fluorination, a sub-segment of the specialty chemical industry that has experienced growth in recent years. Fluorination is a complex chemistry, and only a few players possess the technical expertise to produce fluorinated molecules.

Fluorochemicals find applications in various sectors such as cooling, refrigerants, dyeing, automotive, electronics, agriculture, pesticides, herbicides, insecticides, textiles, electronics, and pharmaceuticals. The pharmaceutical sector, in particular, represents a significant consumer of fluorination products.

The usage of fluorine in the pharmaceutical industry has steadily increased over time. From having no contribution in the 1940s, it rose to 17 percent in the 1950s, fluctuated between 11 and 20 percent, and made a substantial jump from 32 percent in the 1980s to 79 percent in the 2010s.

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Fluorination also plays a crucial role in agrochemicals, with 53 percent of agrochemical products currently containing fluorine. Therefore, it is evident that fluorine chemistry is widely used in these two major segments.

Moreover, emerging sectors like electric vehicles, fuel cells, and the coating of printed circuit boards are increasingly adopting fluorine for its enhanced electrical characteristics, presenting substantial growth potential.

Discussing the chemical industry inevitably brings China into the picture. Chinese fluorochemical players have been experiencing declining revenues due to various factors, including a strong push for environmental cleanliness leading to factory closures. As a result, Chinese companies have shown weaker growth numbers or underperformed compared to Indian players.

Chinese fluorochemical companies reported a decline in growth in FY16, witnessed a rebound in FY18, but have not shown strong growth since then. FY23 concluded with a growth rate of only 20 percent.

In contrast, several Indian companies, such as SRF, Navin Fluorine, Gujarat Fluorochemicals, have consistently achieved revenue growth. SRF, for instance, demonstrated a revenue growth of 7 percent in FY17, followed by a gradual decline in FY20 and FY21. However, the industry made a comeback, and FY23 ended with an impressive 57 percent growth following a 44 percent growth in FY22.

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Apart from these three companies, Anupam Rasyan has also shown a significant interest in fluorination, which now contributes 15 percent to their total revenue. Laxmi Organic, on the other hand, acquired Miteni in 2019, a company specializing in fluoro specialties, enabling Laxmi Organic to enter the high-margin fluorine business.

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

Navin Fluorine anticipates its high-performance product plant to operate at full capacity in 2023, a significant trigger for the stock.

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

Now on the outlook, for SRF fluorochemicals is a part of the many businesses company is in but they have announced a Rs 600 crore capex, which will cater to solar PV, EV battery and automotive segments.

For Navin Fluorine, HPP or high-performance product plant will run at full capacity in 2023, this is a big trigger for the stock, the other refrigerant product, R-32 capacity will add Rs 200 crore of annual revenues and will come on stream in H2 FY24e.

Gujarat Fluorochemicals speaks about growing demand from new emerging sectors in the new flouropolymers space and the new fluorochemicals plant gradually ramping up production because of higher demand.

Lastly valuations, Navin Fluorine is most expensive in fluorination space with 42x P/E, followed by SRF at 34x and Gujarat Flourochemicals is the cheapest at 20x.