Gujarat Fluorochemicals – Beneficiary of the regulatory & demand Tailwind ?

Gujarat Fluorochemicals – largest producer of fluoropolymers in India.

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(A) About the company

Gujarat Fluorochemicals houses the chemicals business of the INOXGFL group.

Company is engaged in manufacturing and trading of refrigerants gases, caustic soda, chloromethane, polytetrafluoroethylene (PTFE), fluoropolymers, specialty fluoro-intermediates, specialty chemicals and also in allied activities. Moreover, the company caters to both domestic and international markets.

(B) About INOX Group

The INOXGFL Group with a legacy of more than 90 years is one of the largest business Group’s in India. The Group is a forerunner in diversified business segments comprising fluorochemicals, fluoropolymers, wind turbines and also in renewables. However, the Group currently has 4 listed entities having a market capitalization ~ 5 bn USD. Further, company also have lNOX leisure which is one of the largest multiplex operators in India.

Gujarat Fluorochemicals - Inox Group Structure

(C) Journey

Gujarat Fluorochemicals - Journey

(D) Shareholding Pattern

Gujarat Fluorochemicals - Shareholding Pattern
Gujarat Fluorochemicals - Shareholding

(E) Board of Directors

(F) Business Verticals of Gujarat Fluorochemicals

Gujarat Fluorochemicals - Business Verticals

(i) Bulk Chemicals

Bulk chemicals includes caustic soda which is a versatile alkali with main uses in the manufacture of pulp and paper, alumina, soap and detergents, petroleum products and also in chemical production.

Chloromethanes consists of three products Chloroform, Methylene Dichloride (MDC), Carbon Tetrachloride (CTC), as of now it is the only producer of MDC and CTC in India. Moreover it is used in industry as a reagent in chemical production, an extractant for oils and resins, a propellant in foam production, and a solvent in rubber manufacture and petroleum refining.

(ii) Fluorochemicals

GFL operates one of the single largest and most efficient Refrigerant plants in India manufacturing R22, R32, R125, R407C, R410A.

Further, in specialty chemicals fluorospeciality chemicals {FSC) are intermediates used in agrochemical and pharmaceutical industries. Moreover, company has commercialized seven molecules and is looking to add more. This segment has large growth opportunities and is also a proxy to the growth of pharma, agro chem, electronic and polymer industries.

(iii) Fluoropolymers

Fluoropolymers are majorly used in very specialized applications which require non adhesive, low friction properties along with extreme heat, corrosion resistance, difficult weather and also in harsh chemical conditions. Meanwhile, they finds usage in automotive, aerospace, semiconductors, electronics, common household appliances. FPs because of their physical properties are also expect to find increasing usage in EV batteries and 5G where thermal requirements are significantly stringent.

Some of fluoropolymers manufactured by the company are PTFE and some new fluoropolymer are FKM, PVDF, PFA, etc.

(iv) New Age Industry

Gujarat Fluorochemicals - New age verticals

(G) Revenue Segmentation

(i) Product Wise Breakup

Gujarat Fluorochemicals - Revenue Breakup

(ii) Geographical wise Breakup

Gujarat Fluorochemicals - Geographical revenue

Company’s ~51% of the revenue comes from India and ~49% comes from rest of the world mainly from Europe & USA.

(H) Geographical Presence & Manufacturing Capacity

Gujarat Fluorochemicals - Geographical presence
Gujarat Fluorochemicals - Manufacturing Capacity

(I) Peers Comparison

Gujarat Fluorochemicals - Peers Comparison

(J) Cost Structure

Gujarat Fluorochemicals - Cost structure

Over the years company’s raw material expenses are also reducing as company is focusing on backward integration.

(K) Financials of Gujarat Fluorochemicals

Gujarat Fluorochemicals - Financials

Company’s revenue increase at a CAGR of 9.71%, meanwhile its Profit after tax decrease at a CAGR of 11.17% this was due to the tax exemption that company receive in 2019.

Moreover, its PBITDA margins is constantly improving TTM margins stood at 35%. Further company has reduced is debt in Q3FY23 net debt/equity in this quarter stood at 0.21.

Gujarat Fluorochemicals - Du pont Analysis

Asset to Equity improved from 1.71 to 1.62 while and Sales to total assets improve from 0.44 to 0.57.

(L) Management Discussion & Concall

  • The growth in consumption across the globe has helped to boost demand for GFL’s products.
  • Company has incorporated two new 100% owned subsidiaries, GFCL EV Products Ltd and GFCL Solar and green hydrogen product ltd.
  • Management believes, that their new-age products are poised to deliver growth in the near short term, with higher margins leading better profitability and value creation.

Q3FY23 Highlights

  • US is catching up on regulation restricting PFAS class products.
  • Moreover, company is expecting to see growth in Fluorochemicals. Volumes in fluoropolymers were impacted by holiday season in Us and Europe. Expecting growth in fluoropolymers in next few Quarters.
  • Company is expecting approvals of LiPf6 in next 3 Quarters. Lipf6 is the starting point for the company to get into battery chemicals. Eventually plan is to get into Electrolyte.
  • Meanwhile, company is insulated to commodity prices variation to intermediate/chemicals due to backward integration.
  • Company has received Rs 623 Cr from Inox winds, which have been paid adjusted for wind power capacity.
  • For power cost saving plant (20MW) will be live by Q1FY24, this will help them to save around Rs 40 Cr per annum.

Capex

  • At the starting of FY22 the capacity of new age fluoropolymers were 700 TPM which is currently at 1000 TPM, they believe that it will be around 1400-1500 TPM in the couple of Quarter.
  • Company is increasing its PTFE capacity by 25% by the end of Q4 from 1500 TPM to around 1900-2000 TPM.
  • Furthermore, company is adding 10,000 TPA capacity of R32 Ref gas with a capex of Rs 125 Cr which will be commercialized by FY24.

(M) Future Outlook

(i) Regulatory Tailwind

  • PFAS class products will see a rise in restriction and Europe/US products are already facing massive penalties. Which result in 3M announcing closure of fluoropolymers business.
  • Gujarat fluorochemicals is leading with a shift to non-fluorinated aid from CY23 where it has already adopted non-fluorinated aid production.
  • Solvay another global peer has announced 100% shift to non-fluorinated aid by CY26, it has decded to cut fluorinated aid based PTFE production which will result in the reduction of its total PTFE capacity.

(ii) Demand Tailwind

  • Shut down of capacity by 3M and reduction in PTFE capacity by Solvay.
  • There are only 3 large non-Chinese global fluoropolymer producers after the exit of 3M (Chemours, Solvay & Daikin). Chemours is focusing on others materials as their PTFE realization is significantly lower. This put GFL into a sweet spot.
  • India plans to add large green hydrogen capacity, and local membrane producer is desirable. Further membrane will have a replacement market which will make demand resilient on maturity.

(iii) Increasing demand for New age polymers

Company is foray into New Age Business – Chemicals & Fluoropolymers for EV- Batteries, Solar Panels & Hydrogen Fuel Cells whose demand is also increasing rapidly as all the countries in the world are moving towards green energy.

(N) Strengths & Weaknesses of Gujarat Fluorochemicals

(i) Strengths

(a) Established market position

GFL is the largest PTFE manufacturer in India and among the top four players globally. It is also a leading manufacturer of hydro-chloro-fluoro-carbon (HCFC), which is use in refrigeration and air conditioning, among other industries. Moreover, company has a diversified product portfolio, comprising PTFE, new fluoropolymers, specialty chemicals, caustic soda, chloro-methane, and refrigerant gases.

(b) Integrated operations driving operating efficiency

The chemicals business is integrated forward into manufacturing PTFE and backward into HCFC, anhydrous hydrogen fluoride, chloroform and also into chlorine. The new fluoropolymer products such as polyvinylidene fluoride (PVDF), fluorocarbons (FKM) and phosphoric acid (PPA) fit seamlessly in the production cycle as they are manufactured from the same raw materials such as fluorspar and R-142b.

(c) Healthy financial risk profile

The financial risk profile is back by strong networth, comfortable gearing and also with healthy debt protection metrics. Meanwhile the financial risk profile has improved as the management has brought down advances provided to group companies by infusing funds in group companies.

(ii) Weaknesses

(a) Support to group companies, though diminishing

Although, GFL has supported group entities over the years through loans, advances, corporate guarantees and lien marking its own liquidity for loans of group entities, resulting in an increase in its own debt.

Meanwhile, the management’s efforts to improve the capital structure of group companies and the expected improvement in their performance may result in less support required from GFL. This remains a monitorable.

(b) Inherent volatility in the chemicals business

The chemicals business is largely export-driven, and thus is vulnerable to volatility in international markets. Addition of large capacity overseas could also constrain the performance of GFL. While the large scale and integrated operations drive operating efficiency, business remains susceptible to fluctuations in global supply and price trends.

Drop us your query at – info@pawealth.in or Visit pawealth.in

References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry Publications.

Disclaimer: The report only represents the personal opinions and views of the author. No part of the report should be considered a recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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