Reiterate ‘buy’ on UPL (formerly United Phosphorous) and raise our fair-value target price to R600 (earlier R503) based on next four quarters earnings.
Apart from higher earnings, we are also increasing our assigned PE multiple by c10% from c14.4x earlier to 16.0x as UPL’s recent earnings growth have led to our/consensus earnings estimates going up by 10% and 20% in the last two quarters.
We raise our EPS estimates for FY16 and FY17 by 4% and 3% as we now assume low double-digit sales growth for NA (from c5% earlier).
Further, we believe that UPL deserves higher multiple due to (a) our FY16 and FY17 RoE estimates indicate that over the next 2-3 years UPL’s RoE profile should shift to c25% levels from c20% currently and market is likely to reward UPL with higher PE multiples; (b) peer PE multiples have expanded 20-25% from 16x to 20x and we expect UPL’s historical average discount to peers of 25-30% to gradually shrink to 20% as UPL’s earnings growth profile moves up closer to peers; and (c) we now expect 30%+ EPS growth for FY16 and c25% in FY17, driven by strong sales growth and 30-50bp margin in FY16 and FY17 each.
In FY16, we believe that UPL’s topline growth may yet again beat the company’s sales growth guidance, this time the higher North American (NA) region contribution can be a key factor.