Near term headwinds? Extended plant closure may impact SRF's fortunes

Plant closure for an extended period could have an adverse impact

The stock of SRF is down 3 per cent after the Gujarat Pollution Control Board asked the company to shut down its Dahej (Gujarat) plant citing the violation of industrial waste disposal norms. The plant, which is part of its chemicals segment, makes speciality chemicals and refrigerant gases. While the chemicals segment accounts for a third of the company’s revenues, it is among the more profitable businesses contributing significantly to overall operating profit. Given the importance of the unit to the company, analysts believe that an extended plant closure will have an adverse impact on the company’s fortunes.

The company on its part is filing a detailed reply clarifying its position with regard to the violations of the Water (Prevention and Control of Pollution) Act, 1974 at its Dahej unit. While it is not clear how long the unit will be under the scanner, analysts at Motilal Oswal Securities say that if the company ramps up production post the recommencement of the plant at 0.6 times asset turns, the maximum time which the plant can remain shut without impacting production is 20-30 days. However, other brokerages believe that the plant could open in the near term. Analysts at Emkay Research cite channel checks to say that the plant should resume operations over the next weeks.

While there are near-term headwinds most analysts have a buy rating on the company from medium to long term investment horizon. Citi Research says that the company’s unique skills in fluorine chemistry, 50 per cent market share in refrigerants business, and proven ability to extract profits from even commoditized businesses is responsible for their rating. In addition to the chemicals business, the technical textiles and packaging films business segments are also expected to generate strong cash flows. Packaging Films is its largest segment and is expected to account for about 35 per cent of its revenues with margins slightly ahead of the chemicals business.  

Given the prospects of key segments, investors could look at entering the stock on dips. Moreover, at 11 times its FY20 earnings estimates, the company is trading at a discount to some of its peers.