| STOCK UPDATE BASF India
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs712
Current market price: Rs656 Price target revised to Rs712
Result highlights - Bottom line in line with expectations: BASF India?s stand-alone Q2FY2011 net profit came in at Rs45.6 crore, up 34% year on year (YoY) and in line with our expectations. The Q2FY2011 results however are not strictly comparable with those of Q2FY2010, as the quarter under review includes the financials of the merged Ciba India.
- Top line zooms on consolidation with Ciba India: The total income for the quarter was up by 78.8% YoY to Rs658.6 crore, driven by a 1.2x year-on-year (Y-o-Y) rise in the revenue from the performance products business. The robust growth in the performance products business was largely due to the merger with Ciba India. The agricultural solutions business also logged in a good show with the revenue up by 55% YoY.
- OPM deteriorates on consolidation with Ciba India: The operating profit grew at a slower pace than the top line, expanding by 42.3% YoY to Rs78 crore in the quarter, due to around 300-basis-point contraction in the operating profit margin (OPM) to 11.9%. The OPM contraction was a result of the amalgamation with Ciba India, which enjoys lower margins than BASF India, and also on account of a decline in the margins of the agricultural solutions business.
- Board of directors approve scheme of amalgamation: During the quarter, the board of directors of BASF India approved a scheme of amalgamation of BASF Coatings (India), BASF Construction Chemicals (India) and BASF Polyurethane with BASF India. The proposed amalgamation would enable BASF India, to conduct its business more efficiently and leverage on economies of scale. The amalgamation would lead to an increase in stake of the BASF group in BASF India to 73.33% as compared to 71.69% earlier. Additionally the amalgamation would result in an increase in the share capital to Rs43.29 crore from Rs40.7 crore, thus implying an equity dilution of around 6%. However, we have not factored in the same in our assumptions due to lack of availability of financial details for BASF Coatings and BASF Construction Chemicals.
- Maintain Hold with a revised price target of Rs712: BASF India has reported a strong set of numbers for Q2FY2011 on the back of a healthy traction in demand across all its businesses. The OPM, however, witnessed some pressure as a result of the amalgamation of Ciba India coupled with lower margins for the agricultural solutions business. We have revised our earnings estimates for FY2011 and FY2012 to factor in the Q2FY2011 performance and our revised earnings per share (EPS) now stands at Rs38.3 for FY2011 and Rs47.5 for FY2012. Additionally, positive global news flow (ChemChina is considering the acquisition of Makhteshim for $2.7 billion, which is at around 22x FY2011 consensus EPS estimate) coupled with the recently approved scheme of amalgamation which will lead to improved synergies as well as greater parent company stake in BASF India causes us to raise our target multiple on the stock. As a result our revised price target stands at Rs712. At the current market price of Rs648, the stock trades at 13.6x its FY2012E EPS and 2.4x FY2012E book value (BV). We maintain our Hold recommendation on the stock with a price target of Rs712.
SECTOR UPDATE Fertiliser Government reduces NBS subsidy rates for FY2012
The government has reduced subsidy rates under nutrient based subsidy (NBS) for potassic, phosphatic and complex fertilisers for FY2012. The proposed rates would come into effect from April 1, 2011. NBS for NPK nutrients has been reduced by around 15-20% while that for S has been reduced by over 30%. On a product wise basis too the subsidy has been reduced by between 15-20%. The subsidy rates for the two micronutrients?boron and zinc have been left untouched. Additionally to improve the fertiliser availability, the department of fertilisers (DOF) has introduced two new distance slabs for reimbursement of freight subsidy for road transportation of fertilisers.
SHAREKHAN SPECIAL Q2FY2011 Banking earnings review During Q2FY2011, the banks under our coverage recorded a robust growth in core income led by an increase in margins. However, despite a sharp increase in the net interest income, the profit growth was slightly subdued due to an increase in non performing assets (NPA) provisions and a decline in treasury income. Going ahead, banks will continue to post a strong growth in operating profits led by a pick up in credit growth and healthy margins. Given the concerns emanating from microfinance and telecom sectors and weakness in certain sectors (exports, real estate etc), NPA provisions will remain high. In our view, a pick up in credit and healthy margins will remain key drivers for earnings. Our preferred picks in this sector are Axis Bank, State Bank of India, Union Bank of India and Bank of Baroda. Higher than expected slippages and increased provisioning for pension liabilities remain a key risk to our earning estimates. Q2FY2011 Capital Goods & Engineering earnings review Our capital goods & engineering universe?s Q2FY2011 results saw a better execution of the order book and reported a revenue growth in line with our expectation. This growth momentum in the top line in Q2FY2011 was a respite from the subdued growth posted in Q1FY2011. Operating margins were stable for the quarter as compared to that of last year as the effect of the rise in input cost started reflecting in the margins. A robust top line growth in H1FY2011 and an expectation of a better performance in H2FY2011 are the main reasons for us maintaining the earnings estimates for most of the companies in this sector post Q2FY2011 results. The management commentary in the capital goods space indicates an uptick in the clients? enquiries and a better demand scenario. Moreover, given the huge quantum of investments expected in the infrastructure space, the future of the capital goods sector continues to hold promise. Our top picks for the sector are BHEL, Thermax and V-Guard Industries. Q2FY2011 Construction earnings review The order inflow for construction and infrastructure development companies was subdued in Q2FY2011; our assessment based on BSE announcements and corporate press releases hints at a total order inflow of around Rs45,120 crore in Q2FY2011 as against close to Rs66,900 crore in the corresponding quarter of the previous fiscal. Even sequentially it would be down from the order inflow of Rs52,100 crore in Q1FY2011. The order activity was muted because the National Highway Authority of India (NHAI) awarded very few road projects during the quarter. However, the macro environment is positive and we expect the order awarding activity to pick up in H2FY2011. Going ahead, we expect a strong order intake for companies in sectors like roads, power, urban infrastructure, ports, buildings and industrial.
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