Analysis of Navin Flourine International Ltd

A company giving Rs66.5 per share dividend in form of (final + special) dividend always attracts attention. Since its announcement it has risen from 330 to 430 and post ex-date, it now trades at 305. Its P/E multiple shows 1.xx and it reported a fantastic result as follows:

Navin Fluorine International Limited, a part of reputed industrial house of Arvind Mafatlal Group, today reported a consolidated net profit of Rs. 217.58 crore for the year ended March 31, 2012 as against Rs. 71.34 crore in corresponding period of last fiscal year, registering an increase of 205 %.
Net Revenue for the year stood at Rs. 7.24bn, registering a growth of 68.23 % as compared to Rs. 4.30bn posted the last fiscal year. Earnings per share (EPS) increased by 214 % to Rs. 222.91 as compared to Rs. 70.81  of the last fiscal year.
(source: http://www.indiainfoline.com/Markets/News/Navin-Fluorine-FY12-net-profit-jumps-68-percent/5407635849)

The big question coming to my mind is: “Why then is this stock not catching the imagination of the prudent investors?” The answer becomes apparent on looking at its annual report.

The largest contributor to the profit was the sale of Carbon credits, which grew from 78.33 crore to 251.09 crore. So, is this lucrative revenue from the carbon credits to continue? The answer is NO. The same has also been mentioned in their Annual Report. The European Union ETS has put a ban on trading of Industrial Gas CERs, under which Navin Fluorine was making the massive profits. Same has been done by NZ (New Zealand) ETS. The end result being, beyond 31^st Dec 2012, this source of revenue for the company would dry up due to lack of a market. What would the books of the company look like then?

The following table contains my back of the envelope calculations for the same. The operational sales are actual sales of the company (excluding carbon credit sales). The cost of the process of breaking down HFC23 (the basis of getting the carbon credits) is minimal (lesser than a tenth of the value of the carbon credit) and hence neglected.  

	2012	2011
Sales	703.86	430.74
Carbon Credit Sales	251.09	78.33
Operating Sales (less CC)	452.77	352.41
Cost of Sales	486.16	337.07
EBIT	-33.39	15.34

Considering this, we observe the EBIT for this past year was negative. For 3 quarters of FY13, they will still continue earning from this source, thereby a handsome interim dividend may be expected, but after that it all depends on how their expansion plans pay-off.

My verdict is either hold your investment in the stock if any and wait for the Q2 results after which you may sell the same if no other significant development happens.