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Gujarat Fluorochemicals Ltd
Earnings Call Analysis
Q3-2024 Analysis
Gujarat Fluorochemicals Ltd
In the third quarter of FY '24, the company saw a consolidated revenue increase of 5% quarter-on-quarter, reaching INR 992 crores. Following suit, the EBITDA for the same period rose significantly by 26% quarter-on-quarter, amounting to INR 206 crores.
The company's various segments, including Fluoropolymers, Bulk Chemicals, and Fluorochemicals, have all displayed performances in line with management's expectations. Signs of growth are beginning to emerge, with all three sectors experiencing marginal lifts from the previous quarters.
Although the Fluoropolymer segment saw a marginal decline due to seasonal impact in the U.S. and Europe, stable prices and a strategy shift to higher-grade products give reason for optimism. With additional fluoropolymer capacities set up, the company anticipates increased sales and demand, especially from emerging businesses like EV, green hydrogen, and solar.
The company is earmarking a significant portion of its INR 1,500 crores capital expenditure for the Battery Chemicals vertical, which is expected to become a major growth driver from FY '26. Although return ratios have dipped due to the capital expenditures for capacity expansion, non-revenue-generating assets are anticipated to begin contributing to revenues and the bottom line soon.
The increment in working capital days is largely attributed to reduced sales. Management reassures investors that this is a temporary phase, primarily caused by global destocking and low demands in certain geographies. Expectations are set for a reversal and significant improvements as revenues increase, with an intact growth fundamental for the core business.
With the depletion of a legacy player's existing stock expected in the next 1 to 2 quarters, the company is poised to see new revenue streams open up. They are also at an advanced stage of developing high-end products, with customer-end testing anticipated in roughly two quarters.
Sequential improvement in EBITDA margins has been noted and the company expects to achieve further increases, with hopes of returning to a gross profit margin of 66-67% driven by the Fluoropolymer business.
While the capital expenditure for the next year has been adjusted to INR 500 crores, focusing on ongoing business, this figure excludes expenses related to the EV side, implying continued investment in innovation and expansion in that area.
The company's march towards enhanced margins will likely surpass levels seen in FY '23, though potentially delayed by a few quarters. Growth in FY '25 is primarily expected from the Fluoropolymer segment, driven by capacity additions and investment in backward integration for better margins.
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Ladies and gentlemen, good day, and welcome to Gujarat Fluorochemicals Limited Q3 FY '24 results, followed EV Business Update Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Ashvik Jain from ICICI Securities. Thank you, and over to you, sir.
Thank you. Good evening, everyone. Thank you for joining on Gujarat Fluorochemicals Limited Q3 FY '24 results, followed by EV Business Update Conference Call.
We have Gujarat Fluorochemicals Limited management on call represented by Dr. Bir Kapoor, sir, CEO and DMD, and other members of the senior management team.
I would like to invite GFL management to initiate with opening remarks, post which we will have a Q&A session. Over to you.
Good evening, everyone. A very warm welcome to all of you on this GFL Quarter 3 FY '24 Earnings Call. I have with me here our group CFO, Mr. Akhil Jindal; our CFO, Mr. Manoj Agrawal; and also our Investment Relations Head...
Sir, can you speak louder? Can you take the device closer to you? Your voice is not clear.
Is it better now?
Yes, very clear.
Okay, I'm sorry. Okay. So good evening, everyone. A very warm welcome to all of you on the GFL's quarter 3 FY '24 earnings call. I have with me here Mr. Akhil Jindal, our Group CFO; also, Mr. Manoj Agrawal, our CFO of GFL; and Mr. Vibhu Agarwal, who is our Head of Investor Relations.
The company announced its quarter 3 results at its Board meeting held today. That is on February 7, 2024. The results, along with earnings presentations are available on the stock exchange and on our website.
I will briefly talk about the numbers, and then give you an update on the business operations and the outlook.
The company reported a consolidated revenue from operations for quarter 3 FY '24 of INR 992 crores, up by 5% on quarter-on-quarter. Consolidated EBITDA for this period was INR 206 crores, which is up by 26% on quarter-on-quarter basis. The EBITDA margin stood at 21% for quarter 3 FY '24, which is up by 400 basis points on a quarter-on-quarter basis. Consolidated PAT for this quarter was INR 80 crores, which is up by 51% on quarter-on-quarter basis.
Let me briefly take you through the performance of each business segments for this quarter. As we had guided in the previous call, we have started witnessing the signs of bottoming out and a growth from hereon. All 3 segments, which is Fluoropolymers, Bulk Chemicals and Fluorochemicals, have performed in line with our expectations.
The Bulk Chemical vertical saw a marginal lift from the previous quarter, and the prices are at nearly the same level as previous quarter, which we believe have bottomed out.
The Fluorochemicals segment also witnessed marginal growth compared to previous quarter, primarily driven by refrigerant business, which had been its all-time low in the previous quarter. The refrigerant business is expected to improve marginally from the next quarter. Specialty Chemicals continue to be at the same level due to dumping from China.
The Fluoropolymer segment saw a marginal decline from the previous quarter. The prices remained stable. However, the volumes were marginally impacted due to the quarter -- due to holiday season in U.S.A. and Europe, which is a seasonality impact. We are seeing signs of growth in this segment in the current quarter, and we believe the destocking phenomenon, which we had seen in previous quarter, seem to have been largely over, and we expect to see volume picking up from here on. As we had indicated in the last quarter, our endeavor is to move on to higher grades. It is continuing. And this, along with the exit of legacy player should yield better results for GFL in this segment going forward.
Additional fluoropolymer capacities that were recently set up are expected to result in continued increase in sales over the subsequent quarters. EV, green hydrogen and semiconductor and solar, among other emerging businesses should contribute to further increase in demand going forward. We are definitely seeing green shoots of recovery, and expect FY '25 to be far better as compared to FY '24 for this segment. We hope to come back to normal levels in next few quarters.
On our new vertical, the Battery Chemical, we have scheduled a detailed call immediately after this, where we elaborate our plans and outlook for this segment. This segment would be a major growth driver for us starting FY '26.
Of the INR 1,500 crores CapEx that we had announced in the beginning of the quarter, we'll be spending close to INR 1,000 crores to INR 1,100 crores this year, and rest will be staggered to the next year. With CapEx already incurred and some additional in the next financial year, we believe that we have built enough capacity in the fluoropolymers to be able to deliver growth for the next couple of years. Going forward, we expect our major CapEx to be incurred in our Battery Chemicals verticals.
On the balance sheet front, our return ratios have reduced during the financial year on account of higher capital expenditure towards setting up of additional capacities. And at the same time, the revenues have been affected majorly on account of destocking.
We believe that this should reverse going forward. And currently, non-revenue-generating assets will start contributing to the top line. A large part of the current CapEx is incurred in the Battery Materials segments and also the expenditure in the form of CWIP for various fluoropolymers, which is currently not contributing to the revenue and bottom line. As we had indicated, revenue from this segment will start trickling in from second half of FY '25 onwards.
The working capital days have also increased primarily on account of reduced sales. This is expected to reverse and improve significantly going forward as the overall revenue improves. I can assure you all that the growth fundamental of our core business is intact. And this phase is temporary, leading primarily due to the global destocking and low demand in some of the geographies. We have already started seeing signs of recovery, and we can assure you that from here on, we expect to see quarter-on-quarter growth going forward.
With this, I'll let this now open for -- open the floor for question and answer. Thank you.
[Operator Instructions] The next question -- the first question is from the line of Sanjesh Jain from ICICI Securities.
I got a few of them. First, on the fluoropolymer business. Last quarter, we said that we have pushed some of the CapEx to FY '25. And now that we are gaining confidence, when do we expect to resume that CapEx for fluoropolymer?
And earlier, we said that we are in the process to expand the new fluoropolymer capacity from 700 metric ton to 1,800 metric ton, when should be able to reach that 1,800 metric ton capacity? And what is the ramp-up time we are anticipating now? And that's my first one.
As we had said in the last quarter that we are staggering our CapEx in view of the market situation. So clearly, we had anticipated overall CapEx of INR 1,500 crores, which is now going to be INR 1,000 to INR 1,100. So the rest we intend to [Indiscernible] in next 2 quarters of the next financial year.
Regarding the utilization of this capacity, we had already mentioned that utilization of this capacity will take several quarters, particularly in fluoropolymers, which is -- in the new Fluoropolymer segment particularly. So we would see this utilization becoming probably next over 1-year period, probably 4 quarters or so.
And this will happen over a period of time because capacity utilization requires the grade development, grade approval process, which goes in a sequence and a stepwise manner. So it will take some time after CapEx is incurred. The capacity is put in place. As of now, we have capacity in place and the plan to cater to whatever the growth that we expect to see in the Fluoropolymer segment.
Got it. Got it. One follow-up. Again, what you said last quarter that the legacy players have built a large inventory in the market for business continuity. How is our discussion with the customer indicating when should they really start picking up a material from us? Is it second half? It is in first half of '25? And we were also in the process of developing FFKM, which is one of the large products from the exiting player. Where are we in that process?
Yes, Sanjay, first of all, legacy player, we are already seeing inquiries. We are already engaged with some of our customers. And we expect that their existing stock to be depleted in the next 1 to 2 quarters.
So we are most likely, I would say, next year beginning -- or I mean, middle of next year's financial year is what we expect to see the revenue stream or the impact of that showing up. Now coming back to FFKM that you asked, this is, again, a part of our strategy to go up high up in the value chain.
We are at the advanced stage of product development. And this will, again, being a very high-end product, it will require some sort of approval process and the testing at the customer end, which we expect to see in probably, I would say, 2 quarters from now.
But we are ready with the product on the FFKM side?
Almost there.
Almost there. Got it. Got it. One...
These are strategic initiatives, Sanjesh. I cannot share much on this.
No, no, no. I appreciate it. One on the gross profit side, though, EBITDA margin has seen a good improvement sequentially, gross profit has remained largely stable at around 64%. With the rise in Fluoropolymer business, we should be, again, inching back to that 66%, 67% kind of a gross profit margin? Will that be a fair assumption?
Yes. We expect that. I mean with the Fluoropolymer, we probably be getting back to the same levels of profitability in the gross margin.
Got it. Got it. One last question before I join back in the queue. On the CapEx side, I see the presentation, the CapEx for next year has been reduced to INR 500 crores. Any particular reason for cut in the CapEx?
Let's not misinterpret it. Let me really clarify it here. INR 500 crores is probably more like an ongoing business that we are talking. But what we have done this time now, Sanjesh, is going forward since we are having a separate call on EV later today. This does not include the CapEx that we'll be incurring on the EV side.
So this is for the non-EV side of the business, INR 500 crores?
Absolutely. Which is right because we already have put in a significant amount of CapEx now in the fluoropolymer with capacity has been built in. Now we will take some time to utilize it. So we'll -- so our CapEx in the existing businesses in the fluoropolymer would probably start later on. But as of now, we are looking at the next year around INR 500 crores, which is, again, is staggered from the last few quarters. You know that.
So what will be the CapEx in the Battery Chemical in that sense? Did the overall CapEx -- does the overall CapEx enveloped changes for us or it's just segregation?
Not really. Overall CapEx does not impact -- you will hear the EV story later on. Maybe they go up totality.
And the next question is from the line of Hansal from Lalkar Securities Pvt Ltd.
So obviously, it's encouraging to observe the positive developments, particularly with the growth in volumes and some sort of resolution to this destocking phenomenon. And we're hopeful that we probably see price rationalization to follow through. Just taking it ahead from the previous question on the CapEx, Slide 13 of the presentation has a footnote regarding the FY '25 CapEx, which excludes the GFCL EV CapEx.
Now I'm not sure if I should ask this question here on the EV side, but I'll ask it anyway since it's part of the GFL presentation. This CapEx, which we plan to do apart from the INR 500 crores, ideally, you mentioned that it will obviously be funded through its own SPV.
So -- I mean is there some dilution involved over there? Or will it be debt? So I'm not really clear on that. And the follow through on that, you said that it seems to be without any recourse sort of parent GFCL. So exactly what would that kind of -- what is the company emphasizing when it says no recourse to the parent GFCL?
My request to you is that we'll answer this at our EV call separately because the EV business has its own CapEx. And right now, we have separated it out. And I would...
Sure, sure, sir. I completely understand. I was just not sure whether I should ask it here or there given that it was a part of the GFL presentation. I'll take this question up on the EV side.
And we will discuss and share our plans in the EV call separately.
And the next question is from the line of Rohit Nagraj from Centrum Broking.
Congrats on recovery in third quarter. So first question is on our guidance, which we had indicated during the last call. And we had given that in the next couple of quarters, we'll see some improvement in margins, which has actually been delivered in Q3. And full recovery in terms of margins, et cetera, should be in Q1 FY '25. Even we had guided that FY '25 should be better than FY '23.
I just want a little more -- probably if you can give us some granular details in terms of how things are likely to change from FY '23 to '25. Now just to give a color on this, FY '23, the Bulk Chemicals had a significantly high margin, which is normalized. So FY '25 will be normalized margin scenario.
In Fluorochemicals, again, we were significantly benefited from the ref gas pricing, which has again normalized and probably should be normalizing going forward. And in Fluoropolymers, also, we had a favorable pricing environment, plus the current higher stocking by one of the players who is exiting was also not there. So if you can just give us a little more understanding how things will percolate over FY '25 to be better than FY '23. That would be helpful.
Yes. I think the way we are right now, we are seeing a sign of growth and green shoots emerging. Looking at the current situation, yes, we will -- our margins will improve going forward in the subsequent quarters.
Coming back to how FY '25 would look like, it will probably be approaching towards '23 better, but it will probably be delayed by a few quarters, Rohit. Not exactly may happen, but we started seeing going beyond '23.
Let me tell you why I was saying beyond '23. Because you mentioned that the Bulk Chemicals and the upside on the refrigerant will not be there. However, on the Fluoropolymer, if you look at it, that we are expecting significant growth, partly because of the investment that we have made. And we expect the growth to come from a new Fluoropolymer segment, which is a higher-end segment, okay? Compared to the baseline Fluoropolymer that we had earlier.
So in a way, our growth story now in FY '25, we are not accounting for the similar kind of uplift in refrigerants, but a lot of it will come from the Fluoropolymer segment.
Sure. Sure, sir. And I understand that this should be driven by both in terms of higher grades, which will entail higher margins and the volume growth that we are targeting. Is that a fair assumption?
Yes, because we have added capacities. And also, there is one more reason we would like to mention here, that in Fluoropolymer, our investment is also on the backward integration to some cases, our own -- to have better margins.
So all combination of all of these will probably result in a better margin in the Fluoropolymer segment than what we have seen in the past, the top line and the bottom line both.
So this is really helpful. Sir, second question is on Slide #13, where we have given the RoCE, RoE and there is a footnote regarding the capital employed, and CWIP has been excluded.
I believe that we will -- I mean, generally, whenever we'll be providing capital employed, it will include the CWIP because that's an ongoing process at any point in time. So any specific reason of giving this particular ratio without using that?
And an allied question to this. I'm not too sure whether it will be taken in the second call or not. But just to mention it over here, incrementally, whenever we are providing our financials, so would we be clubbing the financials of the EV business as well? Because on a consolidated basis, the consolidation -- since it's a 100% subsidiary, the consolidation will happen, and the ratios should actually reflect the investment in both the businesses. So just your color on this.
Yes. Thanks, Rohit. I would request Akhil to take your question.
So what you think is right. From an absolutely accounting perspective, I'm not disputing what you said. But I think from a real business operating practices, if you see the EV business are now being -- it's a subsidiary. All our investments in the subsidiary will have its own ratios and its own financials.
Although in the consolidation, it would -- any way, it will come. But from an RoCE/RoE perspective, our intention was to explain to the Street 2 things. One, that on an operating basis, what are our ratios, number one. Number two, if you separate out the EV business, which has just started, I mean, we have just announced some commercial production now. How the EV business will shape up in the future will be handled in a separate call.
So from a market perspective, we thought that operating numbers of what it is for the operating capacities is the right indicator of our profitability. And as we go along, as the capital work in progress will become a part of our operating capacities, that would also be reflected in that manner.
So there's attempt that we have done to explain to the market on our operating capacity what are the ratios.
Just a clarification, sir. In terms of now -- once the EV part of the business gets capitalized, the LiPF6, et cetera, so how will we then show the ratio? So will it be including the EV and excluding the EV? I mean, we would -- whether we will be bifurcating it or whether that will -- that time it will be again consolidation or separation?
Yes. So on a consolidated basis, obviously, the EV CapEx will be a part of our overall GFL balance sheet. But from a stand-alone perspective, from a financial ratio perspective, you will see the EV ratio there in a separate manner.
So naturally, it's a subsidiary of GFL. So in our overall consolidation -- line by line consolidation, everything, you will see the impact. But however, as a matter of abundant caution, we thought the operating capacity should be highlighted separately, and the returns from that operating capacity be highlighted separately so that people can understand what are the real ratios on our capacities will be going forward.
And the next question is from the line of Archit Joshi from B&K Securities.
So first one on the HFC-32 project that sort of shelved off earlier, I think our competitor is leasing up their CapEx to almost double the capacity in R32. Do we have any plans to sort of resume that or put it under consideration?
No, Archit, we do not have any plan of -- in R32 at the moment. We had some plans you know that, and we shelved it because we are getting into other areas. And for a long-term sustainable growth, we thought of other opportunity, which are available to us to invest our CapEx.
Sure, sir. No problem. Sir, second one, not sure if I heard you -- if you already answered this question, but if we could provide an update on the solar-grade PVDF, the battery winder-grade PVDF and the semiconductor grade PFA, where are we in the scheme of things towards development and commercial launches of these products? And what the expected time line of introducing these products in the market?
Yes, Archit. The solar grade PVDF, we had a plan of setting up at the film plant, which is the PVDF fluoropolymer film plant, which is under commissioning as we speak right now. We will soon announce its commercial production. It's at the advanced stages right now, okay?
On PVDF, which is for a battery grade, we have developed several grades, which is, again, going through the -- it has gone through the lab phase. Lab testing has been over, even at the -- some of the outside labs. And now this is -- we are in touch with the OEMs to get that validated and certified. So that's already moving.
Coming back to the semicon-grade PFA, We are already supplying. In fact, I had indicated that since some quarters back that PFA semicon has several levels. So we are already supplying to some semicon application PFA. And we are continuing in that direction to go into the next level of PFA for semicon application, okay? So that process is on, and we are already in that market segment.
Great, sir. Great. Sir, the PVDF, the grade -- the first 2 grades that you spoke of, can we expect sales to begin FY '25, maybe in the first half? Or is it still quite late in realizing sales at least?
We expect to see the sales probably in the second half of next year -- this next financial year because part of the -- right now, the battery capacities outside China are very, very limited, okay?
While our samples are already at the valuation stage, but the real growth we expect to happen in the non-China territory. And the -- we expect to see probably in the '26, '27. However, as far as our own sales and the revenue, we probably would expect to see it from the second half of next financial year.
Got it, sir. Sir, and would this also be a part of the staggered increase in capacity that you're planning in new fluoropolymer? So just trying to clear the air, what would be the concentration of the incremental jump that we have seen on a per month basis with respect to the ramp up? I think we were at 1,100 ppm, and our plan was to go to 1,800 ppm, 1,900 ppm in a staggered manner.
So are these new grades of PVDF or PFA a part of that? Or this is completely different? And how do we see that part of the ramp-up in the new fluoropolymer with respect to the capacity expansion?
Okay. No, these are part of the same capacity that we talked about earlier. So this ramp-up has come over a period of time because once this PVDF grades get qualified, this capacity will get utilized, okay? So this will happen over a period of time.
Sure, sir. I saw...
One more very quick thing, Archit. When I said next financial, I meant '25, '26, I'm sorry. I just may not have clarified it at that time.
Sure, sir.
Okay. All right.
Sir, also on the ramp-up that I was asking about, where are we in terms of the capacity that we might have added already in FY '24? And what would be the balance that might spill over to FY '25, whereas we would have already ramped up from 1,100-odd tonnes to 1,800 tonnes, 1,900 tonnes per month. That would be my last, sir.
In the battery chemicals space, particularly, if we -- first of all, we cannot give you exactly the capacity utilization and the capacity number. However, all I can tell you is a lot of our investment when we said that we have made in the new polymer, it was done primarily a lot in the backward integration space, okay? For example, in case of PVDF, a lot has happened in setting up the capacities for monomer and the VDF.
So as the market builds up, okay? We already have added capacity for PVDF reactor. And if the market builds up, we'll keep on adding reactors to capture that, okay? So as we see a growth progressing, which we have said will happen in -- over the next year or so.
Sir, so would it be safe to assume that all new -- this expansion, wherein we are actually anticipating the fact that FY '25 would see growth over FY '23 or be at least at par with respect to EBITDA that we generated in FY '23, I think that was largely a function of this new CapEx in the new fluoropolymer, my just limited question is which I'm a bit confused about is, when do we see this capacity being added? Sir, that's the only question that I have.
Yes, I think there's -- let me clarify here. The capacity that we're talking about, which we had said earlier about 1,500 tonnes or so, that capacity will come in place probably in next quarter or so. And then it will get utilized over a period of time.
I thought when I answered about adding more reactor, that was more related to the battery chemicals and the PVDF related to battery, okay? That was -- because if we look at what we have added in new polymer, we have added FKM, we have added PFA, we have added micro powders and PVDF, okay? So it was a combination of these 4.
Okay. So what I had answered to you -- probably it may have been a little bit confusing, but what I answered to you earlier was only in context of PVDF, which is for EV segment because you were asking about how the growth will happen on the EV, okay? Is that clear, Archit?
Sir, I'll probably take it up off-line with you later.
And the next question is from the line of Meet Vora from Emkay Global.
Just wanted to -- sorry for hopping on this again. Just wanted to clarify on our guidance for growth over FY '23, in FY '25 or either flattish number. So if I look at our historic numbers, our FY '23 EBITDA of INR 1,900 crores, nearly half of that would have come because of 3 reasons. One is higher realization in Bulk Chemicals, higher pricing in ref gas, and at the same time, higher pricing in fluoropolymers.
Now when we say that we are freezing our CapEx at this juncture for fluoropolymers, because this is a long gestation business and capacities will get utilized over a period of time, what gives us the confidence that at least half of our EBITDA of FY '23 can be compensated in FY '25?
So ideally, I think that we should see at least 100% growth in our fluoropolymer business for the erstwhile dip in the business growth. So just wanted to understand, how will we see that at least flattish or growth numbers in FY '25 versus '23?
I think, Meet, I have already said that in the previous call, that there was -- if I look at FY '23 numbers, that EBITDA was partly contributed because of the high pricing in bulk as well as refrigerant.
So going forward, this will be met primarily by the fluoropolymers and because that high EBITDA number that you saw, because fluoropolymers -- multiple things are happening. As I said, that we are adding the fluoropolymers, the volume as well as the type of fluoropolymer, which are being added are high-end polymers, which are the new polymer segments. So this will be made up by growth in fluoropolymers, particularly, okay?
Again, you need to look at sort of the -- from the baseline to the increase due to the ref gas and also because of the -- partly because of 125, if you recall at that time, okay? So that will be taken care of partly by -- and obviously, when we look at this year or the earlier quarter, a lot of it because -- in all the segment market has completely bottomed out, okay? So as we see, there's already a sign and some marginal improvement in the ref gas that you saw this year -- this quarter. Again, it will probably be marginally better than next year. Plus, even in the bulk chemical stays where it is, a lot of it will be made up by fluoropolymer.
Sure. So that means that we are expecting at least 80%, 90% growth in fluoropolymers over FY '23 for that to get compensated. Obviously, because the realizations of fluoropolymers have also gone down versus FY '23, in terms of volumes basically?
Yes, that's what our expectation is, partly because of the new fluoropolymers. And -- the higher volume and the higher margins, both.
Sure. And just one last question from my side. So whatever sales you will be doing for PVDF battery grade, going forward will be registered, I mean, in terms of the revenue under the EV subsidiary or it will be under our GFL entity itself?
It will be under EV subsidiary.
And the next question is from the line of Sanjay Kular from ACME Private Limited.
Sir, again, my question is on the same topic, which is FY '25 EBITDA will be greater than FY '23. So sir, are you confirming the guidance again in this con call?
Sanjay, let me clarify here. Our position right now is that it will probably be at par with FY '23, not really greater than FY '23.
It probably will be a quarter here and there based on what we are seeing as the traction is coming up, but the growth rate could be plus/minus 1 quarter or so. So it will be at similar levels of FY '23 going forward in FY '25, last give or take, a quarter.