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GFL’s Q2 EBITDA was down 68% YoY at Rs1.6bn (-50% QoQ) on: i) sharp price decline in commodity grades of PTFE (Chinese dumping) along with continued destocking in higher-end grades, ii) subdued volumes and pricing impact on refrigerant gases on Chinese dumping and poor season in the domestic market and iii) pricing pressure on bulk chemicals. Management expects to fare better in H2 vs H1 in fluoropolymers, due to expected phasing-out of destocking, pickup in the demand in USA, and positive impact of exit of legacy players. Refrigerant gas volumes are expected to improve in H2; however, they may remain subdued compared with FY23. We expect FY24 to largely remain muted on volume/pricing pressure and FY25E/26E to see gradual recovery; we cut FY24E/25E/26E earnings by 26%/12%/13%; we maintain our SELL rating with revised TP of Rs2,200/share (25x Sep-25E EPS).

Gujarat Fluorochemicals: Financial Snapshot (Consolidated)

Fluoropolymers business impacted by subdued demand

GFL’s fluoropolymers business de-grew 25% YoY to Rs5.7bn (-15% QoQ), on : i) pricing pressure from commodity-grade PTFE due to Chinese dumping in the export market; and ii) continued destocking in higher-end grades and headwinds due to sluggishness in demand, particularly in Europe. GFL continues optimizing company’s product mix and moving to higher-end grades of PTFE. Focus is now on improving utilization of the current capacity before moving forward with debottlenecking of PTFE capacity. New fluoropolymers like PVDF and PFA are seeing good demand across customers in battery, solar and semi-conductor industry; however, FKM is seeing subdued demand on slowdown in the European auto industry. LiPF6 and its electrolyte plant are in the advanced stage of commissioning, and sampling with a few customers is under way

Fluorochemicals business hit by Chinese dumping

GFL’s fluorochemicals business sharply de-grew 53% YoY to Rs1.85bn (-44% QoQ). Revenue mix for this segment fell, from 27% in Q1 to 20% in Q2. This was primarily due to slower demand for R125 in the export market and falling prices, while the domestic market too saw lackluster demand. Also, the management faced backslash from customers asking for reduced pricing due to Chinese circumvention through unfinished blends in USA. Management has guided for improvement in ref gas volumes in H2; but FY24 volumes will be lower than FY23 volumes. Specialty Chemical vertical remains sluggish in Q2 and Chinese dumping, particularly in this segment, will continue impacting both, revenue and margins (products are commoditized building blocks).

Bulk chemicals business normalized

Bulk Chemicals segment de-grew 38% YoY to Rs1.7bn (up 2% QoQ) due to reduced realizations and marginally-higher volumes over the previous quarter. Caustic soda/MDC prices were compressed further in this quarter, but are expected to have bottomed. Management expects this segment to perform better in H2 vs H1. The business has peaked in FY23 and will see normalization in subsequent years.