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Friday, March 02, 2012

Fw: Investor's Eye: Update - United Phosphorus, Cement

 
Sharekhan Investor's Eye
 
 
Investor's Eye
[March 02, 2012] 
Summary of Contents
STOCK UPDATE
United Phosphorus 
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs167
Current market price: Rs136
Price target revised to Rs167
Revenue growth guidance revised downward for FY2012 to 25-30%: United Phosphorus Ltd (UPL) has reduced its revenue growth guidance for FY2012 due to the extended winter weather in some of its major markets. The company expects a revenue growth of 25-30% for the year 2011-12 which is much lower than the 35-40% growth guidance given earlier. During M9FY2012 UPL has seen a robust growth of 40.8% on the back of good volume and inorganic growth. But in Q4FY2012 volume offtake will undergo a de-growth due to prolonged winter in the western countries, which has delayed the sowing season to Q1FY2013. 
Revised guidance implies muted performance in Q4FY2012: The downgrade in revenue guidance to 25-30% in FY2012 and margin guidance in the range of 18-20% implies a muted performance in Q4FY2012. Going by the guidance, we expect a flattish growth in revenue in Q4FY2012 as compared to 40.8% growth in M9FY2012 and that there would be a single digit growth in earnings. 
Outlook and valuation: Given the expectation of a low volume offtake in Q4FY2012 due to unfavourable weather conditions in the USA and Europe, we have revised downward our earnings estimate for FY2012 by 21.5% to Rs13.9 and by 15.5% for FY2013 to Rs16.7. Consequently we have also reduced our target price from Rs197 to Rs167 per share. At the current market price the stock is trading at 9.6x and 8x its FY2012 and FY2013 earnings estimates respectively. Though the valuation has turned attractive after the steep correction in the past two days, we believe the stock could continue to underperform in the near term in anticipation of lackluster results. However, the stock offers value for long term investors. Hence, we maintain our Buy recommendation on the stock.  
 

SECTOR UPDATE
Cement     
Seasonal pickup in demand
Key points
  • Cumulative volume for pan India players grew by 10.1%: The volume growth of the top two domestic cement players - ACC and Ambuja Cements for the month of February 2012 was impressive on a year-on-year (Y-o-Y) basis on account of a pick-up in cement offtake in the north, west and central regions of the country due to a pick-up in execution of infrastructure projects. Among the large players Ambuja Cements has posted an impressive dispatches growth of 13% YoY. On the other hand ACC has posted a 7.5% growth in its dispatches. Hence, the pan India players have cumulatively registered a 10.1% volume growth. On a sequential basis (compared to January 2012) the cumulative dispatches of pan India players have increased marginally by 0.2%. 
  • Cement offtake picks up in north, west & central India; partially recovers in the south: In terms of demand, dealers have confirmed that the cement offtake in most parts of the country has shown sign of recovery in the past couple of months due to post monsoon pick up in the infrastructure activity. Further, demand in the southern region has partially recovered in February 2012. Going ahead dealers expect the momentum in demand to continue in the coming couple of months. 
  • Cement price increased in most parts of the country: Cement prices during the month of February have increased in the range of Rs5-12/bag of 50kg in most parts of the country. The eastern region witnessed the highest price hike on a month-on-month (M-o-M) basis whereas cement prices in the southern region remained largely unchanged sequentially. The price hike has largely been driven by a revival in the cement offtake and supply discipline. Further, dealers are of the view that cement prices may further increase in the near term as cement offtake is expected to be strong going ahead. 
  • Outlook-Maintain bullish stance on Grasim & Orient Paper: The cement sector has outperformed the broader market in recent times due to positives such as a recovery in cement offtake and strong realisation. However with the pick-up in cement offtake, supply discipline may break, which could lead to pressure on cement prices going ahead. Hence we maintain our neutral stand on the sector. But we are selectively positive on certain stocks in the sector and prefer Grasim Industries (Grasim) in the large size space and Orient Paper & Industries (Orient Paper) in the mid size space.

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Regards,
The Sharekhan Research Team
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