The stock is down ~35% since our last report dated 22nd May, 2019 (rating SELL) and at current valuation of 8.1x/7.6X FY20E/FY21E earnings, trading at fair valuation given the industry dynamics (weakness in demand and lower realization as capacity in China ramp-up) and re-rating will take some time. Hence, we continue to retain our SELL rating, with a revised target price of Rs.71 (earlier Rs109), valuing it at 7x FY21E earnings.
Volume growth in SPS, Trion and Thionol Chloride will remain the key growth driver for next two years until the new capacity comes on stream. However, China turbulence can impact realisation growth thereby putting pressure on operating margins. Moreover, any negative surprise on FCF generation due to lower OPM and extension in working capital can impact the payback cycle of upcoming capex. We value the company at EV/EBITDA of 5x and arrive a target price of Rs 105. We have a REDUCE rating on the stock.
Factoring 4QFY19 performance, we have revised our FY20E earnings to Rs12.7 (earlier Rs13) and introducing FY21E with earnings estimate of Rs13.6. The stock is up ~18% since our last report dated 7th Feb, 2019 (rating BUY) and at CMP, we believe that at current valuation of 9.0x/8.4X FY20E/FY21E earnings, the stock is trading at fair valuation and re-rating will take some more time. Hence, we recommend SELL (earlier BUY) on the stock (valuing at 8x FY21E EPS), with a revised target price of Rs109 (earlier Rs117), as we roll forward our valuation multiple to FY21E.