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.
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