BASF Rs 5600
BASF was discussed on 9th October 2024 at a price of Rs 8500 as a potentially decent performer if certain positive triggers played out. Post the Q2FY25 results on 12 Oct 2024, company did a conference call with investors on 21 November 2024 from which the following data point stands out along with our concerns regarding the same (in italics): –
BASF has given 800 Cr inter-corporate deposit (ICD) to group companies at 7.5% rate of interest. Management shared that these funds are not required at present but would be available to BASF whenever required on account of need for higher working capital or capex.
Past 3, 5 and 10 years topline growth rates of BASF have been in the range of 12-18%. Working capital of BASF on 30 September 2024 as per company PPT was Rs 1542 Cr. Assuming higher than historical growth of 20%, the working capital requirement, which tends to rise in line with topline growth, would be around 300-325 Cr. Also, BASF is making annual profits in the range of 500-600 Cr. This annual accretion can easily fulfil working capital requirements. Placement of 800 Cr as ICD thus seems too high.
Regarding preserving this cash for capex requirements, in the last 10 years, BASF has added approximately 1000 Cr to its gross block translating to average capex of 100 Cr per year. In the 21st November conference call, management did not lay out any large capex plans. To be sure, the cash generation through annual profits could be sufficient to cover the past capex trend. This again raises concern about placement of ICD.
The stock price has fallen sharply from a high of Rs 8750 on 7th Oct 2024 before Q2FY25 results to around Rs 5600 currently. This could partly be a reaction to weak margins in Q2FY25 but some part of the fall surely seems to be because of concerns regarding judicious utilization of spare funds. It also raises concerns whether further capex of BASF group in India would be done through the listed entity or its unlisted arms. Until these concerns are clarified by the management expressly or through actions, it may be prudent to wait and watch.