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Fluoropolymers business is in a sweet spot

Gujarat Fluorochemicals’ (GFL) stock price has corrected 21% in the past one-month, and 25% in the past three months while fundamentals remain robust with opportunities expanding. The stock trades at reasonable P/E valuation of 19.5x FY24E and 13.2x FY24E EV/EBITDA – this makes it the most affordable India fluorine player by valuations. It offers a strong net profit CAGR of 41% over FY22-24E, and return ratios are healthy, post-tax ROCE at 21% and ROE at 25.6% in FY24E. Within fluorine chemistry, we relatively prefer fluoropolymers business as it is in a sweet spot to grow along with new-age industries such as batteries, solar panels and green hydrogen. Integrated players are winning on reliability, and rise in the cost for western peers is helping GFL expand margins. New fluoropolymers capacity expansion will immediately help in growing profits in FY23 and FY24; thereafter, the company is working on expanding presence in battery chemicals. We believe the recent sharp stock price correction offers good entry point. We retain BUY rating on the stock with an unchanged target price of Rs4,270 (30x FY24E EPS). It is among our top pick in specialty chemical sector.

* Fluoropolymers - market turning more favourable for integrated players. Fluoropolymers business is incrementally favouring integrated players considering intermediate products are HCFCs (sin products with ozone depleting substance) – R-22 and R-142b. The reasons for users of fluoropolymers (such as PTFE, FKM, PVDF and PFA, relevant of our analysis) favouring integrated players are 1) non-availability of key intermediate products have made non-integrated players less reliable due to multiple shutdowns in the past two years; and 2) sharp rise in HCFCs’ prices have made non- integrated fluoropolymers business less attractive, particularly in VDF. The situation puts GFL in a sweet spot as it is fully backward integrated for its entire fluoropolymers business. GFL has done upfront investments in intermediate production (R- 22 and R-142b), which has enabled the company to win more customers / contracts in fluoropolymers business. Large Chinese fluoropolymers producers also enjoy the same position; however, GFL scores over Chinese players in terms of market penetration, technical sales team and local warehousing. It has at least a few years of head start compared to any potential Chinese / Indian competition.

* Are PTFE prices sustainable? PTFE prices have increased by ~40% to Rs960/kg in FY23-TD vis-à-vis FY21, and we take Oct’22 exit month prices for PTFE at Rs1,017, it is up 48%. However, if we analyse the scenario for non-integrated PTFE manufacturers, pricing situation does not look equally rosy, or at peak. PTFE-R22 spreads are stable at Rs319 in Oct’22 vis-à-vis Rs312 in FY21. For FY23-TD, the spreads have improved to Rs349, but this is no comparison to the significant rise in the price of PTFE. Higher PTFE- R22 spreads can also be explained by higher power cost which is the largest cost component in converting R22 to PTFE.

* New fluoropolymers exports market has just opened up for GFL. The exports revenue from new fluoropolymers has improved to Rs4.5bn in FY23-TD compared to just Rs1bn in FY20 (we attribute the entire exports to GFL considering it is sole manufacturer in India). The exit month annualised new fluoropolymers revenue run rate works to >Rs10bn. The new fluoropolymers will continue to grow exponentially for the next two years as GFL expands its new fluoropolymers capacity. New fluoropolymers capacity stood at 8.4ktpa at the start of FY23, and it was 12ktpa at end-H1FY23. It is in the process to increase the capacity to 18ktpa by H1FY24. The future expansions are planned in battery-grade PVDF in which the company is in the process of taking approvals, and commercialise full-scale reactor.

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