Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the Rs 50 crore non-convertible debentures and bank facilities of Gujarat Fluorochemicals Ltd (GFL)’ at ‘CRISIL AA+/Stable/CRISIL A1+’.

 

The ratings reaffirmation reflects established market position of GFL in the chemicals business, healthy operating efficiency driven by integrated operations, and strong financial risk profile. While GFL’s operating performance remained weak in fiscal 2024, the reaffirmation reflects expectation of significant recovery in operating performance in fiscal 2025. Further, the ratings also reflects the strong financial risk profile emanating from healthy debt protection metrics and strong net worth.

 

GFL’s operating performance has been subdued in fiscal 2024 with operating revenue of Rs 4281 crore and EBITDA margin of 21% compared to Rs 5,685 crore and 36% respectively for fiscal 2023. This is due to significant moderation in realisations in fluorochemicals and bulk chemicals segment compared to above average realisations in FY23. Further the global destocking phenomenon for fluoropolymers (FPs) segment in the major export markets of USA and Europe led to both decline in volume and realisations impacting the overall profitability. Furthermore, company has invested ~1200 crore for setting up capacities in new FPs where commercialization takes times due to long customer qualification process leading to slower than expected ramp up thereby impacting profitability.

 

The rating reaffirmation reflects expectation of significant recovery in operating performance in fiscal 2025 which will remain key monitorable. GFL has seen sequential recovery in operating performance with EBITDA margin over 20% in 4QFY24 compared to ~16% in 2QFY24. While the fluorochemicals and bulk chemicals segment are expected to remain flattish in fiscal 2025, CRISIL Ratings expects that the recovery will driven by the FP segment. This will be driven by bottoming out of destocking phenomenon and exit of few legacy players leading to demand recovery in FY25. Furthermore, certain new FPs including EV battery chemicals are under sampling stages with customers with commercialization expected from second half of fiscal 2025 onwards.

 

The new FP segment comprises products such as salts like Lipf6, binders like PVDF and electrolytes like LFP which have end-use applications in high growth sectors used electric vehicles batteries, hydrogen fuel cells and semiconductors. GFL is well positioned to cater to these segments with expertise in fluorine chemistry, significant investments undertaken and China plus one sourcing strategy for end users and this segment will drive revenue growth over the medium term. Hence, improvement in the product mix will lead to lower volatility and sustenance of strong operating margin. This ramp up in new age FPs will remain monitorable.

 

The financial risk profile remains strong with external net debt of Rs 1797 crore and robust debt protection metrics with interest coverage ratio expected to sustain at over 7 times. GFL is incurring significant capital expenditure (capex) given the growth opportunity in the new FP segment with ~Rs 1,300 crore planned per annum in the next few fiscals. Majority of the capex is likely to be funded through internal accrual and promoters have healthy financial flexibility to raise equity funding for these significant capex plans. Any significant debt funded capex will remain monitorable.

 

CRISIL ratings also notes the steps that management taken to reduce debt in group companies by raising funds through various measures and improvement in operating performance of the wind business leading to reduced support from GFL. Adjusted net debt (including guaranteed debt of IWL, Inox Wind Ltd.) to EBITDA deteriorated to over 3 times in fiscal 2024 compared to ~1.5 times in fiscal 2023. However, CRISIL Ratings expects recovery in operating profitability of GFL and the guaranteed debt towards IWL significantly decline leading to adjusted net debt to EBITDA sustaining below 1.5 times going forward. This will remain key rating sensitivity factor.

 

The ratings continue to reflect the established market position of GFL in the chemicals business, healthy operating efficiency driven by integrated operations, and strong financial risk profile. These strengths are partially offset by the financial support extended to group companies and susceptibility to inherent volatility in the chemicals business.

Analytical Approach

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

 

CRISIL Ratings has included the debt of Inox Wind Limited (rated by CRISIL Ratings), which has been guaranteed by GFL, to arrive at the 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:

• Established market position: GFL is the largest polytetrafluoroethylene (PTFE) manufacturer in India and amongst the top players globally. The company has a diversified product portfolio, comprising PTFE, new fluoropolymers, specialty chemicals, caustic soda, chloro-methane and refrigerant gases. The new fluoropolymer products and contributed to ~25% of the overall revenue in fiscal 2024. The new fluoropolymer segment is expected to drive growth over the medium term. Market position here will be benefited by the growing demand in end use industries like electric vehicles and semi-conductors and China plus one sourcing strategy for end users. Ability of GFL to ramp up revenues in this segment going forward will remain monitorable.

 

• Integrated operations driving operating efficiency: The chemicals business is integrated forward into manufacturing PTFE and backward into 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 production cycle as these products are manufactured from the same raw materials, such as fluorspar and R-142b. This reduces dependence on external sources for raw materials and ensures healthy operating margin and capacity utilisation. While the Ebitda margin was subdued at ~21% for fiscal 2024, it is expected to recover and remain over 27-28% over the medium term driven by improved product mix.

 

• Strong financial risk profile: The financial risk profile is backed by strong networth, comfortable gearing and robust debt protection metrics. The financial risk profile has improved as the management has brought down advances provided to group companies by infusing funds in these companies. Debt protection metrics should remain strong with interest coverage ratio expected at over 8 times and expected reduction in debt guaranteed by GFL. Adjusted gearing should remain below 0.6 time going forward. Given the subdued operating performance in fiscal 2024 while capex intensity remains high, return of capital employed was subdued at ~10% in FY24 but is expected to recover in the near term. 

 

GFL has plans to undertake capex of ~Rs 1,300 crore per annum in the next few fiscals mainly towards the new FP segment particularly the EV chemicals, which will be funded largely through internal accrual. Moreover, promoters have healthy financial flexibility to raise equity funding to meet the capex requirement. Any significant debt funded capex will remain monitorable.

 

Weaknesses:

• Support to group companies, albeit expected to reduce materially: GFL has supported group entities over the years through loans, advances, corporate guarantees and lien marking its own liquidity for loans of group entities, resulting in an increase in its own debt.

 

With focus on deleveraging and improvement in operating performance in group companies, this support from GFL has already been reduced significantly and is likely to be minimal going forward, which remains a monitorable.

 

• Inherent volatility in the chemicals business: The chemicals business is largely export-driven and is thus vulnerable to volatility in international markets. Addition of large capacity in overseas markets could constrain the performance of GFL. While the large scale of integrated operations drives operating efficiency, the business remains susceptible to fluctuations in global supply and price trends especially in bulk chemicals and refrigerant gases. For instance, GFL’s operating margin was significantly impacted in FY24 due to destocking in Europe because of economic slowdown. However, the higher mix of new fluoropolymer products with increasing demand and higher margins should help reduce volatility in earnings over the medium term.

 

Despite prudent foreign exchange (forex) management policy, the company is vulnerable to any large fluctuations in currency exchange rates.

Liquidity: Strong

Liquidity is backed by expected annual cash accrual of over Rs 1,000 crore over the medium term, against annual term debt obligation of Rs 50 crore. Liquidity is also supported by unencumbered cash equivalent/liquid investment of about Rs 198 crore as on March 31, 2024. GFL plans combined annual capex of Rs 1,300 crore over the next few fiscals, which will be financed mainly by internal accrual. It has access to fund-based limits of Rs 2000 crore, which were utilised at 80% on average in the 12 months through March 2024.

Outlook: Stable

CRISIL Ratings believes GFL’s business and financial risk profiles will remain healthy over the medium term, owing to strong demand across products.

Rating Sensitivity factors

Upward factors

• Significant revenue growth from new products resulting in leading market position in those segments along with operating margin sustaining above 30%
• Material reduction in debt and support to group entities leading to improvement in the capital structure

 

Downward factors

• Slower than expected ramp-up in new segments leading to subdued operating profitability
• Significant, debt-funded capex or acquisitions or increase in support to group entities weakening the financial risk profile with adjusted net debt to EBITDA sustaining above 1.75 times

About the Company

GFL houses the chemicals business of the INOXGFL group. The company has a diverse product portfolio which includes caustic soda, chloro-methane, PTFE, HCFC and value-added products. It is one of the largest chemicals players in India, with a combined installed capacity of 72,000 tonne per annum (TPA) of HCFC, 19,750 TPA of PTFE, 138,450 TPA of caustic soda, and 109,620 TPA of chloro-methane.

Any other information: Not Applicable