CRISIL's ratings on Gujarat Fluorochemicals Ltd's (GFL?s) bank loan facilities and commercial paper programme continue to reflect GFL?s integrated operations and diversified product profile, strong liquidity, and comfortable financial risk profile. These rating strengths are partially offset by GFL?s exposure to risks associated with its carbon credit business, and with its debt-funded capital expenditure (capex) plan for its windmill power projects.

GFL is the largest manufacturer of hydro chlorofluorocarbons (HCFC) in India. HCFCs are used as a refrigerant gas and as feedstock in the production of poly-tetra-fluoro-ethylene (PTFE). The company?s operations are marked by forward integration into the manufacture of PTFE and backward integration into manufacturing chloroform and chlorine. CRISIL believes that the profitability of GFL?s chemicals division will improve over the medium term, underpinned by increased production and capacity utilisation for PTFE; the company currently has a capex of around Rs.5 billion for increasing the plant capacity for PTFE, caustic soda, and chloromethane, with a corresponding increase in capacity for its captive power plant.

The profitability of GFL?s chemicals business (excluding carbon credits) was impacted over the past two years due to problems relating to stabilisation of operations in its PTFE plant. Consequently, the synergistic benefits from integrated operations were not fully available during these years. However, GFL registered healthy operating income and profitability over the past four years supported by sale of carbon credits generated by thermal oxidation of hydrofluorocarbon-23 (HFC-23). The carbon credit revenue stream may not be available in 2010-11 (refers to financial year, April 1 to March 31) as the Clean Development Mechanism (CDM) Executive Board is currently reviewing the methodology governing the issuance of carbon credits from HFC-23 projects. CRISIL believes that this is a temporary phase for GFL, and that the revenue stream from carbon credits will resume in 2011-12, once the issuance of carbon credits recommences after the review. However, the Kyoto Protocol?s first commitment period gets over in December 2012, and there is uncertainty over a market for carbon credits after December 2012. Nevertheless, the expected improvement in profitability from the chemicals business, coupled with expected profits from wind power and wind turbine business, will compensate for any reduction in GFL?s topline and profitability owing to the absence of, or reduction in, carbon credit revenues beyond 2012-13.

GFL?s business strengths are complemented by its comfortable financial risk profile, as reflected in its large net worth of more than Rs.17 billion and low gearing of 0.35 times as on March 31, 2010. The company also has strong liquidity and comfortable debt protection indicators. However, its large debt-funded capex for installation of wind power capacity of 400 megawatts (MW) by 2012-13, is expected to result in an increase in its gearing to about 0.6 times by 2012-13.

Outlook: Stable

CRISIL believes that GFL?s profitability from the chemicals business will improve from 2010-11 onwards due to better capacity utilisation in its PTFE business on implementation of its planned expansions. The lack of income from carbon credits in 2010-11 is expected to result in a decline in cash accruals for the year; cash accruals, though, are expected to pick up from 2011-12 onwards. CRISIL believes that GFL will maintain a comfortable financial risk profile on the back of its healthy capital structure and strong liquidity. The outlook may be revised to ?Positive? if the company demonstrates a sustained improvement in profitability of the chemicals business, while maintaining its comfortable capital structure. Conversely, the outlook may be revised to ?Negative? if GFL is unable to revive income from the sale of carbon credits in 2011-12, resulting in deterioration of its net cash accruals over the medium term. The outlook could also be revised to ?Negative? in case the profitability of GFL?s chemicals business does not improve in line with CRISIL's expectations.