Gujarat Fluorochemicals Limited (FLUOROCHEM) Earnings Call Transcript

Thanks, Margaret. Good evening, everyone. I would like to welcome the management of Gujarat Fluorochemicals and thank them for giving us this opportunity. Today, we have with us Mr. Vivek Jain, Managing Director; Mr. V.K. Soni, Head of Projects and New Initiatives; and Mr. Manoj Agrawal, Chief Financial Officer. I would now hand over to Mr. Manoj Agrawal for his initial comments. And then later, we can switch to question-and-answer session. Over to you, sir.

Thank you very much, Miloni. On behalf of Gujarat Fluorochemicals Limited, I would like to extend a very warm welcome to all participants. We are happy to inform that Board of Directors of the Gujarat Fluorochemicals Limited had its Board meeting, approved the audited financial results of the company for the quarter and half year ended September '20. The financial results are uploaded on the websites of the stock exchange, both BSE and NSE, as well as the website of the company. We have also uploaded the earnings presentation for Q2 FY '21. I will take you through this presentation initially, and then we can open the call for any question and answers that you all might have. Starting with the financial results overview. Revenue for the quarter Q2 FY '21 stood at INR 617 crores, which is 10% higher than the revenue for Q1 FY '21, which we were at INR 559 crores. Further, when compared to Q2 FY '20, revenue was INR 662 crores. It is a fall of about 7% to higher base. Looking at the EBITDA numbers, EBITDA for Q2 FY '21 stood at INR 157 crores as compared to INR 143 crores in Q1 FY '21, which is up by 10%. When compared to the EBITDA for Q2 FY '20, which was INR 132 crores, it is higher by 19%. This is essentially due to reduction in raw material costs and other expenses. Now as far as PAT is concerned, PAT for Q2 FY '21 is at INR 79 crores, up 13% when compared to Q1 FY '20, which was INR 70 crores. Further, PAT for the previous year same quarter, Q2 FY '20, before exceptional item on account of demerger expenses was INR 38 crores. So this is a brief financial overview of the company at the aggregate level. Now if you look at the segmental performance, as you all are aware, the company's revenue from operations comprises of 6 different product categories, which is caustic soda, chloromethanes, refrigerant gases, PTFE, new fluoropolymers, and fluorospecialty chemicals. Our caustic soda revenue for Q2 FY '21 stood at INR 72 crores as compared to INR 63 crores in Q1 FY '21. For chloromethanes, it stood at INR 83 crores as compared to INR 64 crores, while there is improvement in the chemicals revenue during the quarter, even though there is some hangover since COVID remains; refrigerant stood at INR 88 crores as compared to INR 93 crores; PTFE stood INR 205 crores as compared to INR 199 crores; new fluoropolymers is virtually flat at INR 64 crores; fluorospecialty chemicals grown to INR 73 crores from INR 63 crores. Similarly, revenue when it is compared to the previous year same quarter, that is Q2 FY '20, caustic soda fell from INR 100 crores to INR 72 crores; chloromethanes is nearly flat from INR 85 crores to INR 83 crores; refrigerants down to INR 88 crores from INR 126 crores; PTFE down INR 205 crores from INR 240 crores. However, fluoropolymers scaled up from INR 62 -- INR 44 crores to INR 64 crores, that is up 47%; fluorospecialty chemicals up 43% from INR 51 crores to INR 73 crores. So this was a broad breakup of the segmental revenues. And within the product line also, we normally provide you the breakup of the PTFE into the regular grade versus value-added grade. So talking about the breakup of PTFE to regular grades and value-added grades, in Q1 FY '21, regular grade was INR 84 crores; Q2 FY '21, it went down to INR 76 crores. In Q1 FY '21, value-added grade of PTFE was INR 115 crores, which went up to INR 129 crores in Q2 FY '21. As a result of this, value the proportion of regular grades, value-added grades improved from 42:58 to 37:63. For the same period last year, that is Q2 FY '20, regular grade was INR 95 crore, which went down from -- went down to INR 76 crores in Q2 FY '21. Value-added grade was INR 145 crores as compared to INR 129 crores now. As a result of this, in this period also, the proportion of regular grade to value-added grade improved from 39:61 to 42:58. Board has also approved -- and balance sheet as on September 30, 2020. And we have also given in the presentation broad balance sheet breakup. The balance sheet remains at about INR 6,325 crores, that's comprising of INR 3,630 crores of fixed assets, INR 442 crores of cash and financial assets, INR 833 crores of inventory, INR 498 crores of receivables and a MAT credit entitlement of INR 626 crores. And there are -- apart from this, there are other FX INR 249 crores and income tax refund receivable is of about INR 47 crores. On the liability side, equity comprises of INR 3,851 crores, borrowings of INR 1,553 crores; financial liabilities and trade payables INR 436 crores; and another liabilities INR 69 crores; and INR 415 crore was of deferred tax liabilities. So that's the balance sheet breakup. So as you are aware, from the last quarter onwards, we have started apart from giving the quantitative data, qualitative description of the business and how each segments are performing. So apart from the financial performance in the presentation, we have included a qualitative section of each business segments that are performing. And I will very briefly take through each of them. As far as the caustic soda is concerned, the plants are currently running at about 90% capacity utilization. Caustic soda prices continue to be adversely impacted, both because of curtailed demand because of COVID and surplus capacities, which has come up off late. The future outlook, therefore, prices are expected to continue to remain depressed for the next 2 to 3 quarters. Our endeavor is to reach full capacity utilization by the end of current quarter in the quantitative terms. As far as chloromethanes are concerned, production was impacted in Q1 FY '21 due to COVID lockdown. The plants are now running at full capacity and demand for MDC, which was mainly used in pharma sector, remains quite strong. Prices as well as demand, both are expected to remain stable. As far as our refrigerant are concerned, demand is expected to remain suppressed in Q3 FY '21 due to seasonality and expect to normalize by Q4 FY '21. Production will continue to increase due to rising feedstock requirement. And as far as prices are concerned, we expect prices of refrigerants to remain stable. On the PTFE side, PTFE sales again was adversely impacted as well as demand fell both in the domestic and overseas market because of COVID-related lockdown. In Q2 FY '21, domestic demand came back to about 85% and overseas demand came back to about 75% of pre-COVID levels. By end of Q3 FY '21, it is expected that the domestic demand should reach about 90% of the pre-COVID levels and overseas demand by 80% of the pre-COVID levels. With demand growth coming back, it is expected current level of capacity utilization, which is about 75%. We will be running at the full capacity by early next financial year. And prices are also expected to remain stable in coming quarters. On new fluoropolymers, we have set up capacity of around 700 tons of 6 new fluoropolymers, which is FKM, PFA, FEP, PVDF, PPA and micropowders. Various grades under each of these have been established and are in process of customer qualifications and commercial ramp up. There has been delays in getting final customer approvals for few grades as many overseas customers were still suffering with limited manpower because of COVID. Sales of established products were also impacted because of COVID-related demand erosion. Current capacity utilization remained at about 35%. However, as most of the grades are now developed, we expect to reach 50% capital utilization by end of this financial year and 100% by the end of next financial year. Similarly on the fluorospecialty chemicals side, several products have been fully commercialized. Current capacity utilization remains at about 45%. The last quarter saw relatively low capacity utilization due to COVID-related hangover, impacting raw materials availability. Demand for all these products remains strong, and we expect to achieve 80% capacity utilization by Q3 FY '21. Additionally, 4 products are under final stage of implementation, and will be fully commissioned by the end of this financial year. Because of increasing demand and also strategic needs of both domestic as well as versus overseas customers to derisk from China, we are witnessing an increasing demand for new molecules by agro as well as pharma industry. Several new products have been developed in-house by our R&D team, based on which additional CapEx of about INR 300 crores to INR 350 crores is envisaged. So that's the brief qualitative outlook of each of these segments. In terms of overall outlook at the company level, we expect that the company performance in the coming quarter is driven by the improved capacity utilization in PTFE, new fluoropolymers and new fluorospecialty chemicals. All growth is expected to come from the product of segments that have a higher profit margin, hence the margin profile of the company is also expected to improve significantly, on this account as well as due to cost reductions in the raw material prices and other expenses. Most of the CapEx required for the capacities is already incurred, and hence no significant additional CapEx is expected for present product levels. And lastly, we also expect our debt levels to come down further, improving our financial leverage, essentially from 3 forces, operating, cash flow, working capital optimization and balance -- income tax refund, which is expected, to be received in Q3 FY '21. So that, ladies and gentlemen, is a walk-through to the presentation. I would like now to open this up for any questions that you might have that we will try to answer. Thank you.

[Operator Instructions] The first question is from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on sequentially better performance. So the first question is on the fluorospeciality. So as I understand during last con call, we have indicated that fluorochemicals, we have done almost a CapEx of INR 600 crores to INR 700 crores. So when do we expect the deep utilization? So in the presentation and just now you also said that we'll be reaching about 80% utilization by Q3. So when will be -- I mean, is this INR 700 crores we are talking about utilizing at 80%? Or is there some CWIP as well? And what would be the revenue potential of this entire CapEx?

Right. Thank you, Rohit. As we had mentioned earlier, the revenue potential from the current molecules for which capacities have been implemented, we would expect to get to a run rate of INR 600 crores to INR 700 crores by the end of first -- by the end of the last quarter of this year.

Okay. Okay. And so this is the peak potential you are talking about? Or this is -- probably, there is further growth from this expected in FY '22?

Yes. Well, as we have also mentioned, there are a few more products, which we have -- which we're -- in the planning stage and the implementation will start before the end of the year. And the total investment on these currently identified projects, which have -- where R&D has been completed in private plants have been -- private plant operations have been concluded, we would expect these to be commissioned by the end of 2021 to the first quarter of the calendar year 2022.

Okay. And same question on the fluoropolymers' front. So how is the outlook on that division or segment?

So we have -- again, as we have mentioned, we are currently at about 35% capacity utilization in this quarter. And by end of March, by the last -- by the end of the fourth quarter, we'll be at about 50% capacity utilization, and we'll reach 100% capacity utilization by 31st March '22.

And the revenue potential at 100% utilization level?

Would be again about INR 700 crore to -- around INR 700 crores plus.

[Operator Instructions] The next question is from the line of Viral Shah from Enam Holdings.

Sir, first, my question is on the debt. Could you just help me with what you have...

I am sorry to interrupt you, Viral. Can you please speak on the handset mode? Your audio is not very clear.

Okay. Is this better?

Yes. Thank you.

Yes. So just first, my question on debt. Could you give me the exact number of your gross and net debt, please?

Yes. Our -- as on 30th September '21, FY '21, our gross debt is around INR 1,500 crores, and debt is around INR 1,100 crores.

INR 1,100 crores.

Which is down by INR 300 crores from the March 31, '20.

Okay. Okay. And how much of IT returns would still be remaining?

IT refund is around INR 75 crores, is still remaining, which will be received in this quarter.

Okay. Okay. And my second question is on the wind bid that we are planning to install. So when can that installation we expected? And when can we see the full benefits of the wind energy being installed?

So we'll be putting up this investment in phases. The first phase will be commissioned by April-May-June quarter. And thereafter, we will continue to implement further capacity.

So would FY '23 be the year when we will probably see all the benefits of the wind project?

Yes, that is right.

Okay. And could you just run us through, again, how much would be the savings because of this power project?

Manoj, do you have the numbers? I think we had given the numbers earlier.

INR 230 crores.

It would be around -- the savings would be around INR 200 crores a year when we have implemented the complete wind farm.

Sure. Sure. Okay. Is this some...

It's just around 25% ROE.

Okay. Okay. Okay. Just some bookkeeping question, sir. Would it be possible to share the tonnage breakup between regular and value-added grade PTFE for the quarter?

Normally, we have stopped giving the quantitative details. So we can provide it offline afterwards.

Okay. Okay, sure. And just one on the -- would it be possible to share the exports number for the quarter?

For exports and domestic is around 50-50 because some of the chemicals are not allowed to be export. So overall export percentage in terms of turnover is 50-50. But as you move down line with the polymer, it will improve and it will be more 60% -- 65% is export and 35% is domestic.

Okay. Okay. Okay. And just lastly, on this presentation, Slide 9, where you have said INR 26 crores is contra on consolidation. Could you just help us understand what exactly this contra on consolidation would be?

We have got overseas subsidiaries, our -- in Americas and Europe. GFL Limited sells those goods to them, and they receive those goods and then they onward sell it. So in stand-alone, whatever GFL Limited Sales to LLC and GmbH, which our Europe and Americas subsidiaries, that will be recorded as sales, that will be recorded as purchases in those subsidiaries. And upon consolidation, those purchases will be knocked out with each other and their sales will be recorded.

So ideally, it should have got knocked out, right, but when we're trying...

Let me complete. At the same time, the inventories which are lying there has to be valued at cost of production per the movement expenses. So you have to eliminate the profit margins also on that.

Okay.

As per the -- because as per the accounting standard, wherever your inventory is lying, irrespective, so all the cost up to the place of removal, you have to include and value add inventory at cost only. You cannot value add inventory at the sales price to your subsidiaries.

Sure, sure, sure. No, fair, that I understand. But I was just trying to kind of tally the numbers, and I have to add INR 26 crores to get to the INR 670 crore number, while ideally, it should have got knocked off, right?

But that is -- again, it is a function of the increasing and decreasing inventories and because of that margin fluctuates.

[Operator Instructions] The next question is from the line of Riddhesh Gandhi from Discovery Capital.

Congratulations on your performance. Sir, a couple of quick questions. We have about INR 200 crores of actual investments which we have made in the first half of the year. Could you just highlight in terms of actually -- I mean, what those investments are? Are these just in liquid funds, I mean debt funds? Or is it something else?

Miloni, can you help in getting the voice clearer because we are unable to get the question from the participant.

May I request Mr. Riddhesh Gandhi to use handset mode, sir, in case you are on speaker.

Sure. We've got about INR 200 crores of actually investments, which we have made in the first half of the year. This is as per the cash flow statement. Just wanted to understand actually, I mean, what those investments have been made in? Are these just in liquid funds, I mean, in debt funds?

Yes. Mostly into the -- it is market investment.

But is it like equities in terms of -- what is it -- is it -- I mean, debt piece? I just wanted to understand the piece of...

It is a mix of all, actually, it's a mix of some FMPs, liquid funds and equity.

And equities also. Any idea how much of the breakup is in the form of equity, of this INR 200 crores?

It's 50-50.

50-50. Got it. Got it. Got it. And the other question is on the other income. If you could you just highlight for the other income? Or is this sort of FX in translation? Or...

No. Other income, which is our -- some of the interest on the inter-corporate deposits, et cetera. It is not because of the...

Understood. I just wanted to understand that if we are making the investment rather than making equity investments shouldn't we ideally pay down the leverage and reduce the leverage rather than investing in equity instruments of INR 100 crores? I just want to understand the mix.

No. See, the entire investment is decided by the Board based on the market outlook, the cash flow and the liquidity position and the requirements of the fund. So at an opportune time, which is the investment to be made to be decided by the Board and the new committee. It is based on that, so it keeps on changing.

[Operator Instructions] The next question is from the line of Dhruv M from HDFC Asset Management.

Sir, question on PTFE. We understand the demand scenario is a bit weak globally. But we haven't seen a lot of correction in the realization. So it seems like they're trending around $9, $10. So sir, any thoughts? Is it because a lot of capacities have gone off the market that the realizations are sustaining? Or I mean, what's holding the realization? Is it -- I mean, what I'm trying to understand probably is as the demand recovers, can there be a possibility that the realization give us a decent positive supply?

You see, we are not really looking at any improvement in the current prices because, frankly speaking, it's very, very difficult to gauge whether prices will go up. But at this point of time, there doesn't seem to be any indication of the prices going up. The reason why we have been able to hold on to our prices despite the recessionary trends because we are supplying -- a lot of our PTFE is supplied to companies under some kind of a contract arrangement, and several of them are large consumers. So the price negotiations doesn't take place regularly. So given that and the fact that almost about 55%, 60% of our PTFE is in value-added grades, normally, the price changes in those value-added grades is minimal. It's only in the granular grades where because of the fact that there could be some competition, which comes in from China or Russia, that you have some price case. But otherwise, by and large, prices are same.

Okay. So it's not due to a lot of capacities? I mean, your sense of the market that some of the capacities globally might have gone out?

No, no, no, not at all. It's because of that. And second, as we said, that this weakness in demand, which was there, both because of COVID and because of some of the earlier legacy issues, which is the automobile sector was very badly impacted last year, and that continued on and for a quarter or 2 quarters it doesn't. But that seems to be coming up now. And as far our current projections, we are expecting to reach our full capacity utilization by the first quarter of the next financial year, which is May or June, we should be at full capacity likely, because January onwards, we are expecting, that is what most of our customers are saying that they expect demand to become normalized and the consumption pattern is likely to grow.

Okay. Sir, when you say full utilization, that would include the value-add also?

Yes, of course. Yes, so our total capacity is about 1,500 tons, 1,550 tons. So out of that, about 800 tons to 900 tons will be value-added and about 600 tons to 700 tons will be the granular grade. So at that time, it will probably be about 60-40, 60% for value-added and 40% for granular grade.

Got it. Got it. And sir, if I look at the margins, EBITDA margins, they are -- about last 2 quarters have been about 25%, 23%. Considering that some of the products like caustic soda, methane, refrigerants have been seeing some weak demand and probably, as you indicated, some pricing pressure also, the margins are still holding quite well. So I was trying to understand what is driving this? Is it a significant reduction in the raw material cost, which is aiding the margins? And any thoughts how do you see this raw material cost benefit that we are getting, if it is the case?

Well, we certainly are seeing raw material benefits. But I don't think that there is -- at this point of time, there doesn't seem to be very major changes happening there. And the margins, yes, because -- perhaps the margins would have been higher had it not been for the caustic soda pricing because that has had a severe impact both on margin and as well as the bottom line. We would expect in the coming quarters, as caustic soda improves, then the margins will go up. That's also the fact that our new -- the recent fluoropolymers and the specialty chemical business, the margins are better. So that is also one of the contributing factors why our margins still remain at this level.

Sir, any raw material that you would like to highlight, which is aiding the margins which is helping us?

Well, chloroform has gone down. Chloroform prices have gone down. We buy about 50% of our requirement that has gone down. That had some impact. And methanol went down, but it started going up again. So I suppose there are 1 or 2 raw materials where we'll continue to have a positive impact even during the course of next year. And somewhere, I'm sure that some of the raw material costs will also increase. So net-net, I think raw material cost increases or decreases are likely to net off each other.

Got it. Sir, 2 questions more. On the specialty chems, you mentioned about 80% utilization by the end...

End of this year, which is December, this year, yes.

End of this year. Sir, some highlights on where are you seeing this demand? And any -- what could be the risk factors? I mean, could completion be a risk factor in terms of the -- say, for example, you're trying to sell more, there is some competition and aggression from the other competitors? Is that could be a risk? I'm just trying to understand.

As we see it currently with the capacity we have set up for these products, we are not expecting any significant price competition because some of these products are exclusively manufactured by us. And there is -- and some of these products, for instance, are also sold to the domestic pharma industry, where we are seeing a robust consumption. So our capacity -- as we increase our capacity utilization into January, February, March of the next calendar year, we would expect improvement because of the volumes. We don't see any price pressure on the products which we are currently monitoring.

Got it. And sir, this INR 700 crores, INR 600 crores of revenue potential, would -- the products it would be spread across, say, 10, 15 products, what would be the range? And the broader segment mix, if you can provide, agro or pharma or industrial?

So with the addition of 3, 4 additional products, which we will be adding from end of this month, and if we look at March '21, I would say that about 55% goes to pharma, 45% goes to agro, and between export and domestic, it would be almost about 50%, 50%.

Okay. The pharma would be largely domestic?

Yes. That's right.

Okay. Okay. Got it. And yes, broadly -- just a second. And sir, I mean from demand side, you don't see a concern, to reach the INR 700 capacity?

No. Yes, yes, that's right, not for the products, which we are currently manufacturing, no.

That you are looking at. Okay. Got it. And sir, the capacity expansion of INR 300 crores, that would come by end of FY '21?

I would say that would start coming in from December to March '22, December '21 to March '22. There are 3, 4 products which we're looking at, and they will -- the commission of the plants will be phased out from, I would say, November -- October, November '21 to March '22.

Okay. And any broad idea on -- I understand the revenue potential will be about INR 300 crores, INR 400 crores?

That's right. About INR 400 crores or so.

INR 400 crores. And a similar mix to pharma and agro and domestic and exports?

This will be more domestic, will be -- maybe about 75% would be domestic, 25% exports. And maybe about 60% agro -- and about 70% agro, 30% pharma.

Okay. Sir, just I missed on the earlier -- I mean, excluding the new project that you're planning, the number of products are, you mentioned 3 new products, the total number of products will be -- the...

With the new CapEx? You are talking about the new CapEx?

Excluding -- so in the new CapEx, you have about 3 to 4 products...

We have 5 products. We'll have 5 products in the new CapEx.

It will be 5. And the existing CapEx will be around how many products?

Existing would be about -- how much revenue...

7 products, and the additional 4 products will be there.

Sorry?

7 products have been fully commissioned and commercialized and further 4 products will be there.

The next question is from the line of Deepak Gupta from Reliance Nippon Life Insurance.

I just wanted to understand this CapEx of INR 300 crore, INR 350 crores that you guided for -- in FY '21, this will be funded completely from internal sources?

Yes. Yes, absolutely. It will be completely funded from internal sources.

And this CapEx should come on soon by the end of this year? Or are we expecting it more...

No, the CapEx will come up by March '22. All that investment will be commissioned by March '22, as I just spoke a few minutes earlier.

Sure, sir. Okay. And sir, you've given a guidance earlier that you expect your net debt to reduce by INR 400 crores, so does that add...

Yes, that's right. By -- in the second half, we will be seeing a reduction of about INR 300 crore -- about INR 350 crores growth of debt further.

By end of FY '21, our net debt should be at about INR 850 crores or so?