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Fluoropolymer prices stable; demand weak on destocking

Gujarat Fluorochemicals’ (GFL) Q1FY24 EBITDA at INR 3.5bn was down 24% YoY. It was impacted by: 1) lower realisation for bulk chemicals where entire revenue loss flows down to PBT, and 2) lower fluoropolymers volumes which led to under-absorption of fixed costs. Company expects fluoropolymers volumes to normalise in Q4FY24 and ref-gas revenue to recover in H2FY24 on revival of R-125 exports to the US (while bulk chemicals price recovery may take more time due to excess capacity). Q1FY24 reflects underlying EBITDA for the company excluding the benefit of higher pricing of bulk chemicals. GFL has emphasised incremental growth to be driven by applications in new-age industries including battery chemicals, solar, green hydrogen and semi-conductors.

Company has stalled capex by a few quarters for new fluoropolymers and PTFE on weak demand and modular capex flexibility, and has put R-32 capex on hold. We have cut our EPS estimates for FY24E / FY25E by 10-27% factoring-in lower realisation for bulk chemicals and cut in ref-gas volumes. Accordingly, we have reduced our target price to INR 3,570 (earlier: INR 3,950) - unchanged FY25E P/E multiple at 25x. Maintain BUY.

Fluoropolymer revenue dips 5% YoY (6.8% QoQ) to INR 6.7bn

GFL’s revenue was down 9.3% YoY to INR 12bn due to decline in bulk chemicals revenue by 43% YoY to INR 1.7bn on lower prices of caustic soda and chloromethane. Company expects revival in bulk chemical prices to take a few more quarters due to large capacity addition in India. Fluorochemicals revenue grew 5.1% YoY (down 30.5% QoQ) to INR 3.3bn and was impacted by mild-summer in India, and lower exports of R-125. Company has guided for recovery in ref-gas segment in H2FY24 as R-125 exports get resumed. Fluoropolymers revenue was down 5.1% YoY (6.8% QoQ) to INR 6.7bn, impacted by lower volume offtake on destocking. However, prices for value- added grade of fluoropolymers have remained stable. Company believes Q4FY24 could see normalised revenue for fluoropolymers business and FY25 may benefit from restocking.

EBITDA fell 24% YoY to INR3.5bn

Gross profit margin contracted 210bps QoQ to 70.1% on lower benefit from bulk chemicals. Power and fuel cost dipped 5.5% YoY (6.3% QoQ) to INR 2.2bn; ‘other expenses’ decreased 2.7% YoY while employee cost was down 17.8% YoY to INR 918mn. EBITDA margin came in at 28.8% (down 720bps QoQ). Net profit fell 34% YoY to INR 2bn. The impact on EBITDA was higher due to price drop in bulk chemicals, which entirely flows down to PBT. Lower volume in fluoropolymers reduced utilisation and led to lower absorption of fixed costs.

Fluoropolymers and battery chemicals are growth drivers

GFL is working on new fluoropolymers for new-age applications – PVDF for battery grade and PFA for semi-conductor. In fact, the company has started supplying basic semi-conductor grade PFA and is working to move up in value chain with higher-purity products. Battery grade PVDF approvals are expected to come in the next few quarters; however, the process has slowed down due to some moderation in EV demand. Company expects to achieve 1,700te capacity/month in new fluoropolymers in Q1FY25 compared to its earlier guidance of Q4FY24 as it has delayed capex due to weak demand.

Expect battery plant to be commissioned by end-Q2FY24

GFL expects to start LiPF6 production by end-Q2FY24 though commercial production may take a few more quarters before teething issues are resolved and validations obtained. It expects revenue booking FY25 onwards. It is also looking to enter LFP, which finds application as cathode material in lithium-ion battery for EVs.

Other highlights

1) GFL expects slippage of some planned capex of FY24 by a few quarters due to lower demand in fluoropolymers. It has put R-32 capacity addition of 10ktpa on hold. Debottlenecking of PTFE capacity by 3ktpa has also got delayed; however, it has already expanded its TFE capacity. PTFE capacity expansion will take much less lead- time; 2) company expects realisation to improve in both PTFE and new fluoropolymers as it is moving up in the value chain. 90% of the PTFE sold is of value-added grade while 10% is granular PTFE, which competes with Chinese products; 3) company does not expect PFAS regulation to apply to fluoropolymers as fluoropolymers are long- chain, non-soluble in water and non-mobile, and don’t accumulate in the environment. Company expects to completely shift from fluorinated aid (used as surfactant in TFE value chain) to non-fluorinated aid by end-FY24; 4) GFL is working on FFKM, LFP and PEM for hydrogen fuel cell and electrolyser for medium-term growth; and 5) company has received approval for installing wind power plant in three locations out of eight (remaining are expected to come in next few months). Wind power installation will save power cost by INR 200mn-250mn p.a.

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