BASF India
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: R220
Piggybacking on consumption boom
Key points
- We expect BASF India (BASF) to benefit from the changing demographics and the resulting consumption boom in India.
- BASF's products are used in industries like white goods, textiles, home furnishing, paper, construction and automobiles all of which have been growing at a fast pace in contemporary times.
- To capitalise on the resulting opportunity, BASF is expanding the capacity of its two key products, expandable polystyrene and polymer dispersion, which are used in the white goods industry and paper industry respectively.
- We expect BASF's revenues to grow at a compounded annual growth rate (CAGR) of 31% and its earnings to grow at CAGR of 32.8% over FY2006-08E.
- It has seen consistent return ratios in the past five years. It has RoCE of 24.8% and RoNW of 17.1% for FY2006; the same are expected to improve to 33.8% and 23.8% respectively by FY2008E.
- BASF has a dividend yield of 3.3% and a high dividend pay-out of 40% which provide a margin of safety to the investment.
- At the current market price of Rs220, the stock is quoting at 7.6x its FY2008E earnings per share (EPS) and 4.3x its FY2008E EV/EBIDTA.
- We believe that the stock is trading at attractive valuations given that:
- the outlook for the company's business is very bright over next two years;
- the return ratios, RoCE and RoNW, are likely to show sharp improvement; and
- the dependence on agrinutrients business is likely to reduce substantially. - We recommend a Buy on BASF with a price target of Rs300.