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Gujarat Fluorochemicals (GFL) is a 30-year-old leading speciality chemicals company with expertise in the fluorine chemistry. Operating in a vertically integrated model, GFL has commercialised several grades of fluoropolymers and refrigerant gases for application in agro, FMCG, pharma and other industries. GFL is now exploring products applied in new-age energy storage solutions, solar films and other green energy applications.
With Indian suppliers providing supply diversification to global customers, the established operations can continue to grow from capacity addition while on the other hand the company explores new-age applications. We recommend that investors with a long-term view can invest in GFL, which is trading at a reasonable 21 times FY24 earnings.
Backward integrated and monetised
Starting from bulk chemicals to value-added products, GFL caters to external sales and internal consumption for value-added products.
Energy-intensive starting product caustic soda (sold to textiles, soaps, and aluminium industries) aids production of chloromethane (pharma, agro-chem and foam) and refrigerant gases (air-conditioning) and the three form the bulk chemicals segment.
The refrigerants are also consumed for producing fluoropolymers PTFE (Teflon) from TFE (internal consumption) and for new-age fluoropolymers; PFA (semiconductors) and FEP (wiring industry). Another refrigerant gas R142b (primarily internal consumption) goes into production of VDC (internal) for new-age fluoropolymers PVDF (pharma, batteries, and solar panels) and FKM (semi-conductors and chemicals).
The speciality chemicals division is also based on the integrated model and rides the rising demand for fluorine-based chemistry in agro and pharmaceuticals industries.
GFL’s new-age fluoropolymers are key chemicals used in energy storage solutions and solar panels for which capacity is being set up and in the exploration stage for hydrogen cell applications.
GFL is backward integrated and it has monetised many products at every level with supply relations spanning several years of vendor approvals and that too in complex fluorine chemistry products. This provides a strong moat to existing operations. GFL’s foray into new-age polymers is fail-safe as the key starting materials (internally produced) have a ready spot market as well.
Strong capex
The company is in the midst of strong capex mode, with outlays of ₹1,100 crore for FY23 and FY24 each. The FY23 capex plan includes ₹400 crore for new-age fluoropolymer capacity addition, ₹300 crore for speciality chemicals complex, which includes materials for battery chemicals; ₹300 crore for refrigerant gases capacity and ₹150 crore for infrastructure, which includes a solution for the high energy costs involved in the operations. Based on the developments in FY23, the plans for FY24 will be firmed up.
New fluoropolymer capacity is being continually added and one new capacity will flow from H2FY23. The company plans to increase the capacity to 1,500 tpm (tonnes per month) from 1,000 tpm as of Q2FY23. FKM, PVDF and PFA, which find application in value-added products, will have an increase in capacity. PFA for semiconductor application is under customer validation currently.
The PTFE growth was held back by lack of TFE capacity, which has been sufficiently expanded now. Along with debottlenecking for PTFE and new TFE capacity, PTFE capacity can grow 10-20 per cent in the FY22-23 period.
GFL increased capacity of refrigerant R125 which is ramping up and the same is planned for another new refrigerant R32 with 10,000 tpa capacity to be commercialised by FY24 with a capex of ₹125 crore. R142b and hence VDF capacity will also be increased, which are used for new-age fluoropolymer production.
The above spends relate to existing business of GFL. The company is also developing capacities and products for the new-age business. Electrolyte required in EV battery, LiPF6 (Lithium hexafluorophosphate) is being developed and the plant should be commercialised by Q1FY24. Existing fluoropolymer PVDF for solar films and battery is being developed and the plant for the specific grades should be commercialised by H1FY24. GFL will provide the commercially produced product for customer testing, which should take another six months before approvals. The significant opportunity is an optional value for investors currently, but GFL can supply to solar power and energy storage solution industries, which are being powered by government funding the world over.
Financials and valuations
GFL reported revenues of ₹2,759 crore in H1FY23 compared to ₹1,176 crore in H1FY21 (54 per cent CAGR) as capacities were added and new products were launched. GFL starting material (caustic soda) being an energy-intensive product, energy cost escalation also played a part in revenue growth as GFL passed on the costs amidst product shortages. The EBITDA margins, meanwhile, have improved from 24 per cent in FY21 to 35 per cent in H1FY23 as backward integrated operations increased in proportion. GFL has maintained a net debt to EBITDA ratio of 1.2x as of September 2022 and expects to be debt free despite high capex plans in the next two years.
Risk
GFL group includes Inox Wind and Inox Green, which have debt issues. These are expected to be partially resolved with the recent IPO proceeds of Inox Green. GFL expects to be cleared of group debt issues by FY24, which should clear some overhang from group. The poorly executed recent Inox Green IPO may also be a near-term overhang for group companies.
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