PL Stock Report: Gujarat Fluorochemicals (FLUOROCH IN) - Q2FY24 Result Update – Challenges across segments - Downgrade to 'Reduce'

Gujarat Fluorochemicals (FLUOROCH IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: REDUCE | CMP: Rs2,780 | TP: Rs2,413

Q2FY24 Result Update – Challenges across segments

Quick Pointers:

♦ Increasing Chinese imports impacting prices across fluorochemicals & fluoropolymers business.

♦ PTFE & new fluoropolymer capex commissioning delayed to H1FY25.

We downward revise our FY24/FY25E estimates by +30% each and downgrade the rating to ‘Reduce’ from ‘Accumulate’ at revised TP Rs2413 (earlier Rs3230) based on 25xFY26E EPS of Rs97, post factoring in lower volumes & realizations due to persisting demand challenges across user industries coupled with increasing imports from China putting pressure on finished product prices.

Gujarat Fluorochemicals (FLUOROCH) topline declined to Rs9.5bn (-35% YoY/ -22% QoQ) due to >40% decline in fluorochemicals business (both YoY & QoQ) led by significant drop in R125 exports to US and poor sales in domestic market. For fluoropolymers business, management. believes H2FY24 to be better as compared to H1FY24, while for fluorochemicals segment, pickup is expected post FY24. We believe near term challenges persist in FY24E & FY25E led by 1) poor demand across fluorochemicals and fluoropolymers segment 2) capacity expansion (delayed) and increasing pressure from Chinese imports. The stock is trading at ~29 P/E on FY26E EPS. Downgrade to ‘Reduce’.

♦ Topline impacted YoY & QoQ majorly due to realization decline: Revenue declined to Rs9.5bn (-35% YoY/ -22% QoQ) on account of decline in fluorochemicals business. Fluorochemicals segment dropped >40% both YoY & QoQ due to significant drop in R125 exports to US and poor sales in domestic market. Fluoropolymers segment, was much impacted due to price decline in PTFE grades (on account of Chinese dumping) and destocking in higher end grades, particularly in Europe.

♦ For fluoropolymers business, management believes, H2FY24 to be better as compared to H1FY24, due to expected phasing out of destocking, pickup in the demand in US and exit of legacy players. While for fluorochemicals segment, pickup expected post FY24 due to impact of phasing out in the USA and Chinese pricing.

♦ Gross Margin dropped to 63.9% vs 73%/70% (in Q2FY23/Q1FY24) due to lower finished product prices for the quarter.

♦ EBITDA came in at Rs 1.6bn (-70% YoY/ -53% QoQ) dropped on account of lower topline; EBITDA margin stood at 17.2% from 36.7%/28.8% in Q2FY23/Q1FY24 respectively. Bottomline came in at Rs527mn (-85% YoY/ -74% QoQ) due to lower operating profit and higher interest costs YoY & QoQ.

♦ For H1FY24, topline dropped 23% YoY to Rs 21.6bn on lower realizations and competition from China specially in fluorochemicals & fluoropolymers business. EBITDA margins stood at 23.7% vs 35.6% same period last year.

♦ Concall takeaways: (1) Management expects EBITDA margin to be at 30% in FY24E (2) There is no impact of PFAS issue across portfolio for the company (3) Working capital days shot up due to higher inventory days and lower volumes as of Sep’23. (4) Management guided FY24 to see realization pressure across business (5) For FKM, business remained stable and company is getting enquires driven by user industries such as ethanol blending, high-end auto applications etc. (6) For fluorochemicals business, pressure expected throughout FY24E especially pricing led. (Click on the Link for Detailed Report)