Are the two leading players in the refrigerant industry driving a cooling revolution?

Last week, SRF and Navin Fluorine saw their shares rally sharply (16 per cent and 14 per cent, respectively) after an unexpected 200 per cent price hike in R32 refrigerant gas by US distributor IGas USA. R32 refrigerant gas is a hydrofluorocarbon (HFC) used in air conditioning and refrigeration systems, valued for its lower Global Warming Potential (GWP) and higher energy efficiency.

Adding intrigue to the industry, Stallion India , a smaller player, came out with an IPO during the week. Despite recent challenges - SRF's profit after tax nearly halved and Navin Fluorine reported a sharp decline in its profit after tax (both since FY23) - these companies' stocks have remained relatively resilient, down only 10 per cent and 24 per cent from their all-time highs.

Is the refrigerant industry on the verge of a transformation, or are these developments just temporary ripples?

Three key drivers of change in the refrigerant industry

The refrigerant industry is undergoing a significant shift, driven by environmental regulations, trade dynamics, and robust domestic growth in emerging markets. Three key trends are reshaping the landscape and creating opportunities for industry players.

1. Shift to low-GWP refrigerants

The refrigerant industry has evolved over the decades, moving away from environmentally harmful gases to more sustainable alternatives.

• The early days : Chlorofluorocarbons (CFCs), once widely used, were banned due to their ozone-depleting potential. They were replaced by hydrochlorofluorocarbons (HCFCs) like R22, which were later phased out for their high Global Warming Potential.
  
• Modern solutions : Hydrofluorocarbons (HFCs) such as R410A and R32 have dominated in recent years. More recently, hydrofluoroolefins (HFOs) have emerged as next-generation refrigerants with significantly lower Global Warming Potential and greater energy efficiency.

Among these, R32 has become a standout choice. It offers:

• Lower GWP compared to older HFCs like R410A
  
• Higher energy efficiency, reducing electricity consumption in HVAC systems
  
• Compatibility with existing systems, making it a cost-effective transition option

For instance, the US-based Chemours (commands a 16 per cent market share in the fluorochemicals and speciality gases market) has seen double-digit growth in R32 sales, with EBITDA margins for its Opteon refrigerants reaching an impressive 30-35 per cent.

While developed markets are rapidly adopting R32 and HFOs, emerging economies like India still rely on HCFCs like R22 due to cost barriers and slower regulatory enforcement. Ironically, as global production of R22 decreases, limited supply has driven up prices, showing persistent demand in developing countries.

2. Trade dynamics and anti-dumping duties

Trade policies are playing a pivotal role in shaping the refrigerant industry.

• In 2021, the US imposed anti-dumping duties of 161-221 per cent on R32 imports from China to curb unfair pricing practices. This move stabilised global prices and benefited domestic manufacturers like SRF and Navin Fluorine.
  
• India has also implemented similar duties, protecting local players from pricing pressures caused by Chinese dumping.

However, challenges remain. During SRF's Q2 FY25 earnings call, management highlighted concerns about Chinese refrigerants entering the US through indirect routes, such as the Middle East and Mexico. While such loopholes can disrupt pricing stability, the US has historically been vigilant in addressing such issues, as evidenced by duties imposed on Indian firms suspected of redirecting Chinese supplies.

Suggested read: How to win against Chinese dumping

3. India's domestic growth story

India's fluorochemical market is expanding rapidly, with a projected annual growth of 16-17 per cent, according to Stallion India IPO prospectus. This growth is driven by several factors, including rising penetration of air conditioners, increasing automobile sales, and expanding domestic manufacturing capabilities.

Leading players like SRF and Navin Fluorine are capitalising on this growth.

• SRF reported robust domestic volume growth in its Q1 FY25 earnings call, with some segments growing by 60-70 per cent.
  
• Navin Fluorine's High-Performance Products (HPP) segment grew 23 per cent YoY in Q2 FY25, supported by rising domestic demand.

Unlike the volatile export market, domestic refrigerant prices have remained stable, buoyed by strong demand and limited competition due to antidumping measures.

Suggested read: Navin Fluorine's flourishing ride

Where should one bet on?

The fluorochemical market is characterised by high entry barriers, including significant capital requirements, technical expertise, and stringent regulatory compliance. It is a highly concentrated market, both domestically and globally, with four to five players dominating the industry. In India, the key players are SRF, Navin Fluorine, Gujarat Fluorochemicals, and Stallion India. However, their positioning and strategies differ significantly.

SRF (Stock Rating - 2 out of 5) and Navin Fluorine (Stock Rating - 3 out of 5)

These two players are the leaders in India's fluorochemical market and are well-positioned to benefit from the ongoing transition to low-GWP refrigerants. Their fluorochemical businesses contribute a significant portion of their revenues:

• For SRF, the Chemicals business, which includes fluorochemicals, contributes 48-50 per cent of total revenue.
  
• For Navin Fluorine, the High-Performance Products (HPP) segment, which includes refrigerants, accounts for approximately 40 per cent of its total revenue.

Both companies have made substantial capital investments in expanding their refrigerant capacities. SRF has allocated over Rs 1,200 crore in FY24 for its fluorochemical business, while Navin Fluorine has committed Rs 365 crore to expand its R32 capacity. Additionally, both companies benefit from backward integration, securing critical inputs like hydrofluoric acid, which enhances cost efficiency and profitability. Their economies of scale and technological capabilities further strengthen their positions.

A brokerage report from Equirus Capital sheds some light on why these companies are eager to expand. It estimates that a $1 per kg increase in R32 prices could add Rs 260 crore to SRF's EBITDA and Rs 77 crore to Navin Fluorine's EBITDA!

Suggested read: Will this ailing chemical giant's aggressive capex secure its future?

Gujarat Fluorochemicals (GFL; Stock Rating - 3 out of 5)

While GFL remains a significant player in fluorochemicals (contributed around 40 per cent to its FY24 revenue), it is diversifying into new areas like electric vehicle battery chemicals. This pivot, with Rs 800 crore allocated for FY25, could dilute its near-term focus on refrigerants.

Stallion India

While Stallion India has garnered attention with its IPO, it operates primarily in the domestic market as a trading company. Unlike its larger peers, it lacks economies of scale, backward integration, or high-value product offerings. Consequently, its margins and growth prospects are more limited.

Suggested read: Stallion India IPO

Investor's corner

The refrigerant industry offers significant opportunities, but challenges persist.

• The dominance of R32 may be threatened by next-generation refrigerants like hydrofluoroolefins (HFOs) and hydrocarbons (such as R290), which offer even lower environmental impact.
  
• Volatility in raw material prices, particularly fluorspar and anhydrous hydrogen fluoride (AHF) could pressure margins if R32 price hikes prove short-lived.

Despite these risks, the growth potential remains strong. SRF and Navin Fluorine stand out due to their backward integration, economies of scale, and strategic investments. Stallion India's IPO reflects optimism in the sector but underscores the difficulty of competing with established players.

The refrigerant industry is at a pivotal juncture. The winners will be companies that successfully navigate the transition to sustainability while maintaining profitability and innovation. In the end, whether these changes mark a lasting transformation or temporary ripples will depend on how the industry adapts to evolving regulations, technologies, and market dynamics.

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Also read : 8 small- and micro-cap traps that eroded investor wealth in 2024

This article was originally published on January 18, 2025.