Gujarat Fluorochemicals: A hidden fluorine story

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 .
image

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
image

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.
image

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)
image

Find enclosed SRF FY20 annual report extract for Chemical Technology Group (CTG) research efforts and patent filed.
image

7) Deficit in CSR spending
FY2017 AR
image
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
image
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)

36 Likes