GUJARAT FLUOROCHEMICALS Stock Research Report by ICICI Securities
Sector: Speciality Chemicals
CMP Rs. 3393, Target Rs. 3950 (16% upside potential)
Target Period: 12 Months
GUJARAT FLUOROCHEMICALS Stock Research Report: New-age industries to drive growth
Gujarat Fluorochemicals’ (GFL) Q4FY23 EBITDA at Rs5.3bn, up 60% YoY, was broadly in line with our estimates and was impacted by lower realisation across businesses – bulk chemicals, ref-gas and fluoropolymers. Revenue / EBITDA benefited from rise in volumes for R-125, and new fluoropolymers. Despite lower realisation, GFL was able to hold to 36% EBITDA margin led by favourable segmental mix. We are expecting further normalisation of realisation in ref-gas / fluoropolymers in FY24 which will likely restrict growth; however, new capacities commissioned over the next few quarters should aid faster EPS growth for FY25E. GFL is seeing promising progress in battery chemicals including PVDF, electrolyte salt and solution; PVDF based solar PV back sheet; semi-conductor grade PFA and membrane for green hydrogen. However, we do not factor any material revenue from battery chemicals / green hydrogen business. We have cut our EPS estimates for FY24 / FY25 by 7-8% factoring in lower realisation and higher finance cost. Accordingly, we have reduced our target price to Rs3,950 (earlier: Rs4,250; unchanged FY25E PE multiple at 25x). Maintain BUY.
● Fluoropolymer revenue grew 14% YoY. GFL’s revenue grew 37% YoY to Rs14.7bn driven by fluoropolymers (Rs7.2bn, up 14% YoY) and fluorochemicals (Rs4.8bn, 3.5x). Bulk chemical revenue was down 8.8% YoY to Rs2.4bn on lower realisations for caustic soda and chloromethane. Fluorochemical revenue continued to expand as the company sold more R-125, and its price remained high albeit slightly dropped QoQ. However, in the next 12 months, we see risk to HFC prices as US goes into phase-down of 30%, but it should be made up by R-32 sales.
Fluoropolymer revenue declined 5.2% QoQ due to a slight drop in realisation, volume has been stable. GFL expects new fluoropolymer revenue to expand on the back of capacity addition to 20-23ktpa in FY24 (vs 8.4ktpa in FY22). Capacity utilisation may take a few quarters and the entire benefit of the capacity will be seen in FY25E.
● GUJARAT FLUOROCHEMICALS Stock Research Report: EBITDA surged 59.7% YoY to Rs5.3bn. Gross profit margin dipped 40bps QoQ to 72.1% on lower benefit from bulk chemicals. Power and fuel cost increased 23.2% YoY (fell 0.6% QoQ) to Rs2.4bn; employee cost and ‘other expenses’ jumped 29.6% and 21.1% YoY, respectively. EBITDA rose 59.7% YoY to Rs5.3bn and EBITDA margin came in at 36.0% (up 90bps QoQ). Net profit rose to Rs3.3bn, up 49.8% YoY.
● New fluoropolymer opportunity evolving for GFL. GFL is in the process of commercialising new fluoropolymers capacity in FY24 (10tpa in FY23) and ramp up of capacity will take another 12-18months. These include PVDF, FKM, PFA and FEP which find application in batteries, solar panel back sheet and semi-conductor industries. GFL expects PFA approval (used in semicon) in H1FY24, while battery grade PVDF validation may take 9-12months. Solar panel back sheet plant to come up by end-H1FY24. Fluoropolymers’ revenue at peak utilisation including new capacity will grow at Rs48bn, assuming prices remain at current levels vs Rs29bn (Q4FY23 annualised). The company has converted 80% fluoropolymer production using non-fluorinated aid and the remaining 20% will be completed by end-FY24.
● GFL is inching closer to battery chemicals and green hydrogen membrane businesses. GFL expects to start LiPF6 production by Q2FY24 though commercial production may take a few quarters before teething issues are resolved and validations. The company also expects to develop electrolyte solutions.
It has technology transferred from ONGC for sulphonic acid based PEM membrane and finds application in green hydrogen electrolyzer. GFL is working with another institute on membrane technology for fuel cell. These are lab scale technologies and GFL will in-house develop pilot / commercial scale technologies based on these lab scale learnings.
● Other highlights: 1) GFL has guided for capex of Rs15bn in FY24 within this Rs10bn will go in fluoropolymers and battery chemicals businesses. This does not include capex towards wind power installation for which the company has already given advances to related party. PTFE debottlenecking (3ktpa) will be commissioned in H2FY24; 2) company believes bulk chemical prices have bottomed. Ref gas prices have slightly corrected, but expects prices to remain firm at current levels. It does not expect fluoropolymer prices to drop significantly while globally PVDF prices for battery grade have dropped, particularly, in China; 3) working capital days will stabilise at 120days; and 4) cash capex in FY23 has been lower due to recovery of capital advance given for installation of wind power to related party.
● Update on related party: 1) Advances for purchase of assets (which is interest chargeable advances) have reduced to Rs2.5bn in FY23 vs Rs8.8bn in FY22. Pending advances is towards installation of 20 25MW power capacity; 2) guarantees stood at Rs17.3bn at end-FY23 vs Rs18.3bn in FY22 (Rs19.8bn during H1FY23). The company expects substantial reduction in guarantees over the next six months; and 3) receivables from related parties stand at Rs3bn (vs Rs2.4bn in FY22).
● Risk: 1) Increase in related-party transactions; and 2) execution in fluoropolymer business.
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