Detailed Rationale

CRISIL Ratings has withdrawn its rating on the commercial paper programme of Gujarat Fluorochemicals Ltd (GFCL) on company’s request. The withdrawal in ratings is in line with CRISIL's policy of withdrawal of ratings.

 

CRISIL Ratings has also reaffirmed its ‘CRISIL AA/Negative/CRISIL A1+’ ratings on the bank facilities of GFCL.

 

During fiscal 2021, operating performance of GFCL remained marginally impacted with operating revenue of Rs 2,650 crore due to the impact of Covid-19 induced disruptions in the first half of the fiscal. Earnings before interest, taxes, depreciation and amortisation (EBITDA) was Rs 638 crore (operating margin of 24.1%), as against Rs 553 crore (21%) for the previous fiscal. The polytetrafluoroethylene (PTFE) segment remained little bit impacted due to continued slowdown in demand. Moreover, delays in getting approvals for its new fluoropolymers due to the impact of the COVID 19 pandemic also impacted the performance.

 

However, the company reported healthy recovery in the PTFE segment as well as new fluoropolymers in the fourth quarter of fiscal 2021. Consequently, EBITDA was Rs 195 crore in the quarter.

 

The improvement in performance is expected to continue in fiscal 2022, driven by the continued healthy performance in the PTFE segment and further ramp up in revenue from the new fluoropolymers. Operating income in Q1 of fiscal 2022 increased by over 60% to Rs 912 crore with healthy EBITDA margin of 26.7%. The company is expected to maintain a healthy EBITDA and margins for fiscal 2022 and the same will remain a key rating sensitivity factor.

 

While total debt reduced to Rs 1543 crore as on March 31, 2021 from Rs 1,722 crore a year earlier. However, debt adjusted for guarantees provided to Inox Wind Ltd (IWL; rated ‘CRISIL BBB/Stable/CRISIL A3+’) remained high. During fiscal 2022, total debt is expected to reduce significantly driven by the expected healthy accrual and limited capital expenditure (capex) plans. Reduction in debt in-line with expectations, will be a key monitorable.

 

In fiscal 2019, the company had recorded an extraordinary income of Rs 828 crore as tax recoverable of earlier years. The company has received this in form of a cash tax refund and MAT Credit Entitlement. Since, the matters were contested by the Income Tax Department at Supreme Court, in fiscal 2021, the company opted for the 'vivaad se vishwas scheme' and reported the loss of Rs. 582 crore for fiscal 2021.  The total impact of the tax written off reported in Profit and loss was mainly on account of a reduction in MAT credit entitlement.

 

The ratings continue to reflect GFCL’s established market position in the chemicals business, healthy operating efficiencies driven by integrated operations, and a healthy financial risk profile. These strengths are partially offset by the need for financial support to group companies, and inherent volatility in the chemicals business

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of GFCL and all its subsidiaries, as all the entities (collectively referred to herein as GFCL) operate in similar businesses and are under a common management.

 

CRISIL Ratings has included the debt of IWL, which has been guaranteed by GFCL to arrive at its adjusted debt.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Robust market position:

GFCL is the largest PTFE manufacturer in India, and among the top four players globally. It is also a leading manufacturer of hydro-chloro-fluoro-carbon (HCFC), which is used in refrigeration and air conditioning, among other industries. Product portfolio is well-diversified, comprising PTFE, new fluoropolymer products and Speciality products, caustic soda , chloro-methanes and refrigerant gases . The new fluoropolymer products have shown a significant compound annual growth rate of over 50% in the past 5 years. These products registered a robust 40% growth in fiscal 2021, despite the pandemic led disruptions. Over the medium term, the new fluoropolymer and Specialty products are expected to be the growth drivers.

 

Integrated operations driving operating efficiencies:

The chemicals business is forward-integrated into manufacturing PTFE and backward-integrated into manufacturing HCFC, anhydrous hydrogen fluoride, chloroform, and chlorine. The new fluoropolymer products such as polyvinylidene fluoride (PVDF), fluorocarbons (FKM) and phosphoric acid (PPA) fit seamlessly in the existing production cycle as they are manufactured from the same raw materials such as fluorspar and R-142b. This reduces the dependence on external sources for raw materials, and ensures a healthy operating margin and capacity utilisation. The new fluoropolymer products have higher margins and should support improved profitability over the medium term.

 

Healthy financial risk profile:

Financial risk profile was healthy, backed by a strong networth and comfortable gearing. Debt protection metrics were healthy with interest coverage ratio of 10.66 times in fiscal 2021. However, gearing increased to 0.60 time as on March 31, 2021 from 0.48 time a year earlier owing to the additional debt guaranteed for IWL.

 

GFCL expects to significantly reduce its debt over the current fiscal, on the back of healthy cash accruals. Sustained improvement in cash accrual leading to reduction in debt should support debt protection metrics.

 

Weakness:

Support to group companies:

As the chemicals business is marked by high cash generation, the company has supported group entities over the years, via loans, advances, corporate guarantees, and lien marking its own liquidity for loans undertaken by group entities. This has led to an increase in debt for GFCL.

 

With expected improvement in the performance of group entities, the requirement of such support should significantly reduce during fiscal 2022, and will remain a monitorable.

 

Inherent volatility in the chemicals business:

The chemicals business is largely export driven and thus, remains vulnerable to the volatility in international markets. Addition of large capacities in global markets could also constrain performance. While the large integrated scale of operations drives operating efficiency, business remains exposed to fluctuation in global supply and price trends.

 

Operations are export driven, therefore despite the management having prudent forex management policy, company remains exposed to any large adverse currency fluctuations.

Liquidity: Strong

Liquidity remains strong, with expected healthy cash accrual of over Rs 800 crore estimated in fiscal 2022 as against term debt obligations of Rs 148 crore. Liquidity is further supported by unencumbered cash equivalents/liquid investments of about Rs 98 crore as on March 31, 2021. GFCL has a capex plan of Rs 350 crore per annum to be financed through internal accrual. GFCL also has access to fund-based limits of Rs 1200 crore, which were utilised 56% for the month ending June 2021

Outlook: Negative

CRISIL Ratings believes GFCL’s business and financial risk profiles may weaken in the near-to-medium term, owing to substantial debt.

Rating Sensitivity factors

Upward factors

• Strong revenue growth from new products, with sustained improvement in operating margin, leading to higher cash accrual
• Lower-than-envisaged debt and improved EBITDA margin, leading to gross debt to EBITDA ratio sustaining below 1.5 times

 

Downward factors

• Slower volume ramp-up, leading to lower-than-expected operating revenue, profitability and cash accrual
• Higher-than-envisaged debt with weak operating margin, leading to sustenance of gross debt to EBITDA ratio above 2 times in fiscal 2022
• Significant, debt-funded capex plan or acquisitions, weakening the financial risk profile

About the Company

GFCL, earlier known as Inox Fluorochemicals Ltd, houses the chemicals business of the Inox group that has been demerged from GFL Ltd, into a separate legal entity with effect from April 1, 2019. The diverse product portfolio includes caustic soda, chloro-methanes, PTFE, HCFC and value-added products. The company is one of the largest chemicals players in India, with a combined installed capacity of 65,000 tonne per annum (tpa) of HCFC, 16,200 tpa of PTFE, 134,750 tpa of caustic soda, and 108,500 tpa of chloro-methane.

 

For the three months ended June 30, 2021, the company's profit after tax (PAT) was Rs 151 crore on operating income of Rs 912 crore, as against PAT of Rs 70 crore on operating income of Rs 559 crore during the corresponding period of the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31	Unit	2021	2020
Revenue	Rs crore	2650	2606
PAT	Rs crore	-222	189
PAT margin	%	-8.4	7.3
Adjusted debt/adjusted networth	Times	0.60	0.48
Interest coverage	Times	7.08	6.25

 

Any other information: Not applicable

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Gujarat Fluorochemicals Americas LLC, U.S.A	Fully consolidated	Strong business and financial linkages
Gujarat Fluorochemicals GmbH, Germany	Fully consolidated	Strong business and financial linkages
Gujarat Fluorochemicals Singapore Pte. Limited	Fully consolidated	Strong business and financial linkages
GFL GM Fluorspar SA	Fully consolidated	Strong business and financial linkages