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Aarati Krishnan

AS A diversified conglomerate with interests in agrochemicals, specialty chemicals and plastics, BASF India appears well-poised to benefit from a simultaneous revival in prospects for both its agricultural and industrial products. The stock market too appears to have taken note, with the price being marked up from Rs 100 to Rs 150 levels over the past six months.

Even now, the stock is not expensive, at a price-earnings multiple of around 12 times its 2002-03 earnings (Rs 11.8 per share).

Fresh investments in the stock may be considered only by investors with an appetite for risk, given the vulnerability of the company's earnings to commodity price cycles.

Shored up by agrochemicals

BASF India reported a marked improvement in both sales and profit performance in the September 2003 quarter, after a modest show in the preceding quarter. Net sales for the quarter were up by 18 per cent to Rs 158.2 crore, while net profits surged 22 per cent to Rs 10.4 crore. Performance in this quarter was driven mainly by a revival in both offtake and profit margins in the agrochemicals business, which accounts for over a third of the company's revenues.

A good monsoon, coming after the drought last year, pushed up the segment's sales by 48 per cent and more than doubled its profits in the September 2003 quarter.

The lag effect of a good monsoon on farm incomes is likely to spill over to the rabi sales (January-March) as well, which could bolster earnings for the second half of the year.

Chemicals: Looking rosier

If a bountiful monsoon has brightened up the prospects for the agrochemicals business, the reviving economy appears to have pepped up demand for BASF India's offerings in the specialty chemicals (catering mainly to leather, textile and paper industries) and plastics segments. Performance from these businesses was sedate in the recent times, but appears to hold promise.

Sales growth in both these segments has the potential to accelerate in the coming quarters, as the user industries pick up. In segments such as textiles and leather, players are beginning to ramp up operations after lying low for several years, helped by a surge in export demand. On the other hand, consumer durables, construction and automotive industries — the key users for BASF India's plastics business — are in the midst of a boom period marked by strong volume growth.

Pressure on margins, muted

While BASF's sales performance is already looking up due to these factors, profit margins have been under pressure in some segments such as specialty chemicals and dispersions.

This is largely because manufacturers have been unable to fully pass on the sharp spike in prices of commodity inputs since 2002 to their customers. The pressure on profit margins could continue, especially as BASF operates in intensely competitive markets.

But given that the upward spiral in petrochemical prices was already well underway by the last quarter of 2002, the impact of this spike on profit growth may be muted going forward.

What may work in BASF India's favour over the medium term, is the fact that it has already created substantial capacities in each of its key businesses.

Therefore, the ramp up in sales performance in recent times has come mainly through better utilisation of extant capacities.

As the company puts its idle capacities to better use, profit margins could benefit without significant additional outlays on fixed costs.

Any reduction interest costs, from the ongoing debt restructuring exercise would also pep up net profit growth. BASF India's per share earnings (unannualised) for 2003-04 first half stands at Rs 7.3.

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