BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs390
Current market price: Rs343
Price target revised to Rs390
Result highlights
- BASF India?s stand-alone Q2FY2010 performance is in line with our expectation. The net profit for the quarter came in at Rs34 crore, up by 30.3% year on year (yoy), as compared with our estimate of Rs34.7 crore. The company reported a healthy profit growth during the quarter despite just a 14% year-on-year (y-o-y) increase in its net sales due to a robust expansion in the margins.
- The net sales for the quarter grew by 14% yoy to Rs366.34 crore, largely in line with our estimate of Rs354 crore, driven by a strong 60.2% y-o-y growth in the revenues from the agricultural solutions business. However, the revenues from the performance products, plastics and chemical business declined by 6.4%, 4.5% and 45.3% respectively on a y-o-y basis. On a sequential basis, however, the performance products and plastics business witnessed a revival in demand, growing by 8.1% and 21.4% respectively.
- Importantly, the operating profit grew by 23.1% yoy to Rs55 crore, as the operating profit margin (OPM) improved by 110 basis points yoy to 14.9% in Q2FY2010. On a segmental basis, the margin expansion primarily stemmed from a steep 380 basis points y-o-y improvement in the margin of the performance products segment. The margin of the agricultural solutions segment too improved on a y-o-y basis by ~80 basis points during the quarter.
- The interest and depreciation charges remained largely flattish on a y-o-y basis. Furthermore, a lower tax incidence (33.1% in Q2FY2010 vs 36.2% in Q2FY2009) also helped to boost the bottom line of the company during the quarter.
- For the half year ended September 30, 2009, the stand-alone revenues increased by 6.3% yoy to Rs748.4 crore mainly driven by a strong 29.6% y-o-y increase in the revenues from the agricultural solutions segment. The OPM witnessed a 180-basis-point expansion yoy to 16.6% on the back of decline in the raw material cost. The stand-alone net profit increased by 19.6% yoy to Rs75.1 crore for H1FY2010.
- During the quarter the board approved the sale of its Dadra plant and the company is in the process of finalising the same. The company has not yet disclosed the consideration at which the sale would take place, but has discontinued production of agrochemicals from the plant.
- We have revised our earnings estimates for FY2010 and FY2011 to factor in the stabilisation of the raw material prices, resulting in a higher OPM for the company. Consequently, our revised earnings per share (EPS) estimate now stands at Rs27.1 and Rs32.53 for FY2010 and FY2011 respectively. BASF India with its diverse product portfolio catering to a variety of user industries ranging from automotive, electrical industries, leather, textiles etc is likely to see a revival in demand going ahead on the back of renewed growth prospects for several of its user industries. Further, the company is in the process of building a new engineering plastics compounding plant with a capacity of 9,000 tonne per annum at its existing Thane facilities primarily catering to automotive, electrical and electronics industries. We believe that the company is likely to benefit from new capacity additions, as it would cater to growing demand from its user industries. At the current market price of Rs344, the stock is trading at 12.7x FY2010E consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7x FY2010E. We maintain our Buy recommendation on the stock with a revised price target of Rs390.