Gujarat Fluorochemicals Limited (FLUOROCHEM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Gujarat Fluorochemicals Limited Q1 FY '26 Post Results Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Nagraj. Thank you, and over to you, sir.

Thanks, Sudha. We thank the Gujarat Fluorochemicals management for providing us the opportunity to host the company's 1Q FY '26 Post Results Conference Call. From the management, we have today Dr. Bir Kapoor, CEO and Deputy Managing Director; and the senior members of the management team. Without taking further time, I would like to invite Dr. Bir Kapoor to share his opening remarks, post which we can have a Q&A session. Over to you, sir.

Thanks, Rohit. Good afternoon, everyone, and a very warm welcome to all of you for GFL's Q1 FY '26 Earnings Call. For this call, I have with me my colleagues, Mr. Akhil Jindal, our Group CFO; Mr. Manoj Agrawal, CFO of GFL; Mr. Kapil Malhotra, Business Head of Fluoropolymers; and Mr. Rajiv Rao, who is Business Head of our Battery Chemicals business. The company announced its quarter 1 FY '26 results at its Board meeting held today. The results, along with earnings presentations are already available on the stock exchange and on our website. I'll briefly highlight the key financials and then give you an update on our business operations and outlook. I'm pleased to share that from this quarter onwards, we will commence reporting segmental data. From now onwards, we'll start providing the segmental numbers. So let me give you the Chemical segment's update first. The Chemical segment reported a 9% year-on-year increase in revenue to INR 1,280 crores in quarter 1 FY '26. EBITDA grew by 33% year-on-year to INR 354 crores, with EBITDA margin expanding by 495 basis points to 28%. Profit after tax for the quarter stood at INR 196 crores, making a 69% year-on-year growth. Consolidated revenue from operations stood at INR 1,281 crores, reflecting a 5% increase year-on-year increase. EBITDA grew significantly by 31% to INR 344 crores, with margins improving around 500 basis points to 27%, up from 22% in quarter 1 FY '25. Consolidated PAT also increased to INR 184 crores, making a 70% year-on-year growth. This strong performance was primarily driven by sustained growth in our fluoropolymers business and an improved product mix. The management is focused on working capital reduction and thereby, the working capital have reduced from 188 days to 172 days in this quarter, and efforts are on to further reduce over the next few quarters. Let me now walk you through the performance of each business segment for this quarter. Our Fluoro segment revenue has been rising steadily, and we have now surpassed our previous high to achieve the highest ever quarterly revenue. We expect this growth momentum to continue on account of growth in new polymer sales volumes, driven by already approved qualifications for high-end applications in sectors like semicon, aerospace and automobiles, amongst others. The capacity which we have added in new fluoropolymer segments over the past few years are expected to reach optimal utilization levels by the end of this financial year. Additionally, we will continue to invest in expanding our fluoropolymer capacities to support future growth. Following initial validations and approvals, we are now witnessing strong traction in these segments as reflected in our current performance and outlook. Rising demand from key sectors such as automotive, semicon and electric vehicles and energy storage systems is opening up significant growth opportunities for us. Based on current customer discussions and approvals, we are confident of achieving around 25% growth as guided earlier. In our Fluorochemicals business segment, we are excited to announce the start of commercial production of R32 in Q2 FY '26 which is several quarters ahead of schedule. This has been achieved through strategic retrofitting and at minimal capital expenditure. We aim to ramp up our R32 capacity to 20,000 metric tons in phases by the end of this financial year. Further capacity additions planned will be firmed up looking at the market opportunity. With this addition, we now offer a complete range of refrigerant products, including R22, R32, R125 and R410. The Specialty Chemicals segment remained stable during the quarter and is expected to see steady improvement going forward. Our Bulk Chemicals segment saw a slight decline in revenue during the quarter, mainly due to lower caustic soda prices and a planned CMS plant shutdown. We expect this segment to normalize in the coming quarters. Turning now to our Battery Chemicals segment. This segment is emerging as a cornerstone of our future growth, further aided by the global demand for battery energy storage to support large-scale global developments in AI/ML, workloads, global capability centers expansion, EV infrastructure and renewable energy deployment, all of which are accelerating the adoption of battery storage systems. A major catalyst is the recently introduced bill in the United States, which expands subsidies beyond electrical vehicles to include energy storage systems. The bill offer a substantial USD 45 per kilowatt hour subsidy, covering approximately 2/3 of the battery costs, making large-scale battery productions in the U.S., not just feasible, but highly attractive. Importantly, the bill also introduces supply chain safeguards requiring up to 85% of inputs in the next few years to be sourced outside the prohibited foreign entity category. over a period of time. Currently, the largest supply chain for battery material is originating in PFE category country, therefore, providing an excellent opportunity for our battery material business to present an alternate supply chain option to our customers. We are exceptionally well positioned to lead this space. Our existing capacities and initial approvals give us a strong foundation for global leadership. Besides our electrolyte and salt plant commercialization, our LFP CAM plant has successfully completed pre-commissioning activities and our LFP pilot plant is also now operational. We are actively developing customized grades tailored to customers' specifications, reinforcing our commitment to innovation and responsiveness. This is a pivotal moment for our Battery Materials business, and we are confident in our ability to capture the opportunities ahead. Let me now touch upon the recent U.S. tariff announced on India, where an additional duty of 15% has been imposed, taking the total to 25% from 10% previously. The products, however, like PTFE and micro powders and majority of our battery materials are exempt under the reciprocal duty list. The revised duty, however, apply to a few of our new fluoropolymers as these projects are -- these products are highly specialized with very few suppliers globally and having a long qualification cycle, we believe it will not be easy to develop an alternate supply chain in short to medium terms. Therefore, we do not see any significant impact on our business. To summarize, the fluoropolymer segments will benefit from incremental sales of high value-added products. Fluorochemicals will see significant increase in revenue driven by commencement of our R32 business. And our battery material business is poised for significant ramp-up in the medium to long term. We remain confident of delivering sustained growth and creating long-term value for all our stakeholders. Thank you, and we are now open the floor for questions.

[Operator Instructions] The first question is from the line of Rehan from Trinetra Asset Managers.

I have a couple of questions. First on the fluoropolymer side. Fluoropolymer revenue has reached all-time high in this quarter. So is this run rate sustainable? And what visibility do you see in the volumes for the rest of FY '26 in the upcoming quarters?

Rehan, we have already stated that we expect the fluoropolymer business to achieve a growth of 25%, and we see that happening probably by the time we complete this financial year. And we expect this revenue growth to continue quarter-by-quarter.

Sorry, I missed that part. Okay. Okay. So, I'll note it. And my second question is on the customer approval pipeline. Can you elaborate on the customer approval pipeline for the new high-purity polymer, especially for semiconductors and aerospace applications?

Sure. I will request Mr. Malhotra to.

So I also mentioned in the previous calls also that a couple of high-end applications, especially semiconductor, we have mentioned in our statement, aerospace, automobiles. So we have also got a couple of high-end polymer approvals from the Western countries also and also from Far East countries. So the commercial business also has started from these applications. With the every quarter coming up, we expect these numbers to ramp up and the business to grow up continuously and more approvals to come consequently from other customers also.

Okay. Okay. And sir, my last question is just understanding like regarding that you have stated right now regarding the U.S. tariff. So right now, we are dealing in the specialty type of chemicals in the U.S. market. So that's why we are not intended towards the [indiscernible] Is my understanding correct in this?

No, there are specific products which are mentioned...

Like R125 and R410A.

Right. I don't think our -- the refrigerant gases are part of that. The PTFE and micro powders are part of it and majority of the battery materials are part of [indiscernible] list, it's exempted from the reciprocal duty list.

[Operator Instructions] The next question is from the line of Sanjesh Jain from ICICI Securities.

A couple from my side. First, on the R32, can you help us understand what is the capacity we added now by retrofitting the existing plant? And we said in the opening remarks that we are looking to scale up to this 30,000 metric tons by end of FY '26. Is that right understanding? Or you will wait for validation of this product and then you would want to expand and take a decision or we have already started the work on expanding.

Not really. Thanks, Sanjesh. Thanks for your question. First of all, we have already -- since this is a retrofit, we have already done. We have already checked the materials, and it's already qualifying. We have also shipped our first shipment to our customers. So the plan right now is not wait and then expand. We are -- since we are retrofitting, it is done in phases. So as I said, I had stated 20,000 tonnes by the end of this financial year, Sanjesh. And then we'll decide on the further ramp-up plan based on looking at the market opportunities available to us.

Okay. So by when are we expecting this existing plant, I don't know, what capacity we have added to reach the optimal utilization? And what is the capacity with this first phase we have done?

So, Sanjesh, it will not be appropriate for me to give the exact capacity now. But of course, it's in upward to 10,000 that we had indicated. And we'll slowly ramp it up going forward.

And the remaining 20,000 will also come as a retrofit or it will be a fresh plant?

Everything will come as a retrofit. Of course, it may require some amount of balancing equipments to be added because always retrofit, there are imbalances. So when I said end of the year, because that means we'll be adding some equipment to debottleneck and ensure that we achieve that capacity that we're talking about.

And when are we expecting to reach this upwards of 10,000 capacity to its optimal utilization this quarter possible Q2?

So I think capacity utilization, we'll probably share you a little later, but we expect it to -- looking at the market opportunity that is available to us, we expect that utilization to happen rather fast.

Got it. Got it. Second, on the fluoropolymer. You said that we have a good visibility on order book and you reiterated the guidance of 25% for this year. First quarter wasn't 25%. So what is giving us the confidence? And then there is an uncertainty of U.S. tariff, which is a very large market for us. I know PTFE doesn't get impacted, but new fluoropolymer does. So what is giving us the confidence of this 25% growth?

So I'll just make one comment, and I'll hand it over to Kapil to add more. The first thing is because since we have already been approved, and as you know, the fluoropolymers, these are very specialized products. After approval, the -- normally, the orders start at a relatively small level and then keeps building up. So that is what is giving us confidence because we have a large number of approvals in place. Now coming back to the capacity, this tariff situation. U.S. is a large market for us. But if you look at the volumes are very large in case of PTFE and micro powders, which are on the exempt list. New polymers are indeed part of it, but there's a certain level of their stickiness to that business. And I'll let Kapil add to that.

Yes, Sanjesh. So as Dr. Kapoor has mentioned, in the U.S., as PTFE and micro powders are exempted, However, all the new fluoropolymers, they command a very special application, as we have mentioned, a couple of application names also. So the demand is elastic of the prices majorly. And we expect that we should be able to majorly negotiate the -- all the prices as per the tariffs slowly and steadily and should be able to continue the business. Our approvals, as I mentioned, are already on and some of the other approvals will keep on happening with every subsequent quarter. And the ramp-up will keep on happening in the business as and when we keep on getting these approvals and also the commercial business keeps on increasing as we keep on getting more orders.

And just to add, Sanjesh, that the earlier 10% that we're talking about has already been passed on. So now we are looking at this delta of 15%.

Very clear, very clear. Just on the pricing of R32, with our 20% -- 20,000 metric ton capacity coming in FY '26, do you think prices slightly softened up or you still believe with...

Mr. Sanjesh, can you sound a little louder?

Yes. Is it good now?

Yes, far better now.

Yes. On the R32 pricing, it's been quite firm for a while now, but now the capacities have started flowing in. What is the expectation on the pricing? Because we have seen this in 125 also, right? The prices went up to $18, then cooled off to $5 something like that in R32, again, do you see a risk of pricing normalizing at the levels which were earlier, say, at $3, $4? Or you still believe a $6 is a sustainable pricing?

See, of course, we expect the price to remain in the same range. And it's not -- and what you're talking about R25 was a different situation. The prices on R25 was based on a duty in very specific country, okay? In this case, R32 fundamentals of where the R32 pricing are very different. And the reasons are very different than 125, okay? And the reason primarily, of course, is the constraint on the supply side and the prices being high in one of the largest suppliers in the world, okay? So that's the reason the prices are high. So we expect it to be -- continue. And -- but obviously, it's very difficult to project, but we expect this to continue in this range.

The next question is from the line of Ankur Periwal from Axis Capital.

Congratulations for a good set of number. Just a follow-up on the R32 bit. From an end-use market where you will be selling this, so this will be largely focusing on the Indian market or the proportion on the export side will be higher?

We'll be focusing Ankur, on the global markets completely because this -- today, because we already had 125. So we have now a combination of R32, 125, which gives us an opportunity to penetrate deeper with 410 into market all across.

Sure, sir. That's helpful. Second bit on the new fluoropolymers, you did highlighted we're going to almost optimal utilization by the end of this financial year. I recollect we had some expansion plans on the FKP -- the PVDF side, almost INR 300-odd crores. By when are we expecting this capacity to come on stream? And secondly, if there are any further plans given that we'll be optimally utilized by the end of this financial year?

See the capacities in terms of the investment that we have made is online. okay? And that's -- those are the capacity that we are talking about because these investments were made quite some time back, okay? And as the qualifications are -- have been received, we are getting more traction on orders and the volumes are going up. So in terms of capacity utilization, we expect the optimal to reach by the end of this financial year. Do I answer your question, Ankur?

Yes. Sir, just a clarification. So once we reach optimal utilization number this year, I'm sure given the demand environment, there will be an incremental sort of market share gain that we'll be looking forward to. Does this INR 300 crore CapEx suffice for that for your growth in '27? Or we are looking something beyond that as well?

No, we'll be looking at more investments in this. And I think we'll give you a better perspective probably a quarter from now, but we have plans to expand and add capacities in fluoropolymer business as we are closing to the optimum capacity utilizations.

Okay. Great. That's helpful. And just lastly, because of the renewable plant there, there was a saving that we were expecting of around INR 150-odd crores. Just -- if you can share some thoughts on the time lines on when we can start seeing the benefit from that coming in.

I'll request Akhil to.

Akhil, the investment has started. The construction is going on, on-site. And to that extent, you must have noticed in one of our notes to the clause 41 that as a company, we have invested close to INR 190 crores till date as an equity. So the total plan is to be a partner in this 450 megawatt of renewable energy. And the saving will start accruing from Q3. So basically, it will come in stages. So I think the first installation will happen in Q3. And to that extent, the saving will start coming in. You should be aware that 50 megawatt is already operational. To that extent, the savings are already accounted for in our current P&L numbers. Did I answer you question?

Yes, yes. Just a clarification, the full benefit stands at INR 150 crores. So, let's say, FY '27, we'll see that full benefit?

That's right. So FY '27 will be the first year of full operation. So the full benefit will be available in that year. You're right.

The next question is from the line of Arun Prasad from Avendus Spark.

I think earlier we had a guidance for our existing business and EBITDA of INR 2,000 crores. So in light of these developments with the fluoropolymers segment, are we still sticking to this guidance? Second, on a like-to-like basis, with the ref gas coming in, probably the like-to-like guidance number should be higher, right? So if you can guide on this, it will be helpful.

Yes, Arun, I think if I recall correctly, I don't think we have given any guidance in the last quarter. Of course, we had mentioned all along that there will be a 25% growth in our fluoropolymers business. And I don't think we had given INR 2,000 crore guidelines in last quarter so for the EBITDA.

No, not in the last quarter. It was mentioned before that, and it's kind of a kind of a medium-term target with the full potential of the fluoropolymers volumes.

Yes. Of course, our target is to reach that level, but that guidance we had not given in the last quarter.

Okay. So at the current volume run rate, is there any possibility that we will be reaching the full potential in this year, sir?

You mean for the fluoropolymers?

Fluoropolymers business, yes.

Yes, we said that we will reach the full potential by the end of this financial year.

And on the exit of the legacy player, what is that you are seeing on the ground? Anything visibly which is shifting ground? And what kind of the impact it is having on the pricing and inventory? Some bit of color on this would be helpful.

Could you come up again? You're mentioning about the legacy players.

Exactly.

Hello, Arun?

Sir, am I audible?

Yes, yes. Can you come again, please?

So, yes, asking on the exit of the legacy player. Post that, we said that in the second half of FY calendar '23, we should see more impact on the volumes and as well as the pricing. Anything? Any development on that front?

Yes. I'll let Mr. Malhotra take that.

So, Arun, some of the impact we have already started seeing in some of the products and segments. And we will continue to see that in subsequent quarters as and when the stocks deplete of these legacy players, and we keep on getting our approvals from the customers. So the business is already on and replacements are already on. And the process is undergoing from quarter-to-quarter.

Okay. And what kind of the impact we have already kind of -- say, for example, in this quarter, we have shown a few increase of...

Mr. Arun, I request you to rejoin the queue for the follow-up question as there are many participant left in the queue. The next question is from the line of Lavanya from UBS. There is no response. I'm taking the next participant who is Archit Joshi from Nuvama Wealth.

Sir, first question on the segment information that we have started providing from this quarter. I see that we sold roughly INR 5 crores in the previous quarter and INR 1 crore this quarter from EV products. And an addendum to that, if I just take a look at our capital employed disclosure, our INR 1,658 crores worth of segment assets have largely remained unchanged on a quarter-on-quarter basis. And we are expecting roughly INR 1,200 crores of CapEx infusion in the EV products business. Sir, first on the sales that we have done, sir, where is this exactly coming from? If you can elaborate a bit that what part of the EV product you started selling? And INR 1,200 crore CapEx endeavor is still on track? And when do we expect the assets to start getting beefed up in the next few quarters? That will be my first question.

Thanks, Archit. Our EV business, as I stated earlier, is we are looking at the longer-term growth opportunities. In the short term, of course, now the sale that we're talking about is very, very small. And those, in my view, is still not trickle in. We expect the sales from the EV business to start trickling in by the second half of this year. It's been quite a little bit, okay? But we will start seeing more meaningful numbers perhaps in FY '27, okay, which we will start seeing the full impact of our -- the capacity that we have set up, okay? Now coming to your next question about your CWIP, I mean this is -- approximately, this is a very -- we have been around INR 1,000 crores, I think, in GFL, which is approximately because we have various projects which is going on at multiple units, and this is a typical number that we see because as these projects gets commissioned, we take them and recapitalize them. So we do not see anything unusual with this INR 1,600 crores number because we have a large number of projects going on and particularly, of course, in the EV, where the large number of projects are under construction and under commissioning.

Sir, sorry, still not kind of fully clear. I mean I'm just referring to the presentation where we have given a divide that you invest INR 400 crores this year in GFL and INR 1,200 crores in EV. And my question was largely pertaining to just getting a sense that how are we seeing CapEx in the EV part? Basically, are you sticking to the INR 1,200 crores yearly CapEx?