PICK OF THE MONTH VOL-4, NO-10 BASF India Limitedreports.progressiveshares.com/ResearchReports/FR_300820183082… · expandable polystyrene, tanning agents and auxiliaries including

OVERVIEW: Industry: Indian chemical companies cater and support highly diversified industries that include commodities, specialty chemicals, polymers, agrochemicals etc. The total chemical sales are expected to grow from USD139bn in 2014 to USD214bn by 2019. (as per KPMG report). By 2025, the Indian chemical industry is projected to reach USD403bn.

About the Company:

BASF India Limited (BASF) is a subsidiary of BASF SE (73.33% of the shares held by BASF SE). It is a leading multinational company in the Indian chemical industry. The company manufactures and markets expandable polystyrene, tanning agents and auxiliaries including specialised metal complex dyes, leather dyes, textile chemicals, dispersions and specialty chemicals, acrylic polymers in primary forms and crop protection chemicals. They are also involved in the trading of chemicals including dyestuffs and related textile auxiliaries and also provides technical services to various industries. BASF and its group companies have their key production sites at Dahej, Mangalore (BASF‟s largest manufacturing site in South Asia in terms of area) Ankleshwar, Thane and Chennai. BASF has two R&D centers in Mumbai and Mangalore, part of BASF‟s global technology platform.

The company has Dr. Raman Ramachandran as the Chairman and Managing Director of the company. The business is organized into segments namely Chemicals, Performance Products, Functional Materials & Solutions and Agricultural Solutions while the products manufactured cater to sectors including agriculture, automotive, pharmaceuticals, construction, consumer durables, consumer care, paper and paints to mention a few.

CMP: Rs.1954 TARGET PRICE: Rs.2500 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

2430 / 1392 84,597

Face value: 10

BSE Code NSE CODE

500042 BASF

Annual Performance

(Rs mn) FY16 FY17 FY18 FY19E

Sales (Net) 47,472 50,782 55,834 63,276

EBITDA 1,058 2,697 3,459 4,456

EBITDA (%) 2.2 5.3 6.2 7.0

Other Income 29 115 229 228

Interest 1,481 1,416 1,130 8,18

Depreciation 1,631 1,690 1,534 1,511

PBT -2,025 -295 1,025 2,356

PAT -304 -141 *2,465 2,345

Equity ( Rs mn) 433 433 433 433

EPS (INR) -7 -3 *57 54

Ratio Analysis

Parameters (Rs mn) FY16 FY17 FY18 FY19E

EV/EBITDA (x) 93.2 36.4 27.4 21.5

EV/Net Sales (x) 2.1 1.9 1.7 1.5

M Cap/Sales (x) 1.8 1.7 1.5 1.3

M Cap/EBITDA (x) 80.0 31.4 24.5 19.0

Debt/Equity (x) 1.2 1.0 0.4 0.3

ROCE (%) -2.4 5.5 11.6 17.1

Price/Book Value (x) 7.6 7.7 6.3 5.4

P/E (x) -41.8 -271.8 96.2 44.9

Share Holding Pattern as on 30th June, 2018

Parameters No of Shares %

Promoters 31,743,220 73.33

Institutions 4,298,603 9.93

Public 7,243,817 16.73

TOTAL 43,285,640 100.00

Quarterly Performance

Parameters (Rs mn) Sep-17 Dec-17 Mar-18 June-18

Sales (Net) 14,551 12,771 13,436 16,271

EBITDA 1,144 679 992 944

EBITDA (%) 8 5 7 6

Other Income 24 39 108 22

Interest 346 211 269 243

Depreciation 401 371 370 372

PAT 1729 69 660 245

Equity ( Rs mn) 433 433 433 433

Note: All the data is calculated as per Market Price on 29th August 2018 * PAT includes exceptional item of Rs1585.7mn

Page No 1

BASF India Limited

August 30, 2018 PICK OF THE MONTH VOL-4, NO-10

Please Turn Over

BUY

Exhibit: Indian Chemical Industry

Source: Market Research Reports, IBEF

Source: Company data

Exhibit: BASF Structure

Source: Annual Report


BASF India Limited


BUY

Page No 2 Please Turn Over

Manufacturing Facilities: The Company has 9 manufacturing sites and 16 offices all over India.

Different plants of the company have received different accolades like the Ankleshwar site won “AIA Anandapura Trophy” for Excellent Manufacturing Performance for the year 2015-2016 from Ankleshwar industries Association (AIA), Thane Site has been honored with State Level Energy Conservation Award for the fourth time in a row. All of these accolades prove the operational edge that the company enjoys. Furthermore, BASF has two R&D centers in India, in Mumbai and Mangalore, working closely with BASF‟s Global Technology Platform, as well as several technical labs which focus on developing sustainable solutions to meet the current market demands based on customers‟ needs across different sectors. INVESTMENT RATIONALE: (A) Business Segments: (i) Agricultural Solution (15% of the Total Revenues): Agrochemical Industry - The Indian agriculture sector, contributing about 15% of the country's GDP and about 60% of the rural households relying on agriculture as their principal means of livelihood is the backbone of nation‟s economy. Realizing the importance of the support of the industry needed for continued growth; the agrochemical industry sector has been constantly working on developing strategies to leverage different opportunities. India is the thirteenth largest exporter of pesticides. In context to the market size, as per different research reports, the Indian agrochemicals market is on a strong footing and expected to touch USD11.3bn by FY20E (USD6.4bn in FY15), growing at a CAGR of 12%. Key Growth Drivers:

Per hectare consumption of pesticides in India is amongst the lowest in the world, 0.6 kg/ha compared to 13 kg/ha in China giving it the scope to expand

India has the capability and edge in low cost manufacturing There is availability of technically trained resources and overcapacity Various agrochemicals going off patent by 2020 which provides

immense export opportunities for generic players Farmers are also investing more into seed treatment, along-with

agrochemicals which would provide better disease resistance and stronger yields

Seasonal domestic demand Better price realization globally Strong presence in generic pesticide manufacturing With government policies like „Make in India‟ and implementation of GST, there is emphasis on developing crop protection and enhancement solutions through latest technology skills. India is heading towards becoming a global manufacturing hub of quality crop protection chemicals going forward. BASF in Agrochemicals: The Agricultural solutions business of the company includes agrochemicals like insecticides, herbicides, fungicides and plant growth regulators. In Jan 2017, BASF entered the crop protection market for rice in India offering a range of new solutions to boost yields in India by managing rice diseases, weeds and pests. Through the launch of products like Seltima, Adexar (fungicides) and Basagran (herbicide for Rice), it is well positioned to provide comprehensive solutions that effectively meet consumers‟ expectations for healthy, high quality food. The company has further consolidated its positioning in the corn markets by introducing Tynzer across different geographies. The diversification efforts planned within Soybean and beyond are being pursued by the company. Although the sales of different products of the Agricultural Solutions business are dependent on the monsoons, the company continues with the efforts to ramp up presence and growth in the industry.

Exhibit: Manufacturing Facilities

Source: Annual Report content recreated

Exhibit: Market Share by Segment

Source: Industry Data


BASF India Limited


BUY


BASF in Agrochemicals (contd.)

Other segments related to Agri-solutions are Biotechnology through BASF Plant Science, through which the company aims to help farmers keep pace with the growing demand for improved agricultural productivity and healthier nutrition. Through the Functional crop care segment, the company targets to unlock agricultural potential in soil, seed and crop. The offerings of the company match the requirements of growth of the overall industry and hence are the segments of interest going forward.

(ii) Performance Products: (39% of Total Revenues):

The Performance Products business includes: Performance chemicals Dispersions & pigments Care chemicals Nutrition & health products Paper chemicals This business segment caters to a range of industries including leather, plastics & coatings, detergent formulators, pharmaceuticals, automobile and oil to mention a few.

Sale of Leather Chemical Business: The Leather Chemicals business of the company is transferred to Stahl India Private Limited with effect from 30th September, 2017, pursuant to global sale of BASF‟s Leather Chemicals business to Stahl Group. However, BASF still supplies leather chemical products from its manufacturing facilities to Stahl India Private Limited under a supply arrangement.

Home Care: Globally the Home Care chemicals market is valued at USD16.1bn as of 2014 and is expected to reach USD21.1bn by 2020. The Indian market size of the home and personal care segment currently is estimated to be around USD16bn, expected to grow to USD29.3bn, at CAGR of 13%. (as per market research reports). Rising urbanization, increasing disposable income and rural penetration are some of the key drivers aiding growth in this sector.

BASF Care Chemicals: The Care Chemicals business of the company caters to personal care, home care and formulation technology sectors. In the personal care market, BASF continues to maintain its position through focused customer approach, effective channel management and a robust sales pipeline. The product portfolio includes surfactants, emulsifiers, polymers, emollients, chelating agents, cosmetic active ingredients, pigments and UV filters. With respect to the laundry care category, with the investment in the Dahej site, the business has witnessed good growth in surface cleaning and dish washing categories. Going forward, with the improvement in the quality of lifestyle, consumers‟ awareness of better performing and higher efficiency products, the overall home care industry is on an uptrend. This in turn is expected to drive demand for BASF‟s polymers, fluorescent whitening agents, stain removers and surfactants going forward.

Source: Annual Reports /press releases

Exhibit: Bifurcation of Agri-Solutions

Source: Market Research Reports

Exhibit: Milestones Achieved


BASF India Limited


BUY


INVESTMENT RATIONALE: (contd.)

Plastic Additives: The Plastic additives business is categorized into antioxidants and light stabilizers for the plastic industry. It caters to customers broadly classified into upstream industries such as polymer manufacturers and downstream industries such as packaging and automotive. The expansion plans of major polymer producers and expected shift from natural fibers to plastic in the packaging sector is expected to increase the demand for light stabilizers and antioxidants. Fuel and Lubricants: This business caters to automotive fuel, lubricants, refinery & refrigeration industries. The company has identified new markets for coolants for tractors and accordingly products are being introduced. Additionally, brake fluids were established in the service fill replacement markets of the automotive OEM‟s (Original Equipment Manufacturers). With new product launches and entry into new market segments, growth prospects of this business look optimistic. Water Solutions: The water solutions business provides solutions to raw water, industrial and municipal effluents. The sales of the segment have been ramping up in spite of the poor sugar season led by orders from key customers and leveraging the cross business unit synergies by introducing products/solutions for new applications/markets by the company. Oilfield Solutions: The Oilfield solutions cater to the service companies that carry out work for the oil sector. Growth opportunities have been identified in the enhanced oil recovery areas and efforts are on. Mining Solutions: Mining solutions are mainly focused on the coal and alumina mining sectors. With various new reforms in the mining sector, this business is expected to grow, but industry related challenges continue to remain. Nutrition & Health Business: The Nutrition & Health business offers a comprehensive range of products and solutions for Human Nutrition, Animal Nutrition, Pharma Solutions and Flavours & Fragrances. The focus of the company continues to remain on excipients and certain core API‟s in the Pharma segment. It is committed to food fortification to address malnutrit ion, leveraging on its strong vitamin portfolio. Improvement in the productivity and efficiency is also undertaken by employing varied performance ingredients in the poultry, dairy and aqua segment. New assets getting operational in China and Malaysia going forward should help grow the business in Pharma and establish new business in flavours and fragrances. The Dispersions & Pigments business comprises of pigments, resins, dispersions and additives, which cater to the needs of the adhesives, paper, paints & coatings, printing & packaging, plastics and construction industries. Innovative paper coating binders were introduced to improve paper quality & printability. Sales to the decorative and construction industry as well as the plastic and printing and packaging grew building upon the right product mix and strong collaborative engagement with key customers. The Paper Chemicals wet end business caters to diverse industry segments such as graphical paper, newsprint and packaging paper. It is enjoying substantial customer goodwill and industry leadership. Innovative solutions to encourage paper recycling and reduction in the usage of water in the paper manufacturing process are also introduced. A comprehensive product portfolio along with requisite technical expertise enables this business to grow in sales and profits. (iii) Chemicals (6% of the Total Revenues):

The Chemicals business includes intermediates, petrochemicals & monomers. The chemicals supplied by the company cater to the requirement of a wide range of user industries including coatings, Life sciences, construction additives, food and feed, pharmaceuticals, agrochemicals, plastics and fibers, process chemicals and intermediates. Intermediates Division: The Intermediates Division caters to industry segments such as pharmaceuticals, agrochemicals, coatings, epoxy, leather, food, feed, etc. Major growth drivers for the business are exports of agrochemicals and pharmaceuticals actives. Although the business registered good growth in sales, specifically in the amines, acids and specialties portfolios; lower feedstock prices, coupled with limited volume availability on certain product lines impacts the performance of this business. With continued growth in Pharma sector, increase in exports by agrochemical manufacturers and growing thrust in the auto and appliance industries, outlook for this business looks positive. Petrochemicals: The Petrochemicals business comprises of Oxo alcohols, Solvents, Acrylic monomers and Plasticizers. Overcapacities on the supply side (primarily in China and new capacities that have come up in Middle East), leads to a challenging outlook. The company would however continue to have close engagement with its customers and position itself as one of the key suppliers in the Indian market. BASF‟s innovative and trusted non-phthalate plasticizer Hexamoll DINCH continues to make strong inroads into a range of applications. Monomers: The Monomers business deals in basic raw materials for polyurethane & polyamides and intermediates. Strong market conditions in sectors such as flexible PU foam, Construction, Footwear, Flexible packaging etc. contribute to the growth of methylene diphenyldiisocyanate (MDI) business. In the polyamides and precursor business, focus lies on packaging and monofilament segment, where the company has been reporting substantial growth both in value and volume terms. Local availability of toluene diisocyanate (TDI) and increasing capacity for Isocyanates in Asia with fluctuating raw material prices continues to be a challenge for this business in the mid-term. BASF will continue to have a strong engagement with customers and with the methylene diphenyldiisocyanate (MDI) splitter at

Dahej, it is expected that the company will maintain its position as one of the key suppliers to the market.

(iv) Functional Materials and Solutions (40% of the Total Revenues):

This segment comprises of the Coatings, Construction Chemicals, Performance Materials and Process Catalyst businesses. The automotive coatings business comprises of coatings for passenger cars, commercial vehicles and two wheelers. The business is focused on developing new products as well as enhancing the supply share at existing accounts that enables acquisition of new customers. Pursuant to the sale of global industrial coatings business by BASF SE, Germany to AkzoNobel, the industrial coatings business was transferred to Akzo Nobel India Limited with effect from 14th December 2016.


BASF India Limited


BUY


INVESTMENT RATIONALE: (contd.) (iv) Functional Materials and Solutions (40% of the revenues) (contd.) The Construction Chemicals business supplies chemical solutions and technologies to customers in the construction industry. The Admixture Systems segment caters to customers from the ready-mix, precast, site mix, underground construction and the cement producing industries. This segment has been affected due to delays in execution of infrastructure projects, liquidity concerns and increased price pressure from domestic and overseas competition. The company has commissioned a new Admixture plant at Kharagpur, West Bengal that produces the entire range of admixtures and accelerators and caters to the demand of customers based in East India and Bhutan.

The Construction Systems segment offers a wide range of products and solutions such as industrial floorings, grouting and anchoring systems, concrete repair and protection materials, crack repair and injection resins, joint sealants, tiling products, waterproofing membranes and exterior insulation and facade systems. There has been substantial growth registered driven by Waterproofing, Flooring and Repair systems.

The Performance Materials business caters to the requirements of Construction, Industrial Product applications and Transportation Industries. Performance Materials business (primarily Polyurethane and Engineering plastics) has been achieving significant growth in sales volume by continuing to capture new markets through business development and improving share at OEMs and their suppliers. The production unit for CELLASTO (Poylurethanes) at Dahej ramped up production and has achieved full capacity utilization. The Company maintains a positive outlook towards growth in this sector through increased penetration of its light weight solutions with engineering plastics and polyurethanes for metal replacement and new integrated seating solutions such as ELASTOSKIN.

The Consumer industry business has a strong presence in the appliance (refrigerator), footwear and furniture markets. Sales to the appliance market is led by addition of new customers and gaining volume from existing customers, which in turn increases utilization of the integrated polyurethane production at Dahej. In the footwear market, the company is one of the leading suppliers. BASF will continue to engage with customers and further strengthen its participation by leveraging its local supply capabilities from the Dahej plant. The Polyurethanes business continues to register growth in the construction industry due to value added services provided to large customers and introduction of system solutions in new markets.

The Process Catalysts business caters to the refining, petrochemicals and downstream base and fine chemicals industries. Commercial supplies from the fine chemicals catalyst plant at Mangalore, which caters to the pharmaceutical & agrochemical industries, has also picked up and the momentum is expected to build up further in times to come. The medium term outlook for process catalysts remains positive on the prospects of growth in the refining, petrochemical and pharmaceutical segments in India. (B) Strong Parentage: Added Advantage: BASF SE is known strongly for its R&D activities to develop innovative solutions. As per different media reports, it is indicated that the company plans that ~25% of the global R&D would be conducted in Asia Pacific by 2020. The different investments by BASF SE engage the Indian arm as well in the R&D domain. This helps it introduce new products into the domestic markets. Hence, the presence of the parent company and strong inclination towards R&D is a positive for BASF in terms of new product innovation and launches. (C) Investments in Dahej to Fructify: Dahej plant is the biggest investment (Rs10bn/USD180mn) made by BASF in India. The plant is located at Dahej Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR). The facility spreads across 23 hectares, housing an integrated hub for polyurethane manufacturing and production facility for care chemicals and polymer dispersions. It replicates 58% of product basket of Ludwigshafen site like MDI splitter (Asia‟s first) and Sulfation plant (India‟s first). It is developed as a chemical complex to reduce imports of intermediate products. The strengthening of the production platform in India is part of BASF SE‟s investment plans for the Asia-Pacific region, where the German parent aspires to invest more than USD12bn from 2013-2020. Through this facility, BASF India aims to significantly increase its competitiveness in the Indian market. While, the care chemicals facility is the first sulfation plant of BASF in India, the polymer dispersion plant will help boost company's dispersions business. With the commissioning of new plant at Dahej, the company has increased focus on making chemicals for downstream industries.

The Dahej plant is divided into 4 key products: (1) Integrated Polyurethane (PU) Complex: This consists of Polyols, MDI Splitter, PU Systems, Cellasto and TPU (2) Surfactants: Sulfation products, Low/High Temperature reaction (3) Polymeric Dispersion: Acronals, Styronals, Basoplasts (4) Automotive Engine Coolants Fluid: Super concentrate coolants, concentrate coolants, Ready to use coolants Thereby, the huge aptly thought capex by the company in the Dahej Plant would gradually fructify and would be visible in the numbers in terms of profits as well exponential growth across customers with increase in the demand catering capacity of the company.

229

804

1,796

3,872

6,004

1,718

43

784 390

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Exhibit: Capex Over the Years (in Rs mn):

Source: Annual Report (Ace Equity)


BASF India Limited


BUY


Financials: The downtrend in the financials of the company due to various factors like capacity addition, business consolidation as well as muted demand is well reflected in the past numbers. However, going forward we expect that there should be a ramp up with the new facilities getting into place. We feel that the gestation period for the company in every aspect of business is over and it should start reporting positive to good growth numbers going forward. The impact of one time profit/loss by the sale of leather business shall be visible in near term. Since the company financials are gradually picking, it is being reflected in the ratios as well. There is ramp up seen in the ROCE from negative to positive in FY18. This trend is expected to continue going ahead as well as the growth triggers fructify into revenues for the company. The focus of the management is to continue to drive profitable growth, improve efficiency and optimize working capital, leverage digitalization and drive customer centricity and innovate to meet market demands.

Recent Developments: Divestments and Acquisitions:

Completed divestment of Leather Chemicals business to Stahl Group Transfer of paper wet-end and water chemicals business to Solenis in India initiated Global acquisition of selected assets from Bayer Crop Science BASF SE, Germany closed the acquisition of vegetable seeds business from Bayer mainly operating under the brand Nunhems. The transaction adds a well-recognized brand with successful business track record to BASF SE's portfolio. The acquired vegetable seeds business comprises 24 crops & about 2,600 varieties. It also includes well-established, strong R&D and breeding systems with over 100 unique breeding programs in more than 15 crops. This closing completes BASF SE's acquisition of a significant range of businesses and assets with combined 2017 sales of EUR2.2bn. The all-cash purchase price aggregates to EUR7.6bn, subject to certain adjustments at closing.

Risks and Concerns: The company stands the risk in the business environment with regard to market growth, competition, currency fluctuations and unfavourable regulations / policies. It also has the risk in terms of fluctuations in the purchase/ supply chain, Production and demand in the industry, investments made to be aptly utilized. Outlook and Valuations: The company has been in the red as far as net levels are considered mainly due to the capacity additions in process, loss making business being consolidated as well as muted overall demand. However, the company has been streamlining the different segments, divesting the ones not accretive and ramping up the ones that are actually going to be lucrative for the company going forward. We initiate a BUY on the stock for a target price of Rs2500 over a 12 months horizon.

39,406 44,299 47,057

47,472

50,782

55,834

6% 6%

3%

2%

5%

6%

0%

1%

2%

3%

4%

5%

6%

7%

0

10,000

20,000

30,000

40,000

50,000

60,000

FY13 FY14 FY15 FY16 FY17 FY18

Sales (Rsmn) Ebidta (%)

Exhibit: Sales & Ebitda Margins:


12%

0.02%

-2%

6%

12%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2014 2015 2016 2017 2018

ROCE (%) Exhibit: ROCE on an uptrend:


Exhibit: BASF India vs. Nifty

Source: Ace Equity

Exhibit: BASF India EV/EBITDA

Source: Ace Equity

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