United Phosphorus Limited (UPL), in an announcement on March 1, lowered revenue growth estimate for the current financial year by about 10 percentage points. This also led analysts to lower their earnings estimates for UPL, and, thus, reduce their price targets for the stock.
After the announcement, the UPL’s stock has corrected by almost 12 per cent to Rs 137 currently. Analysts do not see further downside to the stock, given that valuations of 7.7 times FY13 earnings are reasonable and most concerns are already factored in.
“While lower revenue guidance is weighing on the stock price, we believe current valuations are attractive and, hence, maintain a buy rating, with a revised target price of Rs 177 as against Rs 185 earlier,” says, Varun Guntupalli, analyst, Edelweiss Securities, in a recent note. Apart from the valuations, the company has a large pile of cash in the books. This is expected to reach to Rs 2,000 crore (about 30 per cent of the market capitalisation) by the end of FY12. While this cash could be generating other (interest) income at about five per cent annually, if the same is deployed for growth (given that the company plans to acquire companies), it could have a positive impact on returns and valuations.
| FY13: STRONG PROFIT GROWTH | |||
| Rs crore | FY11 | FY12E | FY13E |
| Sales | 5,786 | 7,331 | 8,350 |
| Ebitda (%) | 18.9 | 18.5 | 19.0 |
| Net profit | 625 | 648 | 816 |
| EPS (Rs) | 13.5 | 14.0 | 17.7 |
| PE (x) | 10.0 | 9.6 | 7.6 |
| RoE (%) | 18.6 | 16.2 | 17.6 |
| E: Estimates Source: Edelweiss Securities | |||
Lower guidance for Q4
UPL is a leading player in the global agro-chemicals business. Its strategy to acquire companies in major markets and extend its product profile has yielded good results in the past. It has led to strong growth in revenues and profits as a result of increase in global agriculture activities and higher food prices. At present, Northern America and Europe together, account for almost 40 per cent of UPL’s sales turnover. The company has said bad weather in Europe and dry conditions in North America have led to some delay in demand, leading to lower expectations from these regions for the quarter ending March 2012.
“Extended and severe winter in Europe and parts of the US have delayed the start of the new season for United Phosphorus,” says Guntupalli. “Generally, the last quarter is the strongest for United Phosphorus in these geographies. Hence, delay in cropping is likely to hit the company hard.”
In January 2012, UPL had given a revenue growth expectation of 35-40 per cent for FY12. This means sales of Rs 7,630-8,000 crore for the year ending March 2012. So far, for the nine months ended December 2011, it has registered sales turnover of Rs 5,415 crore. This is about 77 per cent of the new guidance (at the lower end). To achieve this, the company needs about Rs 1,650 crore more revenue in the March quarter. That looks achievable, considering almost 32 per cent of any year’s revenue falls in this quarter. Besides, it is also lower as compared to the sales turnover of about Rs 1,800 crore recorded in the year-ago March quarter. Nevertheless, analysts have cut their estimates after the recent announcement.
Says Abhijit Akella who tracks the company at IIFL: “We cut our EPS estimates for United Phosphorus by 16 per cent to Rs 11.9 for FY12 and by 14 per cent to Rs 13.8 for FY13, after the company lowered its FY12 revenue guidance by 10 percentage points.”
Steady long-term outlook
This effectively means shareholders will have to probably live with lower earnings growth this year. But, a part of this will be recouped next year, as some of the delay in sales will effectively occur in the first quarter of FY13. Thus, investors with a longer-term perspective could use the correction to buy the stock. The prospects remain good, given the favourable global demand-supply food situation, as well as firm prices.