Stock Review: Gujarat Fluorochemicals

Gujarat Fluorochemicals Limited (GFL) operates in two segments: chemicals, wherein it produces refrigerant gases, anhydrous hydrochloric acid, caustic-chlorine, chloromethane, poly tetra fluoro ethane (PTFE), PT-PTFE, and carbon credits; and power, wherein it generates power. It is India's largest and most competitive producer of refrigerant (HCFC22). The company is part of the INOX group. INOX is a family owned, professionally managed business group with interests in diverse businesses including industrial gases, refrigerants, chemicals, carbon credits, cryogenic engineering, renewable energy and entertainment.

 

Strengths

Healthy growth: The company has been able to maintain a healthy growth rate over the past few years. It has posted a five-year compounded annual growth rate (CAGR) of 38.8 per cent in income and 49.6 per cent in profit after tax.
Competitive advantage: GFL manufactures caustic soda, chlorine, chloromethanes and poly tetra fluoro ethane (PTFE). It also operates a 28 MW gas-based captive power plant and a 25 MW coal-based captive power plant. Such a diversified product portfolio improves its competitive advantage due to forward and backward integration.
Strong presence: In the carbon credit business the company has a strong presence in international markets. The sale of carbon credits to European buyers has added a healthy revenue stream and is expected to do so up to 2012, and potentially beyond as well.

 

Opportunities

GFL has set up a subsidiary, Inox Wind Limited, which has manufacturing facilities for wind turbines at Una, Himachal Pradesh and Bawla, Gujarat. At Una the company has commenced the commercial production of nacelles and hubs for wind turbines. It is also in the process of acquiring land banks and setting up an operating team for this business. The sale of HCFC22 is expected to witness a growth of around 5 per cent per annum globally, largely due to growth in PTFE demand.

 

Concerns

Weak Q2 performance: The company posted a decline of 9.87 per cent in sales and a decline of 3.78 per cent in profit after tax in Q2FY11 as compared to the corresponding quarter of the previous year.
Falling RoNW: Moreover, during FY07-10, GFL's return on net worth has been declining continuously: it stood at 40.1 per cent (FY07) and had fallen to 24.2 per cent in FY10. However, this should not be much of a cause for concern because the FY07 level was unsustainably high. The company's refrigerant business is operating at near full capacity. The key threat to the refrigerant gas business continues to be competition from China.

 

Valuations

Over a period of threeyears, the company has been able to reduce its debt-to-equity from 0.62 (FY07) to 0.35 (FY10).
The stock is currently trading at a price-to earnings (PE) ratio of 7.06 (as on December 15, 2010). This is slightly below its five-year median PE of 7.41. The company has registered a five-year CAGR growth of 44.7 per cent in earnings per share which translates into an attractive price-earnings to growth (PEG) ratio of 0.18. You may buy the stock with at least a three-year investment horizon.