Gujarat Fluoro Hits A Record As ICICI Securities Initiates Coverage With A 'Buy'; Sees 50% Upside

Shares of Gujarat Fluorochemicals Ltd. jumped to a record high after ICICI Securities Ltd. initiated coverage on the refrigerant maker with a 'buy'.

The company is in a "sweet spot" as it is the sole manufacturer of fluoropolymers in India and is among the very few players outside of China to have a large portfolio in the segment, the brokerage said in a Dec. 1 report. "It is also present in specialty fluoropolymers where the Chinese have limited global presence, and western and Japanese players are not adding meaningful capacity."

ICICI Securities set a target price of Rs 3,086 on the stock, implying a 50% upside from Dec. 1 closing. Shares of the company jumped as much 15.9%, the most in at least a year, to a record high of Rs 2,387.8 apiece.

The brokerage said it likes the "flourine play" because the entry barrier is higher due to higher expertise required, limited raw material supplies and a long gestation period, which means that product development to customer approval takes several years. Also, battery chemicals and other new-age verticals offer huge option value for the company.

Of the five analysts tracking the company, four recommend a 'buy' and one suggests a 'hold', according to Bloomberg data. The average of the 12-month price targets implies an upside of 14.8%.

ICICI Securities cited the example of Chemours Co., a spin-off of DuPont — a global maker of fluoropolymers.

"Chemours has increased its revenue growth guidance for fluoropolymers to higher than global GDP growth rate with the likelihood of accelerating it over the next few years," the report said. "It has also raised its margin guidance to early twenties for 2022. This is on back of rising demand from new-age verticals."

According to the brokerage, the same trend that Chemours will ride on, should also benefit Gujarat Fluorochemicals.

Further, the company's plan to enter battery chemicals and PVDF sheets, used in solar panels, would increase its addressable market in new-age verticals. "Gujarat Fluoro is working on photon exchange membranes for production of green hydrogen. New-age verticals carry an option value and successful execution can create huge value for stakeholders."

ICICI Securities also listed certain downside risks that could affect the company's growth:

• Continued overhang from related-party transactions and any deterioration in the related parties’ financial health.

• Slower-than-expected execution of new-age verticals and ability to secure lithium carbonate critical for success in battery chemicals.

• Higher-than-expected competitive intensity, lower realisation in fluoropolymers space, and slowdown in demand for fluoropolymers.

• Continued price erosion in fluorospecialties could prove to be a dampener.