BASF
Buy
Target Price: Rs802
CMP: Rs663
Upside: 21%
Niche products to spur growth
BASF India is a part of BASF SE, the largest chemicals company in the world. BASF India is likely to show strong growth momentum on the back of massive investment of Rs10bn on a new facility and consolidating its niche chemicals businesses with itself. Rising agri growth, income levels and urbanisation are expected to aid overall growth as BASF offers niche and innovative products and solutions to the segment it represents. Strong patronage will help BASF India to introduce new products to customers. We believe BASF is a secular growth story which offers a safe bet. Hence, we initiate coverage on BASF India with a ‘Buy’
m Focus on niche segments to propel growth: BASF’s focus on niche segments like agricultural solutions, care chemicals, nutrition & health and paper chemicals, coatings and construction chemicals is expected to fuel growth. New product introductions and innovative solutions for these segments make BASF a preferred supplier of these chemicals.m Significant capex to cater to the growing Indian market: BASF has proposed over Rs10bn capex with a new facility at Dahej. This facility will be operational by 2014 and will cater to growing segments including care chemicals, polyurethanes, coatings and the paper industry. This investment will more than double the gross block of the company and has the potential to generate revenues of over Rs8-10bn annually in initial years.
m Potential delisting candidate: BASF SE has upped its holding in BASF India from about 53% in FY09 to over 73% currently. Following the precedent set by other MNCs, BASF India could also delist. Historical data suggests that delisting has been favourable for minority shareholders with significant value generation.
m Concerns: Exchange rate volatility, weak monsoons and slower growth in India
m Premium for secular growth, Buy: We estimate a CAGR of 14.7% in revenues, 23.4% in operating profit and 28.0% in PAT for BASF India over FY12-14E. This is backed by robust growth in agricultural solutions, performance chemicals and functional solutions businesses along with margin expansion. Post announcement of merger of BASF entities with BASF India, the average P/E multiple of the company in the last two years was about 21x. We believe BASF deserves such premium valuations and hence value the stock at the same average multiple of 21x FY14E EPS of Rs38.2. We thus arrive at a price target of Rs802 and initiate coverage with a ‘Buy’ rating on the stock.
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