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Published on 24/10/2020 2:40:47 PM | Source: Emkay Global Financial Services Ltd

Hold BASF India Ltd For Target Rs. 1,484 - Emkay Global

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A play on many variables

* BASF in its annual analyst meet laid out its strategy which includes improving RoCE from ~6% to 10% in the next 2-3 years by cost optimization, improving product portfolio and increasing capacity utilization. The focus is on improving profitability in key segments.

* Management expects healthy volume growth in Agrochemicals in the coming quarters, which shall partially restrict weakness ensuing from Automotive, Construction and Refining sectors. BAFS aims to launch 15 new products in Agrochemicals unit in the next 5 years.

* The Dahej plant, which was commercialized in Oct’14 (capex of Rs11bn), operated at the ~70% capacity utilization level for FY20 and reported sales of ~Rs13bn (17% of FY20 sales). The capacity expansion (2x) for polymer dispersions at the plant is underway.

* Overall balanced exposure for a business that encompasses numerous segments shall continue to deliver moderate growth in coming years. Margin volatility in Materials and Surface Tech remains a risk. We roll forward our valuations to Sept’22E earnings and raise our TP to Rs1,484 (28x Sept’22E EPS vs 24x earlier). We retain Hold and EW in EAP.

 

Focus on improving RoCE:

In addition to improving margins by optimizing costs, moving toward a favorable product portfolio, increasing the capacity utilization levels, management’s main focus would be to elevate RoCE from current ~6% levels to 10% in the next 2-3 years with better capital deployment strategies. The domestic business remains an average of many sectors, which may deliver in various cycles, and as a result, revenues are expected to grow ~10% (which is slightly above the Indian chemical market growth rate). BASF expects good traction from agrochemical to continue for the next few quarters, led by a better monsoon season and strong demand from the rural side. BAFS is planning to launch 15 new products in the next 5 years in a phased manner, either through in-house manufacturing or licensing with third parties. However, it is closing monitoring weak sectors like automotive, paint and consumer durables where management expects slower recovery amid Covid-19.

 

Capacity utilization displays room to grow:

Utilization levels continue to vary across periods and were 70-75% (with Dahej operating at 70%) in FY20 but still profitability was subdued. Q1FY21 was around – 25-30% (as compared to 75% last year). Revenues from the Dahej facility stood Rs13bn for FY20 (17% of FY20 revenues), dragged by low crude oil prices. BASF plans to double polymer dispersion capacity in the next 12-18 months with capex of ~Rs1.2bn. In FY20, revenue from in-house products stood at 55%, while balance 45% was from merchandise. In Q1FY21, the ratio stood 40:60, respectively.

 

Margin sustenance key; maintain Hold:

Overall balanced exposure for a business that encompasses numerous segments shall continue to deliver moderate growth in the coming years. However, margin volatility in segments such as Materials and Surface Technologies remains key monitorable. We believe that robust volume growth in Agriculture Solutions is critical for the medium term. We roll forward our valuations to Sept’22E earnings and raise our TP to Rs1,484 (28x Sept’22E EPS vs 24x earlier). We retain Hold and EW stance in EAP

 

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