Fundamental Analysis of Gujarat Fluorochemicals – Trade Brains

Fundamental Analysis of Gujarat Fluorochemicals: They say corporate events such as buyouts, demergers, etc. can create valuable opportunities for investors. Perhaps, Gujarat Fluorochemicals have been one such case. Over the last three years, the chemicals stock has advanced by 385%. Or is it because of the China Plus One strategy? Or the company was always undervalued? What can be future catalysts for the stock? We attempt to answer such questions by performing a fundamental analysis of Gujarat Fluorochemicals

Fundamental Analysis of Gujarat Fluorochemicals

In this article, we’ll start with learning about the business and the revenue segments of Gujarat Fluorochemicals. Thereafter, we’ll briefly read about the industry in which the company operates. Next, we’ll analyze the revenues, return ratios, and other numerical metrics. A highlight of the future plans of the company and a summary conclude the article in the end.

Company Overview

Founded in 1989, Gujarat Fluorochemicals Limited is a leading manufacturer of refrigerants, fluorospecialities, fluoropolymers, and chemicals. These products find their end use in various sectors. 

It is a part of the INOXGFL Group, a diversified conglomerate with business interests in wind energy, specialty chemicals, fluoropolymers, and renewables.

The company is headquartered in Noida and has three production sites in India. Additionally, it has a captive mine of Fluorspar in Morrocco and offices & warehouses in Europe and USA. Its facility at Dahej, Gujarat is one of the most integrated into the world.

Gujarat Fluorochem was incorporated on December 6th, 2018. Initially, the fluoropolymers and PTFE businesses were demerged from Gujarat Fluorochemicals to form a separate entity called Inox Fluorochemicals. 

Thereafter, Gujarat Fluorochemicals was renamed to GFL Ltd. and the name of Inox Fluorochemicals was changed to Gujarat Fluorochemicals. Thus the present entity got to keep the chemicals business and the name ‘Gujarat Fluorochemicals’.

Business Segments of Gujarat Fluorochemicals

Poly Tetrafluoroethylene or PTFE is the largest revenue segment contributing to 34% of the total operating revenue in FY22. PTFE is commonly used for non-stick coatings in cookware, wire insulation, surface coatings, and more.

Caustic soda and Chloromethanes are the second and third largest product-wise revenue divisions with 12% and 11.5% shares respectively. Refrigerant gases accounted for 8% of the total income.

As for the geographical breakup, India brings most of the business of the GFL with 51.5% of the sales originating domestically. Europe and the USA clocked 21% and 12% of the total operating income.

Thus we can say that the chemicals manufacturer is well-diversified in terms of product lines and geography. The next section of our fundamental analysis of Gujarat Fluorochemicals provides an overview of the fluoropolymers and PTFE industry.

Industry Overview

According to Astute Analytica, the international fluoropolymers market was pegged to be $ 7.9 billion in 2021. It is expected to grow at a CAGR of 4.3% to $ 10.2 billion by 2027. In the coming years, various industries will fetch the expansion in the demand for the products.

The primary demand will come from both types of industries:

1. Traditional: automobile, chemicals, medical, and construction. 
2. New age: EVs, 5G networks, IoT, solar energy, etc.

We read above that PTFE is a key product line of Gujarat Fluorochemicals. Thus, we have devoted a separate paragraph to it.

PTFE has properties such as non-wetting, high density, and resistance to high temperatures making it ideal for application in the electrical, electronics, healthcare, chemical, and industrial processing sectors. Analysts anticipate that demand will likely increase in the coming years from these sectors.

Financials

Revenue & Net Profit Growth

The reorganized entity of Gujarat Fluorochemicals came into existence in December 2018. Thus, the figures for FY18 are not available.

The operating revenue of the company grew by 49% year-on-year (YoY) to Rs 3,954 crore in FY22. As for the net profit, we can not provide a CAGR calculation. The bottom line has remained volatile during the study period owing to operating margin compression in FY 20 and tax treatments in FY 19 and FY 21. 

Overall, the picture appears to be positive for the company. The table below presents the operating revenue and the net profit of Gujarat Fluorochemicals for the last four years.

Fiscal Year	Operating Revenue (Rs Cr)	Net Profit (Rs Cr)
2022	3,954	776
2021	2,650	-222
2020	2,606	189
2019	2,729	1,246

Margins: Operating Profit & Net Profit

As for the profit margins of Gujarat Fluorochemicals, the figures have improved in the recent fiscal after registering a decline in the pandemic-affected FY20 to FY21 period. 

The figures for net profit margin don’t coincide with the profit after tax in the previous section. This is because the NPM numbers exclude the tax pertaining to previous financial years and net deferred tax changes.

The table below highlights the operating profit margins and revised net profit margin of the chemicals manufacturer over the previous four years.

Fiscal Year	OPM (%)	NPM (%)
2022	28	21
2021	22	14
2020	12	7
2019	24	15

So far we have covered the business, revenue & profit figures, and profit margins of the company as part of our fundamental analysis of Gujarat Fluorochemicals. In the next section, we take a look at the return ratios of the stock.

Return Ratios: RoCE & RoE

A casual look at the return ratios of Gujarat Fluorochem will tell us that it is a good business with adequate return ratios. 

Furthermore, from the table below we can see that the return on capital employed (RoCE) and the return on equity (RoE) have improved over the past few years because of the growth in earnings.

Fiscal Year	RoCE (%)	RoE (%)
2022	18.4	20.1
2021	11.0	9.9
2020	11.0	5.0
2019	19.1	12.0

Debt to Equity & Interest Coverage Ratio

The debt-to-equity ratio of the stock has slightly increased in recent financial years as the management took to the use of debt to fund its capital expenditure plans. Despite that, it was within safe limits with a debt-to-equity ratio of 0.36 and an interest coverage ratio of 16.95 in FY22.

Fiscal Year	D/E	Interest Coverage
2022	0.36	16.95
2021	0.44	5.28
2020	0.46	4.44
2019	0.26	12.68

Future Plans

So far we have only looked at the previous years’ data of the company. In this section, let us try to understand what lies ahead for Gujarat Fluorochemicals and its investors.

1. The management has earmarked a large capital expenditure (CAPEX) of Rs 2,750 crore during the 2022-2024 period towards battery chemicals and binders.
2. Furthermore, other product lines such as PTFE will also see capacity expansions along with backward integration and allied infrastructure as part of the CAPEX.
3. GFL will commission India’s first PVDF solar film project to meet the domestic and international demand for PVDF,  a specialty polymer commonly used as insulation on electrical wires.
4. In the long term, focus on green hydrogen, hydrogen fuel cells, and EV will result in a demand boom for PTFE and other fluoropolymers, GFL’s two significant revenue contributors.

Key Metrics

We are almost at the end of our fundamental analysis of Gujarat Fluorochemicals. Let us take a look at the key metrics of this specialty chemicals stock.

CMP	₹2,883	Market Cap (Cr.)	₹31,500
EPS	₹99.60	Stock P/E	29.3
Face Value	₹1.0	Dividend Yield	0.14%
RoCE	18.4%	RoE	20.1%
Promoter Holding	63.8%	Book Value	₹446.0
Debt to Equity	0.36	Price to Book Value	6.50
Net Profit Margin	20.8%	Operating Profit Margin	28.4%

In Conclusion

We are now at the end of our fundamental analysis of Gujarat Fluorochemicals. It has been an interesting case with rising sales and concurrent expansion in the profit margins. Going forward, volume growth and stability in the margins will be the key catalysts for the stock.

In your opinion, what can be key risks that can hinder the company’s growth? How about we continue this conversation in the comments below?

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