Gujarat Fluorochemicals Ltd (GFCL) will likely benefit from rising demand / realisation for fluoropolymers. Company is backward-integrated for most products, which enables it to expand capacity faster than global peers.

PTFE price increase is being reflected in export realisatons; PVDF and FKM product developments are moving in the right direction. Company also sees opportunities arising from supplying R-142B to global peers as part of China+1 strategy.

GFCL started production of R-125 and R-142B in Q4FY22, and revenue booking should start from next quarter.

Ref-gas: GFCL to manufacture R-125 through TFE route

SRF was the sole manufacturer of R-125 in India (it bought technology and plant on slump sale from Mexichem for US$10mn in FY18). It has capacity of 6-7ktpa for R-125, which it manufactures through the TCE route.

Though GFCL built R-125 capacity a few years back through the TFE route, it did not continue production due to uneconomical realization

GFCL has 5ktpa capacity for R-125, and it is in the process of securing licence for exporting HFCs based on revised regulation by GoI. The imminent revenue from R-125 is not built in our estimates (peak revenue from R-125 could be Rs2.5bn-3bn for GFCL).

PTFE: Price increase showing up in realisation

1. PTFE finds application in auto and aerospace sectors, which are facing challenging times. However, alternative applications have been growing fast - including electrical, electronics, semi-conductor, chemicals, pharmaceuticals, etc.
2. Company saw strong volume growth in 9MFY22. India's PTFE exports increased by 50.7% YoY to 11.5kte from 7.6kte in 9MFY21, which is largely from GFCL. Export realisation has improved by 13.6% during the same period to Rs780/kg.
3. GFCL increased prices of PTFE in Jan'22 by 15-20% to pass on rising RM inflation. Ref-gas prices (intermediate product, R-22) have seen significant rise driven by rise in chloroform prices. Export realisation increased by 13.7% in Jan'22 to Rs939/kg, which is in line with company guidance.
4. GFCL has ~18ktpa capacity for PTFE, and is in the process of expanding capacity by 25% by Jan'23. Capex spend is estimated at Rs2.5bn for PTFE and TFE-3 plant.

New fluoropolymers: PVDF and FKM seeing rising demand; realisations have risen sharply

1. GFCL's new fluoropolymers revenue has been restricted for the past few quarters due to unavailability of key raw material R-142B. PVDF and FKM require VDF monomer, which is indeed produced from R-142B.
2. Company has commissioned R-142B plant with VDC (one-step backward integration) as feedstock, which has partially eased R-142B supply.
3. Company has submitted samples of PVDF, which would find application in battery cells, with consultants for certification. The approval from these consultants will open battery market for GFCL.
4. The demand for FKM is also strong, and company is expediting capacity enhancement in FKM.
5. The prices of PVDF and FKM have increased to US$25-40 from ~US$12/kg. The key reason is higher prices for R-142B (intermediate); demand for these fluoropolymers is significantly higher than supply presently.
6. GFCL is in the process of increasing capacity for FKM from 2.4ktpa to 4.8ktpa, and PVDF to 1.2ktpa to 2.4ktpa. The new capacities should be commissioned in H1FY23, and existing capacity is under-utilised on unavailability of R-142B, which is resolved. We expect new fluoropolymer revenues to rise sharply in FY23E on higher volumes; upside risk could be from supplies to battery cell manufacturers.

R-142B: Rising opportunities in export market

1. R-142B is largely manufactured in China, and has seen sharp price rise and shortage of supply. The product has disrupted manufacturing of PVDF and FKM, which resulted in sharp price increase.
2. This is good China+1 opportunity for GFCL to emerge as an alternative supplier for R-142B. Demand for R-142B is expected to rise multifold driven by rising demand of PVDF, which indeed is benefiting from application in energy storage (batteries), solar panels and hydrogen fuel cell.
3. Company is backward integrated to VDC presently, and we expect it to manufacture VDC from VCM from H2FY23E. VCM is a bulk commodity with global capacity of 50mn-60mn tpa. VCM is ~US$1-1.5/kg product. The backward integration will put GFCL among the few fully backward-integrated players globally (VCM to PVDF).
4. The existing R-142B peak capacity is 25ktpa; however, GFCL anticipates to manufacture only 5ktpa to start with, and would gradually ramp it up. It can reach full capacity only on backward integration to VCM, which removes intermediate availability issue.

R-22 and fluorospecialty revenue will suffer in Q4FY22 from incident in Ranjithnagar plant

1. R-22 and fluorospecialty sales will be impacted in Q4FY22 from unfortunate incident in Ranithnagar. There are also delays in commercialisation of the new facility, but it was anticipated in Q4FY22.
2. R-22 sales are on quota basis, and Q4FY22 is a seasonally strong quarter for India markets (start of summers). The realisation for R-22 in India is significantly better compared to exports. We estimate GFCL's R-22 domestic sales to see significant dip owing to shutdown of plant for almost 45 days.
3. Fluorospecialty plant saw accident in Ranjithnagar; segmental sales should also be lower in Q4FY22.
4. Fluorospecialty has gross block of Rs3bn-3.5bn, and GFCL is in the process to commission three plants with a total capex outlay of Rs3bn. The peak revenue from fluorospecialty is Rs8bn-9bn (asset turnover: 1.4-1.5x).
5. Fluorospecialty revenue for 9MFY22 was just Rs2bn, and company expects significant jump in revenue for FY23.