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‘Positive business outlook’

Gujarat Fluorochemicals Limited (GFCL), earlier known as Inox Fluorochemicals Ltd, is the largest integrated producer of PTFE (poly tetra fluoro ethylene) resin in India & fourth largest in the world. GFCL has two manufacturing plants in India located in Gujarat Ranjitnagar (set up in 1989) and Dahej (set up in 2007). GFCL’s core chemical business is fluoropolymer which accounts ~11% of world’s total capacity. The company has become one of the most efficient Fluoropolymer producer in the globally efficiently utilized application in 20 industries such as automotive, aerospace, electronics among others.

GFCL also holds a leading position in manufacturing Hydrochlorofluorocarbon (HCFC) which is used in refrigeration and air conditioning. The company drives business across various chemical products namely Caustic Soda, Chloromethanes, Poly Tetrafluoroethylene, Refrigerant gases, New Fluoropolymers among others. GFCL generates around 35% of revenue from Poly Tetrafluoroethylene, ~15% each from Caustic Soda & Chloromethanes and ~18% from refrigerant gases. Thereby these four chemical products accounts for ~85% of the GFCL’s operating revenue.

Investment Rationale:

* Anti-dumping duty on fluorochemicalsto boost business

* Cold storage to be a demand driver for refrigerant gases

* Improving profitability and margin

* Positive industry outlook and govt initiatives to provide boost to business

View & Valuation

GFCL reported TTM sales (as of Q3FY21) of Rs2,443 cr as compared to Rs,2606 cr in FY20 which seems comforting given the pandemic hit first Q1FY21. EBIDTA margin improved to 21% in TTM period compared to 17% in FY20. In Q3FY21, GFCL reported 11% YoY sales growth to Rs634 cr, EBIDTA margin at 25% (2% YoY improvement) and PBT of Rs107 cr. Meanwhile the company reported loss of Rs480 cr due to charging of a non-recurring item of Rs539 cr to P&L during the quarter (due to settlement of disputed tax amount for the assessment fiscals FY08 to FY14.

Owing to its fully integrated manufacturing operations, company is a most competitive producer of fluorochemicals reflecting from its EBIDTA trend of above 20%. Company is a category leader in most of the segments that it operates in. GFCL strategized to focus on higher value added products in each of its segments with a focus to reduce competitions concerns from China. Moreover, entry barriers for a new competition also remains high due to complexity of business, extremely stringent and time consuming customer qualification and approval process. Some of the positive development for the business are improving capacity utilisation in PTFE, significant cost reduction in manufacturing process, likely strong growth in high margin products, high operating leverage and lower debt level with D/E at 0.35x.

We expect GFCL to report a strong performance and sales to grow at a CAGR of 13% over FY20 to FY23E and margin to improve with better realisations and higher capacity utilization. At CMP of Rs816, GFCL’s stock is trading at TTM P/E of 34.9x (adjusting with non-recurring tax payment). We assign ‘Buy’ rating to stock with target price of Rs940 valuing business at P/Ex of 26xFY23E.

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