The key skepticism in GFL story has been around margins. The skepticism is well placed as we have over the years and specifically in chem/agchem/pharma seen growth and margins fluctuate significantly. We have seen multiple companies eulogized in this forum and elsewhere going through large corrections/consolidation when growth falters and margins fall. This doesn’t necessarily mean that these companies were bad but as investors we got the following wrong
a) external environment/competitive intensity/dumping
b) extrapolating one time/short duration margins as sustainable margins
A simple game theoretical explanation is sufficient to prove that anything that can be mass produced by multiple players will have cyclicality.
For a medium term growth investor the most important thing is to get the following two right:
a) Growth
b) Margins sustainability
I will focus here mainly on the margin sustainability part. In yesterday’s call multiple questions were asked around margin sustainability and the management replied with the following:
a) The no. of grades across FP being over 100. The following are links to some documents that point to large no. of grades publicly available:
PVDF (INOFLAR): https://www.inoflar.com/products.html
PTFE (INOFLON): https://www.gfl.co.in/inoflon/ptfe
FKM (FLUONOX): https://www.fluonox.co.in/images/Fluonox-Brochure.pdf
FPA (INOFLON FPA): https://www.gfl.co.in/inoflon/pfa
PTFE MicroPowder (INOLUB PFOA free): https://www.gfl.co.in/PTFEmicropowders/pfoafree
https://www.gfl.co.in/upload/Fluoropolymers.pdf
This is what the management said on developing grades:
“See, in most of the cases where we operate, we are operating in a very specialized grades, and we are not having competition per se, because there is a — see, one thing happens in fluoropolymers is once, let’s say, a grade — let’s say, talk about FKM used for a fuel. And once it’s qualified and accepted, then there is a lot of stickiness, because there’s no — because the numbers– these grades are not change quickly. Plus qualification time is high and also at the same time there is a stickiness to it. So there are — and so there is a long drawn process of qualification, but then — and then slowly the volumes are ramped up as OEM gains more confidence in our grade, and then they remain sticky to us. That’s the process, actually.
So it’s not that I go to a customer with list of my grades and they may give an offer to us. That’s why you may see certain volumes in China or outside, wherever, but those volumes are very little meaning because it depends on the kind of grade and kind of the customer base and applications they are present in.”
b) Backward Integration and shifting segments: GFL is the most backward integrated company in FPs and they have similar plans for Battery chemicals except Lithium Carbonate the most basic RM they will make everything inhouse. Despite the fall in LiPF6 prices Tinci China (largest electrolyte producer in world) has significantly higher margins when compared to other players. The call also mentioned of ‘we’ll be having a long term strategic arrangement in place.’ for LiPF6.
Shifting products:
Qn. I mean, if I look at our business model, we have one of the best supply chain. I mean, right from, we have a JV fluorospar, and if the caustic chlorine prices comes down, I mean, we capture it as a lower cost in manufacturing of R22. If R22 price comes down, we can do more of TFEs, if the TFE is lower, you can probably make more of PTFE or PFA. So, is that understanding right, even if the commodity prices comes down, you might have a momentary shift between one segment to another, but largely the price fall should be captured as an input cost benefit to another segment.
Bir Kapoor : Yes. I mean, as you have rightly put, we are completely backward integrated. And, for example, for our PTFE fluoropolymer, the raw material is salt, power and methanol. So most of these — so we are actually insulated from any kind of a commodity price variation in the intermediate part. So, I think your understanding is fine, it’s just — it’s not going to have an impact, either the price rise or price drop in any of the intermediate chemicals.
d) Exit of 3M and move towards non-fluorinated surfactant technology which is limited/patented.
e) Significant cost savings in power (more details awaited).
In conclusion, large no. of grades ensuring GFL is not mass producing FPs and hence will have minimal impact of cyclicality with high client stickiness, backward integration allowing shifting to higher margin products depending upon the market scenario, +ve demand side (3M’s exit), non-fluorinated surfactant tech and the upcoming power saving gives high confidence in margin sustainability in GFL.
Discl. Invested. Trades in last month.
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