ICICI Securities recently hosted Gujarat Fluorochemicals Ltd. GFL) management for an investor meet in Mumbai. GFL is optimistic about the rising opportunity in fluoropolymers and battery chemicals over next 5-10 years. The company plans to expand capacity by 7x in FKM, 4x in PVDF, and 4x in PFA over the next two years, which will significantly drive revenue growth in new fluoropolymers.

These are high-value products on which realisations currently are at US$25-40/kg, and EBITDA margins are higher than the company average. Post FY25, GFL expects significant opportunities from battery chemicals for which it is planning to commercialise the first plant in next two quarters.

GFL is well placed to increase its revenues on the back of its significant exposure to new-age industries of battery, solar and green hydrogen. It aspires to double the revenue in next three years and maintain EBITDA margin at 30-35% at least.

PTFE – value-added grades and reliability helped scale the business. In FY22, PTFE revenue grew 60.9% YoY to Rs13.3bn, which was helped by higher volumes and better realisations. Volume offtake was aided by significant background work done by the company in prior few years in terms of value-added grade development and customer audits. It started with 2-3 grades a decade ago, and has now scaled to over 50 grades. 85% of the PTFE sold by GFL is in the value-added grades where Chinese presence is limited. Europe and US are key markets for GFL (it has strong sales teams, warehousing services and large basket of product approvals in the two regions). We believe the company was making painstaking efforts over the past decade, which helped scale up the business. This ensures that competition too has to undergo a similar exercise in case they enter the category. GFL stated its exports to developed markets is higher than China’s total PTFE exports to these markets.

GFL’s PTFE production capacity is 18ktpa, and it plans to expand to 21ktpa via debottlenecking in CY23. It has sufficient TFE / R-22 capacity to support higher PTFE production. GFL’s market position has improved in the past few years whereby it is now charging premium pricing vs peers (western and Japanese players) compared to earlier times when it sold at discount. It does not anticipate large price decline in PTFE in the near term, and prices could remain in tight range with +/- 10-15%.

Total global demand for PTFE is 175ktpa, and GFL’s share will be 12-13%. Company has not benefited much from the Russia situation in Europe as Russian PTFE producer (HaloPolymer) has significant presence in regular-grade PTFE where GFL has limited exposure. India demand for PTFE is >6ktpa.

FKM – significant capacity expansion planned led by spurt in demand. FKM has large use in ICE automobiles, and western peers have avoided adding new capacities in past few years. However, FKM demand has surged due to: 1) slower than expected EV penetration; 2) stricter emission norms, which has increased use of FKM in ICE vehicles; and 3) rising mix of ethanol in transport fuel. FKM production was also impacted by limited availability of key intermediate, R-142B / VDF. It is the same intermediate that also goes into making PVDF, demand for which has surged due to its usage in batteries, and has better realisation vs FKM. GFL has secured approval for large FKM grades, and is considered a reliable supplier due to backward integration for R-142B. Company is in process to expand its FKM capacity from one reactor in FY22 to seven by FY23-end. This should take FKM total capacity to 7ktpa, and the company has said the entire capacity is pre-booked. Current realisation is strong at ~US$30/kg. 

FKM demand is significantly driven by ICE automotives (50-60%) and, post-expansion GFL will likely have 12-13% of global market share in it. Company does not anticipate any major FKM capacity addition outside of China / India. Further, it has seen increased demand for FKM in US, Japan and South Korea.

PVDF – incremental capacity expansion targeted at battery grade. GFL has one reactor (1.2kpta), which caters to demand from the coating and moulding industry. Demand for PVDF has surged due to its use for binding purposes in lithium-ion batteries. One GWh of battery production need 50te of PVDF for bidder. GFL has developed battery-grade PVDF and believes (from internal assignments) that its product quality is equivalent to global peers. It has sent its PVDF for certification and approval from Chinese battery manufacturers and a few others, but the company’s medium-term target will be to grow its market share in India, US and Europe. The typical approval cycle is 3-4 months.

Company expects to commission four reactors by FY23, which will take its total PVDF capacity to 4.8ktpa. In the medium term, it anticipates PVDF capacity to jump to 12ktpa, with 9.6ktpa likely dedicated for battery grade. Realisations are elevated for PVDF in the current situation due to significant demand-supply mismatch. However, PVDF prices may normalise, but the company would benefit from rise in its share of higher-value battery-grade PVDF. GFL expects PVDF to emerge as the largest fluoropolymer category crossing global demand for PTFE.

GFL anticipates significant PVDF capacity expansion to happen post-FY25 onwards as battery capacities ramp-up in India, Europe and US. It enjoys advantage from availability of the intermediate product (becoming a reliable supplier with negligible exposure to China) while its backward integration makes it cost-competitive as well.

PFA – planned 4x expansion in capacity by FY24-end. PFA is the highest priced TFE fluoropolymer and finds application in the semi-conductor industry and in 5G equipment. Demand for PFA has been rising sharply due to capacity-expansion in semi-conductor industry and growing equipment demand for 5G rollout. GFL has one reactor with 720tpa capacity for PFA and is in process to add two reactors in FY23, and another one in FY24, thereby expanding its total capacity to 2.9ktpa.

Expanding capacity in HFCs. GFL has already restarted its R-125 plant (via TFE route) with a total capacity of 6ktpa. It believes R-125 demand may start tapering in next 4-5 years as it has very high GWP. It has also announced 10ktpa capacity in R-32, which has low GWP, and expects the product to be in use for a very long period (probably till CY40). Company is confident of starting the plant before Dec’23 post which new capacity addition for emissive use will be freezed globally. R-32 will also allow GFL to produce R-410a (made by equal mixture of R-125 and R-32), which is the most popular HFC for RACs today.

The company is also in the process of developing HFO-1234yf, and it already produces an intermediate R-25. HFO capacity may take another few years to commercialise due to patent process.

Battery chemicals plant to commence by FY23-end. GFL is close to completing the integrated battery chemicals complex at Dahej. The plant is intended for production of LiPF6, the most popular electrolyte salt for lithium-ion battery, with an initial capacity of 1,800tpa to be expanded in two equal phases. Company will send samples for certification and customer verification. It also plans to subsequently produce electrolyte solution for use by battery OEMs, and is targeted at India market. Electrolyte salt will be marketed in India, Europe and the US. One GWh of battery need ~120te of electrolyte salt; and 1,000te of electrolyte solution.

GFL has already started discussing with potential battery manufacturers in India, particularly with players who have applied under the PLI scheme. It also expects to produce sodium-based electrolyte salt, and will require similar manufacturing set-up as LiPF6.

Post FY25, the company anticipates significant capex allocation to be for battery chemicals and backward integration of essential chemicals. In the near term, it has already identified a supplier of lithium carbonate, but for future expansion it is also evaluating backward integration into lithium carbonate production.

Evaluating Middle East expansion. GFL is planning to put up a blending facility for R-410a in the Middle East immediately. This can help secure consumption quotes for the regional market for HFCs. GFL also plans for few fluoropolymer capacities such PPA and FKM, which find application in films. Blending plant is likely to commercialise by FY23-end, and the company plans to buy R-32 from market until its own facility is commissioned.

Investment in backward integration of chemicals. GFL plans to expand its AHF capacity from 120tpd to 220tpd, which will help supply key starting raw materials for fluoropolymer, ref-gas and battery chemicals. It has TFE capacity of 36ktpa post debottlenecking in TFE-3, which will take care of the requirements for PTFE, PFA, R-125 and other products. It still sees more opportunity to expand its TFE capacity by debottlenecking in the future in case of requirement. It expects to start its VDC plant by FY23-end, which means it will buy VCM (bulk commodity to manufacture R-142B, a key feedstock for FKM and PVDF). It plans to reach ~30ktpa capacity in R-142b. Morocco mine currently produces 2ktpm fluorspar, and the company is planning to expand production to 4ktpm, which will take care of 35% of GFL’s expanded capacity requirement.

GFL expects to invest ~Rs 2500 crore over next two years, and another Rs 4000 crore -6000 crore during FY25-FY27. GFL in its earning presentation disclosed capex of Rs 1150 crore for FY23, but it expects some frontloading of capex for fluoropolymers during the year, and so capex can jump to Rs 1500 crore. FY24 capex also includes investment into the aforementioned integrated battery chemicals plant. However, the company believes large opportunity for investment may arise post FY25 as its battery chemicals business gains traction. Company’s focus will remain on business expansion only in fluoropolymers and battery chemicals in the medium term, and it does not expect any incremental investment in the fluorospecialty business (intermediate for agro / pharma products).

Reiterated clearing-related part transactions by Mar’23. GFL has given advances of Rs8.8bn toward installation of wind power capacity of 125MW, of which 16MW is under implementation. The remaining capacity implementation is dependent on state policy for wind power. Wind power remains the cheapest source of power at a cost at Rs4/unit. However, if policy remains unfavourable, company expects INOX Wind to return pending advances by Mar’23. GFL has also provided guarantees of Rs18bn for debt raised by its fellow subsidiaries (Wind and affiliated business), and anticipates to expiry these by also Mar’23. INOX Wind has raised funds in past few quarters, and has more fund-raising plans in underway, which should help clean up its balance sheet stress. 

Key risks (downside): 1) Slower than expected ramp-up in capacity utilization; 2) faster than expected drop in prices; 3) completion of HFC project before capacity addition freeze kicks in (Dec’23); and 4) success in battery chemicals.