Discretionary exposure to keep growth under pressure at BASF India

The agrochemicals segment, however, should be able to offset some of the growth challenges

The stock of BASF India has gained nearly 30 per cent over the past week on institutional buying and growth expectations, especially in the agrichemicals segment. In addition to top-line growth, the Indian subsidiary of the world’s largest chemicals company is looking at improving margins across its various segments. 

Near-term growth should be led by the agrichemicals segment, which accounted for a quarter of its revenues in the June quarter. Even as the overall revenue in the June quarter was up about 10 per cent, the agrichemicals segment growth came in higher by 26 per cent year-on-year (YoY). 

An early start to the kharif season led by healthy reservoir levels and a bit of pre-buying helped the sector post strong growth rates in the quarter. Analysts expect the strong growth trend to continue, given the progression of the monsoon and crop-sowing momentum, so far. 

Over the next few years, the company is looking at launching 15 new products in this segment which, coupled with the existing portfolio, is expected to keep volume growth steady. In addition to multiple tailwinds, such as favourable monsoon and government policies, new product segments and enhanced distribution should aid in volume growth.

 

 

In addition, growth in the nutrition and care, and chemicals segments has been strong. While growth in the former was led by higher demand for cleaning products, robust demand for intermediates and a low base helped the latter. While most companies benefitted from the higher demand for pharma, agrochemicals, and home and personal products in the June quarter, the discretionary segment (paints, plastics, polymers, auto, and adhesives, among others) was impacted by Covid-19. 

BASF’s exposure to discretionary demand (about half its sales) through its materials, industrial solutions, and surface technologies segments may keep overall growth under pressure. Analysts at Emkay Research expect moderate growth for the company and highlight that margin volatility in segments, such as materials and surface technologies, will be a key monitorable. Company margins have been the range of 1-5 per cent over the past five quarters. 

The company is looking at improving its return on capital employed from just under 6 per cent to 10 per cent in the next two to three years, led by cost efficiencies and improving product portfolio. 

Given the 55 per cent price uptick in the stock over the past three months, there is little upside from these levels. Investors must await steady revenue growth and margin performance (they have ranged from 1-5 per cent in the past five quarters) before considering the stock.