Gujarat Pollution Control Board (GPCB) has issued a notice to SRF Ltd (SRF) asking it to close operations at Dahej for non-compliance with regulations. Dahej is SRF’s most important facility as it contributes a majority of its chemical business revenue, which was expected to report strong growth after two years of tepid performance. The closure of Dahej operations will also adversely impact SRF’s recently commenced agrochemical active ingredient (AI) facility for an MNC client and likely delay commercialisation of its new HFC capacity.
We are yet to get clarity on the timeline for resolution of the Dahej issue from the management; nonetheless, it could impact the company’s performance in Q1FY20. SRF is strongly positioned as the dominant player in ref-gas business and a growing player in fluorospecialty business; we therefore don’t see the Dahej event materially impacting the company’s underlying fundamentals. We roll forward our SoTP-based valuations to FY21e and consequently increase our TP to `2,510. Considering SRF is trading at close to fair value, we downgrade the stock to Add from Buy.
How important is Dahej? The chemical business contributed 29/27% to SRF’s revenue/Ebit in 9MFY19. Chemical business is expected to report strong earnings in FY20. We have estimated chemical business revenue growth of 39/19% and Ebitgrowth of 77/40% for FY19/20. Entire incremental revenue is expected to come from Dahej. We have thus not yet factored any negative fallout of the GPCB notice.