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Gujarat Fluorochemicals: A hidden fluorine story

Background

Gujarat Fluorochemical Limited (Fluorochem) is a major player in Fluorine Chemistry in India with a major focus on PTFE, Specialty Fluorochemicals and Specialty Fluoropolymers. FLUOROCHEM was setup in 1987 to manufacture refrigerant gases in collaboration with Stauffer Chemicals and Stearns Catalytic near Vadodara. The company was a major player in CFC gases (R11, R12, R22) with Refron brand. In 2007-08 FLUOROCHEM established a Chemical complex in Dahej with captive power plant, Caustic soda, Chloromethane plant and PTFE/Teflon plant. R22 which was subject to progressive production cuts due to environmental norms was used as feedstock for PTFE. FLUOROCHEM erstwhile known as GFL also ventured into multiple unrelated areas like Inox Leisure (1999)/Inox Wind (2009). In 2011 FLUOROCHEM entered a Fluorspar beneficiation process to completely backward integrate. With complete backward integration in Fluoropolymer manufacturing FLUOROCHEM expanded into monomer/polymer capacities and ventured into multiple Specialty Fluoropolymers/Fluoroelastomers like FEP, PFA, PTFE micropowders etc. The company also ventured into Fluorospecialty chemicals.

Customers segments

Fluoropolymers are majorly used in very specialized applications which require non adhesive, low friction properties along with extreme heat, corrosion resistance, difficult weather and harsh chemical conditions. FP finds usage in automotive, aerospace, semiconductors, electronics, common household appliances. FPs because of their physical properties are also expected to find increasing usage in EV batteries and 5G where thermal requirements are significantly stringent.

Fluorospeciality chemicals {FSC) are intermediates used in agrochemical and pharmaceutical industries. Company has commercialized seven molecules and is looking to add more. This segment has large growth opportunities and is a proxy to the growth of pharma, agro chem, electronic and polymer industries. Further, it is planning to incur capex for additional six products and has guided for its commissioning by end FY21. There is also a strategic need of both domestic and overseas customers to de risk from China.

Refrigerant gases are no longer the focus area for FLUOROCHEM. FLUOROCHEM today majorly manufactures R22 as feedstock for FP. It still continues to sell R22 in retail and also as feedstock to agchem/pharma companies.

Chloromethanes consists of three products Chloroform, Methylene Dichloride (MDC), Carbon Tetrachloride (CTC), as of now Fluorochem is the only producer of of MDC and CTC in India.

Caustic Soda

Chloromethanes and caustic soda are in some ways a byproduct since the entire process of manufacturing FSC/FSP/Refrigerant gases requires significant amounts of Caustic/Chlorine/Chloromethanes. In the rest of the discussion, we will be majorly focusing on FPs and SFCs.

Main Products/Segments and Capacities

The major segments are PTFE (33%, 20000 TPA), Specialty/New FP (10%, 8500 TPA (FKM 2500 TPA, FEP 1000 TPA, PFA 750 TPA, PPA 600 TPA , MicroPowders 1200 TPA, VDF Monomer 2300 TPA, PVDF Monomer 1400 TPA)), FSC (12%), Chloromethanes (13%, 87500 TPA), Refrigerant gases (14%), Caustic Soda (12%, 110000 TPA) as per Q2FY21. The currently commercialized molecules in FSC are ETHYL DIFLUOROACETATE, 2,6-DICHLORO-4-TRIFLUOROMETHYL ANILINE, DIFLUOROMETHANE SULPHONYL CHLORIDE, BROMO TRIFLUOROMETHANE, ETHYL 1,1,2,2, TETRAFLUOROETHYL ETHER, 2,4 DIFLUOROBENZYLAMINE, 1,3-DFB, TRIETHYL ORTHOFORMATE.

Exports (~50% of Sales in FY2011) are mainly PTFE and its grades, FSC and FSP. The company has nearly 11% of the PTFE capacity worldwide.

Backward Integration

FLUOROCHEM produces HCFC22 from Anhydrous Hydrogen Fluoride (AHF) and chloroform. AHF is made from fluorspar and Sulphuric Acid. Fluorspar is produced in Morocco and chloroform is made from Chlorine in the Chloromethane plant at Dahej. FLUOROCHEM has captive power plant based on coal and natural Gas. Thus, from basic materials like salt, Sulphuric Acid, Methanol, coal and gas FLUOROCHEM builds the entire value chain.

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Upcoming capacities

The company in its presentation has said that it is working on several new products which have been developed in-house R&D and is planning to incur additional capex of Rs 3.0-3.5 bn in the FS chemicals. In the PTFE segment it plans to add around 400 TPM (3000 TPA) capacity. In the new FP segment it plans to add 450 TPM (3000 TPA) capacity.

Recent Environmental Filing

More interesting is the recent environmental filing where the company has indicated of a capex of 1100 cr. Most of this is going into SFC and also into forward integration of PTFE/SFPs. The company has also indicated that it will enter the end product market in PTFE/SFP by venturing into PVDF membranes, PCTFE film, PTFE auto tubes, PTFE sheets/gaskets and FKM O Rings/Gaskets.

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The list of FSC is huge with some of them being intermediates. Some interesting ones which actually look like agchem technical are

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LiPF6 is another interesting product since it is used as electrolyte in Li-ion batteries

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Opportunity Size and Competition:

FP:

image image image
Worldwide consumption of FP including PTFE is around 320 kt. n 2018, 320.3kt of fluoroplastics were consumed worldwide (Table 1). By comparison, global consumption in 2015 was 270 kt.

The worldwide production volume of fluoroplastics in 2018 was 316kt. In terms of market share, production integration, geographical presence and breadth of the product portfolio, The Chemours Company, USA, is currently regarded as the largest manufacturer. Other leading suppliers with two or more worldwide production sites are AGC Inc. in Japan (formerly the Asahi Glass Company), Arkema in France, Daikin Industries Ltd. in Japan, 3M/Dyneon in Germany and Solvay SA in Belgium (Fig. 3). In addition, there is the Chinese Shandong Dongye Group, Ltd. which owns the world’s largest production plant for PTFE. As of now Gujarat Fluorochem is the only manufacturer of FPs in India. Fluorochem has around 11% of the total worldwide PTFE capacity.

Disc. Invested

TBCNavinFluorineInitiation.pdf (1.2 MB) IDirect_LaxmiOrganics_IPOReview.pdf (485.0 KB) overview-of-the-fluorochemicals-industrial-sectors (1).pdf (264.1 KB) Fluoro Intermediates.pdf (99.9 KB) Gujarat Fluorochemicals - Q2FY21 Result Update - 13 Nov 20.pdf (417.0 KB) Gujarat Fluorochemicals - 1QFY21 Result Update - 01 Aug 20 (1).pdf (213.2 KB)Environmental FIling.pdf (2.3 MB)

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FSC

As mentioned above FSC are used in multiple industries like Pharma, AgChem, Electronic and Polymer industries. Fluorination has gained preference to carry active ingredients in pharma and agrochemicals
applications and therefore interest in fluorination has seen strong revival. Use of fluorine is gaining prominence in pharma/agchem because, fluorine is inert and much more lipophilic (fat soluble) than
hydrogen. Therefore, if one replaces hydrogen with fluorine as an inert carrier, fluorine
can enter into membranes much more easily improving bio-availability of the active
ingredient carried by fluorine.

The global market size of fluorochemicals industry is estimated at c.USD19 bn (c.3.67
MMT) in 2015 and was expected to grow at 5-5.5%. The market for fluorochemicals in India was valued at ~US$405 million for 2019 (source: Frost & Sullivan Report). It is estimated that up to 20% of pharmaceuticals in the market or in clinical development contain a fluorine atom and 50% of agrochemicals molecules developed recently also contain fluorine (source: Frost & Sullivan Report). According to the Frost & Sullivan Report, in future, one in every three new active pharmaceutical ingredients are expected to be based on fluorine chemistry. Thus, fluorine based organic and inorganic chemical products are gaining high importance. Some of the uses as mentioned in the above report are the following:


More recently the active ingredient used for the treatment of Black Fungus also contained/used an FSC called 1,3 Difluorobenzene(1,3-DFB) which is made by Fluorochem. The more commonly used Pantoprazole uses R-22 as feedstock.

Usage of fluorinated materials in LI-ion batteries:

Growth in demand for LiPF6

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In Summary:
Fluorochem started out as a Refrigerant player, moved into PTFE and expanded capacities in PTFE, went for complete vertical integration by setting up Caustic + Chlorine plant and further into Chloromethanes. It also entered into Flourospar beneficiation and into AHF. All of these in someway are building blocks to what Fluorochem is doing now. Around 3 years back Fluorochem went into specialty FP and FSC. The new environmental filing outlines the next set of growth areas which are FP end products (gaskets, o rings, sheets, membranes) and more FSCs.

The overall demand for FPs is growing at a much slower pace and hence the move into FP end products makes sense. Also the growth of FSC in Indian context is a proxy to Pharma and AgChem space which have significant growth opportunities.

Fluorine chemistry is difficult and has strong entry barriers. Even the current incumbents (SRF/Navin/Fluorochem) have only recently started getting into more complex chemistries.

Key Concerns:

Capital allocation: GFL started out as a chemical company moved into multiple unrelated areas including wind power, inox leisure etc. The company which was supposed to be a Chemical company became a holding company. Further most of these businesses have eroded significant wealth over the years. The company had leadership positions in refrigerant gases but it si almost out of retail refrigerant gas sales. SRF has over the years has built an unsurmountable lead in that space.

Asset turns and margins: Even if one looks at the Chemical segment business the company has nothing to show off in the last decade. Before demerger this is how the financials of their chemical business looked:
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It is quite baffling to understand that despite significant capex in Chemical segments the Sales did not go up although there was a significant impact of Carbon credits in previous years but despite that the asset turns seems extremely low.

PTFE prices:

There has been significant fluctuation in PTFE prices. From Rs 400 odd to Rs 800. Despite PTFE being a difficult/specialized product to manufacture it has behaved as a commodity. As of now I have not been able to find out the reason for such large fluctations.

Custom duty
Fluorochem controls around 90% of Indian PTFE markets with virtually no imports from the developed world. Despite this Fluorochem is extremely dependent on custom duties to have decent operating margins. Government has time and again imposed and extended custom duties on PTFE. Government has recently imposed duties also on PTFE end products like sheets, rods etc.

Competition
As of now Fluorochem is the only manufacturer of PTFE in India having 92% marketshare with approximately 20000 MT capacity. But going ahead SRF is coming up with another 5000 MT capacity and as per the recent conf. call his should come in CY22 second half. Also in FSC there are multiple companies who are looking to increase there presence. Besides Navin, SRF and Fluorochem, Aarti and Laxmi Organics too are working on FSC.

Related Party transactions
Fluorochem has placed an order of around 800 cr with Inox Wind to set up a 120 MW wind project. 30-40 MW of this is supposed to come on stream in Q1FY22 and rest by FY23.

What is exciting in this?

The management’s decision to demerge and move the chemical business out brings back the focus on value creation. The company is continuously moving towards more complex and better products. The share of Caustic which was around 35% a few years back today is around 10% and will go down further as new capex comes in. Management has also guided that at optimum utilization sales could be around at 4200 cr and margins around 30%. This is mainly due to capacity ramp up and also because the new age FPs and FSC have better margins. All of this ramp up should happen around Q4 FY22. Domestic demand of PTFE should also go up since earlier PTFE imports only had duties now these duties have been extended to PTFE end products like gaskets, rods, sheets etc. The company has also indicated significant power savings to the tune of 200 cr once the wind energy project is completed. This should further boost the margins.

In the shorter term there is significant upswing in the prices of PTFE, Chloromethanes and now Caustic. In the longer run there are two capex coming on stream one is around 300 cr in FSC and going by the above EC filing this should be the next big lever of growth.

Finally if one looks at valuations of the peers SRF/Navin Fluorine, Fluorochem trades at a significant discount to its MCap/Sales. If Fluorochem is run professionally without any harakiri by the management and if it achieves even partially what it has stated in its conf. calls it can have considerable valuation rerating, moreover the current environmental filing points to significant future opportunities for growth.

Discl.: Invested. The views are biased.

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Notes from my first stab at understanding the business.

Gujarat Fluoro Mind Map.pdf (35.2 KB)

Cost savings from Wind Power project, and good growth visibility on FPs & SFPs product segments are key immediate triggers.

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A recent presentation by Fluorochem to IESA (The India Energy Storage Alliance) speaks about its plans in the EV ide of things:





IESA_Raw_Material_webinar_GFL_Mr_Kapil_Malhotra._548355603.pdf (1.5 MB)

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Some key observations from the presentation:

a) The company is in three segments as far as EV is concerned: PVDF binders, PVDF membranes, LiPF6 used as electrolyte.
b) Both the above are significant and could be around 20% of the RM that goes in EV battery.
c) As per the presentation the company expects to manufacture 1000 TPA LiPF6 by end 2022, this also implies that the above discussed EC filing and the related capex should be coming on stream very early.
d) GFL already has the technology for LiPF6 and will be making not just LiPF6 but the complete electrolyte formulation.
e) In the EC fling they have also mentioned PVDF membranes and these too will be used for Li-ion batteries.

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Co has microsite for Fluoropolymer (FP) brands; link follows -

Interesting Apr 26, 2021 announcement in one the microsite (here) -

  • During last months, the demand for FKM and PVDF has seen a sudden and significant surge
  • EVs is one of the main factor contributing to the high demand
  • VDF is common raw material going into production of FKM and PVDF
  • Global installed capacities of R142b (required in production of VDF) are unable to meet the market requirements, creating an acute shortage and sharp increase in pricing

Disc: Invested

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Some word on competition -

Dongyue, China

  • Dongyue current has capacity of 40K MT of PTFE and they are expanding the capacity by another 10K which is supposed to come online in 2021.
  • Given that China has such large capacities of PTFE, I still do not understand impact they have on world PTFE prices. Dongyue’s 85% sales are within PRC.
  • Dongyue also has 5K MT capacity of FEP and another 5K MT is under expansion.
  • It it also doing expansion of 2K MT in PFA.

Following table gives revenue split across products →

1 RMB = ~ 11.5Rs

After PTFE, FEP and PVDF seem to be large products.

Chemours, USA

Above is presentation of Advanced Performance Materials division of Chemours →

Chemours is #1 or #2 players in most of the segments of fluoropolymers.

Following slide nicely depicts the different polymers and the corresponding end applications →

Following slide talks about PFA being used in semiconductor manufacturing and increasing demand for semiconductors due to Internet of Things.

5G is another area that will require like 10x more towers and more cables etc. and a lot of fluoropolymers get used in that.

The trouble with 5G/Semiconductors and Fluorochem is that most of the semiconductors get manufactured in Taiwan/China/US. I do not know what kind of sales Fluorochem gets from this segment and whether they will get an opportunity to participate in this growing opportunity.

Presentation has few slides on Hydrogen economy and following slide talks about PEM membrane opportunity size →

The thread already covers the plans from Fluorochem to provide membranes and LiPF6. If we can do more scuttlebutt, ask more questions to management around these two areas - that would be great.

We need to understand more about competitiveness in terms of cost and product technology in these two and other emerging segments. Can China + 1 strategy result in more business for Fluorochem, can there be long term contracts?

This (along with FSC) is what probably excites me the most about this business.

Will try to add another post on some of the other competitors.

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There are some updates in a newer EC filing. In this filing the company has mentioned making 5000 MT of 15% electrolyte formulation based on LiPF6.

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The capacity of LiPF6 which was earlier mentioned as 500 MT will now be 750 MT to make 5000 MT of electrolyte.

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I found an Research Paper.pdf (384.2 KB) interesting research paper by Naresh Susarla, and Shabbir Ahmed which went deep into studying the production of Lithium hexafluorophosphate (𝐿𝑖𝑃𝐹6) for Lithium-ion battery application. Spreadsheet-based process models are developed to simulate three different production processes.

It gives some insights into what LiPF6 is and its role in overall scheme of Battery Pack. Below please find my highlights:

  • Lithium hexafluorophosphate (LiPF6) is a commonly-used electrolyte material in lithium-ion batteries.

  • Argonne National Laboratory’s BatPaC3 spreadsheet modeling tool projects the cost of electrolyte to be around 6-10% of overall battery pack.

  • Due to increasing shift towards making total electric or hybrid automobiles, the demand for LiPF6 has increased tremendously in the past few year. Consequently, the price of LiPF6 has increased more than 500% in last 3 years (paper was published in Feb 2019).

  • The analysis of the LiPF6 production in this paper indicated the cost of LiPF6 to be in the range of $20-30 per kg.

  • The major contributors to the manufacturing cost (60-65%) are the cost for procuring raw materials and the cost for solvent recycling. The collective cost of operating labor, utilities, and purchased equipment is < 10% of the manufacturing cost.

  • The cost of the battery increases ~13 cents for every $1 increase in the cost of LiPF6.

Also found that Morita Chemical Industries is the world leader of the LiPF6 market, producing more than 20% of the global production. In October 2016, a plan was initiated to build a second factory in Taixing, Jiangsu Province. This is also a joint investment project in which Sumitomo Corporation will own a 30% stake. The second factory is planned to have the maximum annual production capacity of 10,000 tons, doubling the current level. Here is the source link.

Disc: invested

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Find enclosed my observations from GFL (Chemical business of which in 2020 hived off and got listed as Gujarat Fluorochemicals Limited). From FY1997 to FY2019, the observation are from standalone financial of GFL while for FY2020, same are from annual report of Guj Flouro as sane was listed as a new specialty chemical company of the group. My attempt is look at financial of the company which microscope and highlight whatever smallest issue I came across to bring to observation of the forum. Hence, please take note of that while reading this post. Secondly, I have investment in SRF Limited, a peer to Gujarat Fluorochemicals and hence my view may also be biased against GFL/Guj Flouro. So reader need to keep that in mind while reading this post.

1) Limited directors attending AGM:
The company has been listed since mid 1990s in BSE. I have compiled AGM attendance of various directors of the company .
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The maximum number attendance in AGM is highest during FY2013, when 5 out of 10 directors attended the meeting. In most of years since FY2006, we find around 2-3 directors are attending AGM. What is interesting is despite taking commission income and salary, even Vivek Jain has not attended AGM for FY2014 and FY2016-2019 period.

While many of the directors are reasonably good record on attendance of Board committee, it may be noted that only during AGM, independent minority shareholder are witness to attendance of directors. It is possible that the directors are regularly meeting for various committee meeting as shown in Corporate governance report, I came across my first experience where Managing Director has missed AGM many times.

Higher recognition of CFO then Whole time director:
FY 2020 Annual report, description provide more importance to CFO profile than other operating whole time directors, who are more critical for business than CFO in my opinion.


2) Consistent Audit firm for the company.
Find enclosed the Partner of Audit firm and Auditor of the company. Of last 14 years, data, till FY2017, the company was audited only by Patankar and Associate. Further, due to new companies act restricting tenure of statutory auditor for the company, the company changed the audit firm in FY2018 to M/s Kulkarni and Company from GFL. However, same was again restrored to M/s Patankar And Associate when Gujarat Flourochemical Limited listed as new company under High Court scheme during FY2020.

Further, while the promoter family has their root based out of Delhi and business operations are prominently located in Gujarat (near Vadodara with two plants), it is surprising to find Pune based firm auditing. Even the changed auditor in FY2018 was based out of Pune as per data compiled from annual reports by me.

3) Profit driven by other income/ exceptional item/ and Carbon credit
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While company has managed business very well and shall be credited to generate major income from sale of Carbon credit during FY2007-2013 period. Adjusted for that, other income and one time (exceptional) item, the company hardly managed to report positive net profit 11 of 19 years over period. While the record of profitability has been showing improving trends in last 4-5 years, over a long term period, the company performance was moderate despite being pioneer in flourochemical business which also has limited no of players.

The improve operating performance broadly attributable to new products, one need to get more detail understanding about future growth driver for new products launched by company. While @Anant and other members has provided detail working about proposed products, scaling up of PTFE took almost decade from launch in FY2008 to reach around ~12,000 tonnes sales volume in FY2018.

4) Inox Wind, past record
The company management attempted to develop new business from the extra ordinary cashflow they generated from Carbon credits. While they shall be given credit for identifying Movie exhibition business (Inox Leisure) and reaching to second largest movie theater chain, the record with Inox wind is not so great. We shall give credit to the management for proper capital allocation.

However, I have concern about how they acted in past for Inox Wind business. Find enclosed message from Inox Wind which provide details for about this:
Find enclosed my view on

Some other negative points on the message board about the company.

5) Significant jump in Landfill of Hazardous Waste in FY20
For chemical company, handling of Waste and reduction disposal of same by landfill is very critical factor for long term success. However, as per integrated report for FY20, extract of which is enclosed, the company reported major jump in quantity of hazardous waste disposed by way of landfill.
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6) Intellectual capital:
While number of patent does not indicate business potential, nevertheless, consistent increase in patent does indicate strong research focus of the company.

Find enclosed intellectual capital details provided by Guj Flourochemical in FY2020 annual report (Page 11)
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Find enclosed SRF FY20 annual report extract for Chemical Technology Group (CTG) research efforts and patent filed.
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7) Deficit in CSR spending
FY2017 AR
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FY2018 AR
Page 84: CSR Amount unspent Rs 186.17 Lakhs, total prescribed CSR expenditure: Rs 283.67 Lakhs

While same was corrected and company made for shortfall in FY2019, still under spending on CSR projects in past need some attention.

FY2019 AR
Page 79: During the Financial Year 2018-19, the Company has an overspent amount of H 260.19 Lakhs on its CSR activities than the prescribed expenditure of 509.15 Lakhs. The overspent amount of 260.19 Lakhs on CSR activities includes part out of unspent balance of prescribed CSR expenditure of previous Financial Years on CSR activities.

8) Age-wise Receivable
Find enclosed extract of Age of receivable table in AR FY2018
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More than 3 years in FY2018, can be maximum (assuming no payment came during FY18), 2-3 years receivable in FY17+ >3 Years receivable in FY17. So how amount increased from 187 Lakhs from FY17 figures to Rs 359 lakhs in FY18?

GFL Dhiraj Working July 2021.xlsx (286.6 KB)

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Polymer business looks to be difficult to replicate. CAPEX and long gestation period will dissuade other Indian players to come in. Though SRF is coming up with PTFE capacity but PTFE to me looks like closer to commodity rather than specialty because of significant capacity in China. The way GFL has struggled to improve the Return on capital gives some clue on this (though perineal CAPEX was helping the ROIC to remain low). There is a long runway and opportunity for multiple players. On Indian players ability to crack South Korea and similar far east market, Navin gives us some clue.
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Below picture shows how GFL has been able to scale the polymer exports. They are the only exporters in the Polymer business (excluding PTFE) and the data in graph coincides with what’s happening in the business. Looks like in export business they are able to sell at 16$ whereas PTFE is @may be 9.5$:
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  • They supply to Chemours
  • LiPF6 based Electrolyte formulations strrting 2023 using Technology provided by the customer.

Specialty Chemical: GFL has been working on the molecules for LONZA, BASF, PI Industries and Syngenta. Long Term contract – do they have it. No, but Naveen is also creating capacity based on promised business or letter of Intent.

Diversification : Mr Jain has history of liking Hot Things and he has always been very ambitious

  • 1997 - when the companies revenue was 76cr, he wanted to set-up 150 MW power plant
  • 1999 – INOX Multiplexes
  • 2001 – ITES, 150 seat call center. He was invested in Pentamedia and DSQ Software and other hot stocks
  • 2008 – Wind Energy
  • 2010 – Investment in Venture Capital
  • 2011 – Speculation in Carbon Credit. They bought 35 Cr worth of Carbon credit to sell later. Though they had 1000s of crores of Carbon Credit with them

Carbon Credit – Earned more than 3500 Cr. over 7 years by doing Nothing. It’s admirable to see them being nimble and smart. They were at the right place at the right time and were able to capture the opportunity to the fullest. This one moment changed the trajectory of the business. There would not had been any PTFE without carbon credit. Its difficult to digest significant money and we are talking about 3500 Cr CASH. While they used a lot cash for the chemical business, but invested management bandwidth and money in HOT Sectors like Wind.

Capacity to suffer/ Patience : Well they have shown this one trait with aplomb. First time they talk about Polymer business was 2012. First time they talk about Specialty business was in 2014. It took them years to learn how to make the polymers and Specialty chemicals and creating capacity. They never seem to be bothered about all the investment made in R&D and Capacity creation. But they kept patience while margins and Return on capital suffered.

Fluorspar: Though they have captive mines but that is being used to sell in Europe because they have logistics advantage and the quality is also excellent. They sell high and buy in India at lower price from their long-term supplier.

Growth Mindset : I was concerned about their ability to scale and when I got into details here is what I saw: The sales grew close to 5.5 times between 2007-2012 and 2 times between 2017-2019. They were able to increase the sales 15X in 12 years. These people can scale. There is no doubt about it. Question is profitable growth.
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If we just take Polymer and Specialty business, they shall be able to generate better EBITDA margin wrt Navin because of backward integration.
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2021 revenue from Polymer and Specialty shall be close to 500cr. The question is how long they will take to utilize the full capacity. If we take the past as benchmark, they always overpromise on the timeline and under deliver. Full utilization may take 4 years from 500 Cr as they have been growing at @ 50% YoY.

Concerns and Future

  • Hot Sectors and Risk Seeking Behavior : Mr Jain has shown on multiple occasion his love for Hot Things and Risk seeking behavior. Be it Diversification in unreacted and at the moment sectors or Investing treasury in VC Fund or Risky Equity. I hope he has learned his lessons, it’s subjective and only time will tell.
  • Non-Fluorine Chemistry : They talk about option of getting into other chemistry as well if the opportunity comes since the base or approach is same. This is something to watch out. This can happen in the specialty business.
  • Related Party / Balance Sheet : 2018 they wanted to set-up a Coal fired power plant but changed their mind and gave 850 Cr to Wind business. 850 Cr as advance and at one go. Capacity will come online over a period. To me it looks like this step was taken to help the wind business with cash. This one step just destroyed the quality of Balance sheet.
  • Inventory : there is significant increase in inventory and it looks like Polymer business they stock inventory in the US and EU to sell just in time. This will remain a monitorable.
  • Opportunity Size : Long back Mr. Jain said, I don’t know what’s happening with Polymer business, but there is a huge opportunity that is coming. We don’t know much about it but it’s happening. The way Fluorine chemistry is unfolding, Navin and GFL may not have scratched the surface. Navin says this is multi decade opportunity (specially EV and related field). There is a huge upcoming opportunity and question is if GFL would be able to grow profitably. There are unknowns in the business, which will unfold with time.
  • Supply Side : this is one area where there may be competitive advantage. Companies in Developed world are not expanding. China doesn’t do specialty. It is Difficult to do fluorine and difficult to get approvals from customers and relationships are sticky.

On the EC Filings the company has done over last 3 years:
There was a EC filing they did in 2018 or so where they mentioned 100cr CAPEX and expected revenue of 900 Crs. That was for intermediate business and probably 900cr or 100 cr was a mistake.

Now coming to the current filing, They are reducing PTFE, PFA and FEP capacity and resultant increase in the capacity of some other polymers. I also noticed that they manufacture PVDF but the EC shows current capacity as ZERO. The current EC is for old site in Dahej as well as the new site. I am not sure but looks like they are trying to reduce PTFE and increase other polymers. As TFE is base monomer for most of the polymers they make, some capacity will get freed from PTFE and they are adding additional capacity.
Again they mention PTFE capacity as 16000, though it 20,000 currently. sometime if find GFLs EC confusing.

If at all they are reducing PTFE capacity and increasing capacity for other polymer then the revenue from base business will go down and polymer business we may get extra revenue and higher margin.
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One of the biggest issues with the story is the related party liabilities - They have 1220cr of guarantees given to Inox Wind companies, have receivables of 160cr and have given capital advances of 877cr - total related party liabilities of 2257cr as per last 23(9) disclosure.

I did go through 2-3 conf calls of Inox wind and it looks like situation will take time to improve - mgmt sounds optimistic in conf calls because it is their job to sound optimistic.

Ideal situation for Fluorochem investors would be that all these related party liabilities are moved to holding company or at personal promoter level. How they deal with this is an important moniterable in investment decision. Hopefully spinning off of flurochemicals business means no more additional related party liabilities - only whatever they have from the past before spin off.

Other than this, I found AR21 to be quite encouraging, following are notes -

AR21

  • Refrigerants

    • Largest manufacturer of HCFC 22 in India and supplier to global OEMs and service partners
  • FY21 - revenue from India at 51% and from exports is at 49%

  • R&D

    • We collaborate with leading national laboratories

    • 94 R&D professionals, 1 r&d center, 1 applications lab

    • Intellectual collaboration with Manipal University, Jaipur and IIT Delhi

  • PTFE

    • Facilitated transition of customers to PTFE micro-powder that uses advanced technology and not irradiation

    • Sales of PTFE were impacted due to COVID, expect to reach full capacity utilization in near term

    • Green hydrogen and hydrogen fuel cells are expected to boost demand of PTFE and other fluoropolymers

    • Breakthrough in PTFE micro-powder and additives for printing ink, lubricant and coating applications

    • Increased capacity by 25% in dispersion grade PTFE over 2 years for - liners, wires and cables, electrical tapes, metal coating and applications

    • Developed different grades of powder for new age application under novel process, endorsed by global leaders

    • Developed I-SAN using encapsulation technology - PTFE particles are encapsulated by a shell of styrene-acrylinitrile (SAN) polymer. This takes care of both limitations - dispersibility and fibrillation

  • Fluoropolymers

    • 3.88cr invested in indigenous technology that helps to produce newer grades of fluoropolymers and eco-friendly polymerization aids

    • Developed new grades of several fluoropolymers, some grades are already commercialized whereas some grades are under customer qualifications

    • Working on developing fluoropolymer grades required for new age applications

    • Distributors

      • IMCD Deutschland, Germany - PTFE micropowder

      • CAME s.r.l., Italy - PTFE micropowder

      • Banner chemicals, UK - PTFE micropowder

    • PVDF

      • Demand is fueled by electrical vehicles (lithium batteries), solar panels and membranes for water purification

      • Developed new grades that can be used in solar panels

    • PFA

      • Developed PFA grade for semiconductor applications, second level of acceptance from reputed customers, volume expected from Q3 FY22
    • Working towards new age surfactants which are environment friendly

  • Fluorospecialty

    • Developed 15 new products in fluoro speciality segment

    • Few of the new products are in final stages of implementation and are expected to be commissioned by end of FY22

    • Capex is planned for these new products

    • Rising demand for FSC molecules from domestic and international customers to derisk sourcing

    • Additional new products are in r&d pipeline

  • Capex

    • Planned investment of 480cr at Dahej B site, 9km from Dahej A site - most products seem to be fluoropolymers
  • Commodity Chemicals

    • Witnessed robust demand from Pharma X for methylene dichloride (MDC) and chloromethanes plant is running at full capacity.

I think the most interesting section in AR was Technology Absorption (pasted below) -

  • It is good to see specific product and specific date for high end semiconductor applications. Also good to see company talking about new age applications like lithium batteries, semiconductors, telecommunications, solar panel in AR and also doing some R&D work.
  • I-SAN looks like an interesting product from technical capability POV - Flame Retardant | Flame Retardant Additives | Flame Retardant Additives for Plastics | Flame Retardation.
  • Through AR, again and again, it looks like company has developed several new grades, powders etc. with different characteristics in PTFE for different applications. The feel I got was that - it might not be so easy for new entrant SRF (with 5000T capacity) to crack open this market. This is probably good question to ask in AGM.

Inventory of 400cr+ finished products is another thing that stood out for me. The only reason for this kind of finished product inventory might be distribution led model for key products and need to have inventory. This is one of the important factor in working capital.

Most of the segments remained flat or de-grew except for other products (fluoropolymers + fluorospecialty) - this segment grew from 580cr to 907cr. To my mind scale up in these segments is quite phenomenal and this is business in the middle of transformation. There’s more to come in these two segments based on past conf calls (4200cr sales, 1200cr EBITDA).

There is enough pointers for future growth and operationally story looks to be on strong wicket - 480cr capex in fluoropolymers, capex on anvil for fluorospecialty products, PTFE reaching full capacity utilization, enough hints about potential improvement in product mix within PTFE, scale up of existing fluoropolymers and fluorospecialty products, tangible updates on new age industries /applications.

Disc - Invested, transactions in last 30 days, not a buy/sell reco, not a SEBI registered IA

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