Buy BASF India - Geojit BNP Paribas

BASF India, 71.8% subsidiary of Euro 50 billion German Chemical giant BASF Ag, has diversified business profile comprising of agrochemicals (contributing > 50% of PBIT), performance products (leather, textile, paper, water treatment, specialty and dispersion chemicals) and plastics.

BASF Ag plans to grow faster than the market in Asia Pacific. India and China will be the key markets driving this growth. Hence, Parent company is consolidating its assets and turnover base in India by merging its two 100% subsidiaries viz BASF Coatings and BASF Construction with BASF India w.e.f April 1, 2010.

BASF Coatings is one of the top automotive coating players in the country and BASF Construction supplies products to construction industry for use in making concrete, industrial flooring, tile adhesives and other specialized applications.

BASF Construction supplies products to construction industry for use in making concrete, industrial flooring, tile adhesives and other specialized applications. Merger of these two companies would add over of Rs.400 crore to BASF revenue.

The merger clearly demonstrates that BASF India is going to the main vehicle for driving growth in India. Besides, BASF India's 100% subsidiary BASF Polyurethanes (engaged in manufacture of polyurethanes for application in white goods, automotive & footwear segment) will also be merged with itself. All these mergers would further strengthen BASF India's position in the industry and adding new growth segments to its existing product portfolio. Post merger, parent company's stake will go up to 73.3%.

Agrochemical business will be major growth driver in view of :-

Global alliance with Monsanto, USA to help BASF India to penetrate deeper in higher-yielding and stress-tolerant crops.

Continuous introduction of new products (thanks to strong parentage) - plans to launch 7 products (herbicides & fungicides) over next 3 years, thereby sustaining strong position in soyabean, fruit & vegetable market and foray in cereals & cornmodity segments.

Excellent demand – Due to natural disasters i.e. heat waves, draught & excess rains in major food producing countries, there is fall in food output. While demand for food is rising at brisk pace particularly from growing middle class from emerging markets.

With acquisition of Ciba and now Cognis, parent company is strategically focusing more on high margin specialty chemical products for driving future growth. This augur well for BASF India's performance product business (contributes ~ 40% of consolidated PBIT).

Plastics business comprises of Expandable Polystyrene (Styropor) and Performance Polymers (Engineering Plastics), which are in growth phase. Key sectors driving plastics business growth are consumer durables, automotive, electrical & electronics, construction and packaging. Overall outlook for Plastics business is favourable.

Thus, topline is expected to grow @ CAGR of > 25% for next 2-3 years on back of growing domestic demand for agrochemicals as well as performance products. With improved profitability, bottomline will be growing at faster pace for next few years.

Company is cash rich (net surplus cash of Rs 170 crore on March 31, 2010). Moreover, its capex requirements are also moderate. Hence, will keep on augmenting surplus cash. At CMP of Rs. 658/-, share is trading at 16.4 times FY 2011 expected EPS of Rs. 40/- and 12 times FY 2012 expected EPS of Rs. 54.8. "Excellent BUY" at CMP from long term perspective.

Source : Equity Bulls

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