Alufluoride (market cap: Rs 98 crore) is one of the few manufacturers of specialty chemical (raw material for the aluminum production) – aluminum fluoride. While the end market – aluminum – is witnessing secular uptrend, the aluminum fluoride market is also witnessing tailwinds of supply tightness and improved pricing.
Alufluoride, which like its industry peers, was struggling with a weak pricing environment for the last few years, has witnessed a good traction in its earnings. Its healthy balance sheet, along with a niche production process (non-dependence on imported raw material) positively positions it for an investment assessment.
Aluminum fluoride: usage and production methods
Aluminum fluoride is used in the production process of aluminum manufacturing as it lowers the consumption of electricity required in the smelting process and thereby helps in the reduction of production costs of aluminum. Aluminum producers (smelters) are the main users of aluminum fluoride.
There are two methods of producing aluminum fluoride. The first method (80 percent of world production), requires processing natural raw material resources like Fluorspar and Sulphur.
In the other method, it is sourced from the fertilizer complex by reacting alumina hydrate with hydro-fluosilicic acid, generated from the fluorine recovery unit. This means that this process is not dependent on import of raw materials and hence relatively cost effective.
Global demand and the opportunity
Global aluminum fluoride demand is pegged at 1.5 million metric tons while for India it is at 64,400 tons. This is based on an industry thumb rule that for a one ton production of aluminum, 23-24 kg aluminum fluoride is required.
Source: Care ratings, Rain Industries, Moneycontrol research
For the Indian aluminum fluoride industry in India, the domestic capacity is quite limited and a few players are involved – Tanfac Industries, Alufluoride, SPIC (Southern Petrochemical Industries Corp). Navine Fluorine is one the biggest in fluorochemical industry but it is only involved in a similar compound, ammonium bifluoride, which has a different application.
Earlier, Tanfac Industries (Fluorspar method) had a huge capacity of 15,600 MT but over the years their production tapered off as it could not compete with the Chinese supply. Looking at the implied production levels, Tanfac Industries and Alufluoride, together cater to only ~14 percent of Indian demand. Hence, there is a huge scope for import substitution and creation of capacity in the scenario of sustenance of improved pricing.
Import trends, themselves suggest a huge uptick in domestic demand for the aluminium flouride. The current run rate suggests about 80-85 percent demand is met by imports.
Aluminum fluoride gets further tailwinds from global developments. Earlier this year, one of the key manufacturers in China – Do-fluroide (120,000 MT capacity) — highlighted that strict environmental protection policy has restrained the supply of aluminum fluoride and prices are expected to rise further. In addition, key raw material — fluorspar — prices have also surged and the aluminum demand cycle remains on an uptrend. While looking at the imported landed price from China, on average, fluorspar prices have risen by about 28 percent in last two quarters.
Improving pricing and volume trends
Earlier, Alufluoride had been impacted by industry-wide headwinds on account of higher Chinese supply, lower pricing power and company’s own issues with sourcing raw material. However, the last few quarterly results suggest easing of most of the concerns. The company’s capacity utilization has improved and production is higher by more than 20 percent in 2017 compared to the situation in 2013-16.
Further, the company has been able to keep tabs on the cost of materials aiding margins and return ratios. Additionally, even the prevailing rates of aluminum fluoride have also improved recently after being stagnant in the range of Rs 60-70/kg for the last so many years.
Table: Alufluoride financials
*Sales (MT) values implied from approx. per unit price
If the pricing trend available from the Shanghai Metals Market, indiamart.com are any indication, then per unit price for aluminum fluoride is hovering over Rs 100/kg, which is more than 40 percent jump from last year average.
As per Roskill, a metals/chemicals consultancy firm, export prices for Aluminum Fluoride from China have sharply increased in H2 2017.
Chart: One year chart of ALF price (RMB/Mt)
Source: Shanghai Metals Market
Key risks: Sourcing of raw material & new supply from other regions
As per company’s annual report, though the company has an agreement with Coromandel Fertilizers for the supply of 4000 TPA of hydrofluosilicic acid this supply has been uncertain and lower than required. Hence the company pursued a policy for diversifying its supplier base (Paradeep and fertilizer complex from other location). Improved sales traction suggest that supply constraints are easing.
Further, while the Chinese supply may further shrink, new supply from other regions like the Middle-East (Gulf Fluor – 60,000 MT capacity) can cap the pricing improvement.
Strong Balance sheet
The company is virtually debt free and with cash and current investment constituting 48 percent of total asset provides a lot of headroom in the balance sheet for expansion.
Based on pricing trend prevailing in last two quarters and a stable production volume, we expect 28 percent sales CAGR for 2017-19E. There is an upside risk to projections if production cut in China intensifies and the pricing trend prevailing in the current quarter (~ 20 percent higher than that assumed for the forecast) prevails for a longer term. The stock is currently trading at 14.1x 2019e earnings which is well below the multiple for the chemical sector.
Other than pricing trend, another trigger to look at is capacity expansion plan. Though company has mentioned this earlier but no concrete plan on capacity expansion has come to fore. Sustenance of improved pricing environment could be the right catalyst for the same.