BASF India Limited Analyst Meet

Transcription

1 BASF India Limited Analyst Meet MANAGEMENT: MR. NARENDRANATH BALIGA CHIEF FINANCIAL OFFICER & DIRECTOR (FINANCE), BASF INDIA Page 1 of 26

2 Moderator: Good afternoon. Thank you all for attending our Analyst Meet. And thanks once again for making it, because in-spite of heavy rains outside you still could able to make it, this talks about the commitment. Now, there will be a presentation from Narendranath Baliga, he is our Finance (Director); followed by the question-and-answer session. So, after that I request all of you to join us for high tea outside. Of course, because of today's situation, would like to also wind up at the earliest, but yes, I think we can target 4:30 or so, so that all of us have an opportunity to reach our home safely. Thank you. So, the name is Narendranath Baliga, I am the Chief Financial Officer of BASF India. Today we have a quick short presentation to update you on what is happening in BASF, what we are doing and the results of course, followed by the question-and-answers. So, if you allow we can have more time at the question-and-answer session than the presentation. This you already know, whatever is in the public domain is what we will be talking about and no prognosis about the future business. BASF being a chemical company, we always start with safety slide. Starting in March this year, we had this Global Safety Week where we took more than 70 activities locally in India to identify different safety issues and address that to the people, this is to create awareness in the people that safety is primary to us and to be a sustainable company we need to have safe operations. Green Rating for Thane site, this is a global audit done by our parent company where any plant falling in the red area will be given a chance to improve immediately, if not, the plant is closed. And yellow means it is somewhere in between and green means we are okay. So the Thane plant, which is one of our main important manufacturing plant was in the yellow zone, which after a couple of, you can see 2012 to 2016 the shift happened where they could show the improvement and bring it back to green. So that was a good story for us. TravelSafe Campaign is another campaign that we took up in the country to provide some defensive driving training to the employees, so that even in the daily life they can manage the traffic better, from a defensive perspective. And also when they are travelling they can take care of themselves better. Project Nicer Globe is a one where, if you see, a chemical company we transport a lot of chemicals, the raw materials of finished goods. Nicer Globe is a initiative where we take the drivers and train them and educate them on the safety aspect and ensure that these moments happen in an organized manner, for example, we do not have driving during the night times, from particular given time 7 to 6, for example, 7 in the evening to 6 in the morning we do not allow the drivers to drive. And tankers are generally fitted with GPS, so we have a real time system in Thane plant where we can see who is driving in the night, and there is a clear ban on night driving, because these are tankers with chemicals and we do not want any accidents at Page 2 of 26

3 night time where the visibility can be low. So, these are some of the things that we take care to ensure a safe operation. Coming to the Global Environment. Nothing of this is new to you, all of that is known. The reason I put up that as a slide is to create the context in which we are discussing the numbers, this is the environment in which we were operating, especially if you realize that I am going to talk about 31 st March, 2016, number first last year, four-five months back. So, 12 months of that period had all these problem, the China market was slackened, so whatever is produced in China if they cannot sell in China, probably India is one of the destination for them, so that dumping happened and pushed down our prices. Crude oil prices fell and then rose, pretty volatile period. Second successive year of drought in 2015 we had drought, 2014 we had drought and then that is the scenario against which we are talking about, the March 2016 numbers. And the rupee volatility, depreciated over the period. Again, just to remind you, what is the GDP growth, we are talking about ranging from 6.2% to 7.4% across the two year horizon. This was the situation and the Industrial Capacity Utilization was also around 70% throughout the period, which means 30% is unutilized, which also means every producer is trying to fill that 30% capacity and dump the material, any marginal cost is good enough for the suppliers. So that kind of a situation was also there. PMI Manufacturing, Purchasing Managers Index just above 50, if you see, and then we had a sharp deflate in the manufacturing activity. Rural Income Dipped, which is significant of all the things that you can see here this probably, this is one thing that has impacted us the most when 70% of the Indian population did not have the regular income because of the drought for the last two years and that is the scenario against which we had to sell our products. Not just agricultural products which is directly impacted by rural earnings or drought, but also other products like consumer goods industry, whether it is white goods industry, two wheelers,everywhere if the rural income dips you have a immediate fall in the price. If you are following BASF, you know there are four segments that we have, we have Chemicals, Performance Products, then next comes Functional Material & Solutions and Agricultural Solutions, four segments. Oil & Gas we are not in India, elsewhere in BASF, that is the fifth segment, Oil & Gas, we do not have it in India. Chemicals - paint, agro, these are the growth sectors. And our intention is to maintain the market share here and see where we can optimize the pricing. This is one sector where we do not have any manufacturing facility in India, we import, whether it is intermediates, monomers or petrochemicals, we import and sell either as agency business where we get commission or as merchandize, we import stock and then sell, so plus and minus and then sell. Performance Products is the next segment here. Paint & coatings, if you are following the paint industry, you know paint is one thing that is doing pretty well in-spite of all these negative, paint Page 3 of 26

4 is doing well. Home & personal care is a kind of evergreen in this one, so that continues to do well. And yesterday we had our Board Meeting and one of our Directors was mentioning how the per capita consumption of personal & home care products in India is much below, even places like Philippines and Indonesia, it was really a surprising thing. If you compare it to a global developed markets like US or Europe, you can understand yes there is that difference. But even in Asia, in a developing market, Philippines and Indonesia have much higher consumption of personal care & home care than India, so a good growth potential there. And we have invested in Dahej, two business units of ours are invested in Dahej for Performance Products, Dispersion and Care Chemicals. Coming to the next, Functional Materials & Solutions, the third segment in BASF. This is more of a customer driven solution business, which means we have coatings where you have to interact with Honda or Hyundai or Tata or Maruti and say what exactly they need and provide that, construction chemicals is also sitting here. And performance materials which goes to FMCG goods and white goods industry, auto industry, footwear industry, all that is sitting in this Functional Materials & Solutions. And then the Agricultural Solutions. Again, no need to again repeat or remind, second year of drought and focus on crop and product portfolio to reduce risk, because we are focusing on certain crops earlier and now we want to diversify into some other products so that we are not over dependent on one crop. A quick look at plants that we have across India. Even in that bad year, if you see, we still continue to invest, we first invested in Dahej around Rs. 1,000 crores and then continue to invest small amounts in various spaces wherever we thought there is a good market and there is a good opportunity. Kharagpur is one, in West Bengal, where we have our construction chemicals plant. A small plant required for the region where we think future growth will happen, that is the eastern part of India. And in Nellore, Andhra Pradesh, we have another site which was inaugurated in April Dahej is well known, I mean, there are 10 plants there. This is generally not known, Dahej people consider it as one big plant, it is not one big plant but it is 10 different plants and all the 10 plants have been commissioned. There are enough customer approvals on hand because most of the products that we manufacture in Dahej need customer approval, which means, we are talking about LG or Samsung or Unilever or P&G or Dabur or whatever company you name, you need the customer approval first which is a pretty long process. This you have to remember, because later I will be again referring to this point that is separately long six months process where you start manufacturing, stabilize the plant, give the products to the customer and the customer checks that and says, 'Yes good', and then you can continue to supply. If the customer says I do not accept this quality, back to the drawing board, you rework the product and then manufacture something and then give it and wait for the result. So pretty long six months cycle which we Page 4 of 26

5 have to take care of. And the most important point on that is the ramping up of the utilization and increasing the operational efficiency. Being a new plant, Rs. 1,000 crores you invest and then it takes time to bring up the utilization and also stabilize the operations. Ankleshwar is a small plant, Pergafast plant is one, a small expansion we did and also process improvements and debottlenecking for increase in the capacity continues to be the focus for Ankleshwar. Mangalore, it is a 10 to 12-year-old plant, you remember this clearly. And improving the operational efficiency and operational excellence is one of the focus areas for this, because this is a pretty stabilized plant, already manufacturing, doing well and now we have to optimize the utilization. Thane is a 50-year-old site, this year we are covering 50 years in Thane. And this is the plant which I was talking about which was categorized yellow in our safety audit, which means there were some issues. It is an old plant, all issues, so identified as yellow and then in three to four years time the team could bring it back to green. So this is the plant we were talking about. Always the question comes up, the portfolio restructuring. We keep buying companies, we keep selling businesses. Over a period if you see, this in recent period these are some of the acquisitions, or divestment we had. Textile Chemicals business to Archroma, 1st July, 2015, we sold the business, it was getting around Rs. 150 crores - Rs. 160 crores of sales every year that is the business it sold. A new business model for Automotive Refinish Coatings, this is sometime in February - March 2015, not in 2016, not in our financial year, before. But then that is the business which we had changed the model, so that is not fully captured this year. Industrial coatings business, again, very small, insignificant portion sold around Rs. 12 crores - Rs. 15 crores was what we had here. And of the four, acquisition of Chemetall is the new one, this is the new company that BASF acquired globally, we have two manufacturing units in India and that is the new acquisition. The labels are self explanatory here, nice photos. So, one of the focus that we have is how we can develop the employees, because the company is made up of employees, without right employee you will not be able to manage what you plan to achieve. The focus is continuously to identify employees who are excelling in their work and then encouraging others to follow the lead, and we do a great amount of effort, we put a lot of effort here to educate employees on these things and then reward them for the work done. At the same time, we always think, being a German company the technology and improvement and opportunities always come from outside, not necessarily so. Even from India you have a couple of teams working on certain projects which excel so well they get global or Asia Pacific recognition, and these projects are then copied in other regions. So it is not that we just import things here, we also export our talent and initiatives outside. Page 5 of 26

6 Customers, the main part of the equation. The final recognition is always when the customer says, 'Yes you have done a great job', and reward BASF as a supplier. So, most of the companies like, this is just a small shot of what we usually get every year from Tatas and Mahindras and Unilever kind of companies. Now I come to the performance review of the full year 2015 and This is kind of an old information for you, because we already have announced yesterday the June quarter results also, so this is kind of one earlier result. We had to transform ourselves to the period, because that is what we are talking about here, when we talk about weaker monsoon, this is not representative of what we are seeing outside, so this is one and a half years back. Weaker monsoon, definitely impacting the rural demand, like I already said with so much of people depending on agriculture when the monsoon fails agricultural income falls, the rural income falls and that is when you see the two wheelers not selling, white goods not selling, FMCG goods not selling, none of those get sold and that we have a knock on effect directly because we sell to those industries who manufacture and sell. Lower crude and volatile commodity prices impacted us, at what rate you buy. In one of the earlier slides I showed how much it moved up and down and you have to imagine we buying our raw materials at every stage and by the time it is ready for sale, already the prices have crashed further pushing down our inventory valuation and pushing down our sale price. China stagnation is one big impact, that is when most of the producers started dumping their products in India, which means we have so much extra competition which was not there when China was doing well. Coming to Dahej, commissioned and stabilized, all the 10 plants are commissioned. In the year when it was ramping up, we had a Rs. 90 crores sale, generally we do not talk about sale from our plant, this is kind of internal information, we do not disclose that but being a new plant and being an important part of our future strategy we say a little more about Dahej than what we usually do with our other plants. So, Rs. 570 crores is what we had accounted for 2015 and 2016, this is not representative, it does not mean anything much here, except that it is ramping up and it is going in the right direction, Rs. 90 crores is not really representative because we were just commissioning and starting. Approvals from the new customers are in place, most of the customers and then there are many other customers whom we are still working with. Good thing about the whole situation is, inspite of all the problem that I talked about, in-spite of starting up Dahej which is a huge manufacturing unit for us and in-spite of all this sluggishness in the market, the team was able to reduce the short-term borrowings by around Rs. 200 plus crores, by focusing on the inventory, reducing the inventory to an optimum level where you can say this is the level we should maintain, because you cannot bring it to zero that is the whole purpose, you have to keep it at a certain rate where you say this is the optimal inventory. That was achieved. On the receivables, there was a lot of focus to reduce overdues and keep the receivables under control. And on the supplier side, we also ensured the payment days increased from whatever it was by a good Page 6 of 26

7 margin. So for example, if it was 60 days we tried to push it up to 90 days or 70 days, whatever better to have the credit with us. Dahej borrowings, we had a $150 million of borrowings in Dahej, $12 million was returned because we did not have any use for that unutilized fund which is around Rs. 78 crores, the $12 million translates to Rs. 78 crores. And the savings because of this Rs. 300 crores repayment is shown very clearly in the interest. Exceptional items, probably you are getting used to this now in BASF, monthly, quarterly, annually, half yearly, all this we have significant amount of exceptional items. So to keep it transparent, we disclose what are those exceptional items. Textile business carve out which I talked about, got us Rs. 90 crores. And sale of non-core assets which are basically residential flats, which we had in Mumbai which we sold at that time got us another Rs. 82 crores. So this plus this is the Rs. 172 crores that you see in our full year numbers as exceptional item. The overall growth of 1% looks pretty small, till I tell you, that also includes lower agro sales by around Rs. 270 crores in we had sold around Rs. 890 crores and coming down to the sale was around Rs. 600 crores. The increase in Dahej is not fully new sale, the Rs. 500 crores what we talk about is not fully new sale because part of that is also a replacement of some merchandize products that we bought. So we had some merchandize products which we were importing and as pre-marketing selling into the local market till we stabilized our Dahej plant. And once the Dahej plant stabilizes, we stop the merchandizing business. So it is kind of a replacement of existing business with them. With all that in place, we still could manage that 1% growth. And depreciation of course was higher, because here in 2015 it was not full year depreciation, we were still ramping up from July 2014 we started our capitalization, July, August, September, November, December, I think almost every month we had one plant going live. So, that is not fully captured here, whereas here it is almost fully captured, Rs. 176 crores of depreciation. Interest I was telling you, here in 2015 still a lot of interest was getting capitalized because the plant was still not commissioned and whatever interest you pay during that period is capitalized, so that was getting capitalized here whereas coming here it is full interest captured here. In-spite of that you can see a very small increase in interest, that is mainly because of the Rs. 300 crores of borrowings repaid. Exceptional items, Rs. 172 crores I talked about, the textile divestment of Rs. 90 crores plus real-estate of Rs. 82 crores and here also Rs. 29 crores also refers to some apartment sold in that year. And you remember Rs. 4 crores was our total profit, we distributed dividend of Rs. 4 crores, earnings per share matching dividend per share, because the entire earning of that year we decided to distribute as dividend by convincing our parent company that it made sense to distribute all the profit this year, because the parent company always has this question when you have borrowings when the situation is not good, why do you want to make the dividend, which is 73% of our total shareholding by the parent. Page 7 of 26

8 I would not get into Agriculture Solutions again, I have talked about all the points here. If you have any questions you can ask later. Performance Products is another growth area for us. Care Chemicals and Dispersions both have new manufacturing plants in Dahej, nutrition does not have but Care Chemicals and Dispersions have manufacturing unit in Dahej. Customer approvals are in place, we are working for more customers to get in, full cost of Dahej is impacting. Care Chemical is one product which is so specialized, when you send it to the customer if it is a little off-spec it gets rejected. So, in a new plant when you manufacture a new product, chances are that it is not on spec. And then we get the material back, either we have not dispatched to the customer itself, which is a very good situation or it has already reached the customer and returned. And this material we do not even try to sell it in the market, it is incinerated, destroyed in the plant. So, this cost we had to incur in the beginning, impacting also our results. And Textile carve out is definitely impacting the year-on-year comparison, between that Rs. 160 crores which we had in the full year last year is not fully captured in this year, except for the first three months we do not have that business anymore with us. Functional Materials & Solutions. Growth in the auto sector, consumer and construction sector and then we have, I mean, good volume growth there, 6%, performance material is also existing in Dahej. So, if you ask me which are the businesses existing in Dahej, going back a slide, Care Chemicals is there, Dispersion is there and the third plant is Performance Material. Coatings business is lower, like I said. The refinished business carve out the coatings is also impacting the business here, though the amount is very small, the business model change, but then that is also one of the factors that is affecting. Margins in the Performance Material improved, and that is the kind of turnaround that we had there. On Chemicals, if you remember what I said earlier, this is one segment where we do not have any of our own production facility. We import, I mean, import in the sense we either take merchandize or do agency business, but we do not manufacture it in India for the full year. In Petrochemicals and Intermediates, the business model change from agency to merchandize, which means instead of getting just the commission for arranging the sale, the kind of a brokerage that used to be the model there, from that perspective we turned around and said it is better to do merchandize of this product. In fact, that also impacted us a little bit because when we import it it takes six to eight weeks for the product to reach from Germany to India and by the time if the crude has fallen, we have to take the hit. In agency business that is not the case whereas in merchandize business that is the case, we take the risk of plus or minus. Crude continues to impact, this is our one segment where crude impacts and full cost of Dahej definitely impacted the earlier period. Equity, no major change. Whatever we earn we distribute it as dividend, there is some small addition distribution tax we pay, so it came down a little below the last year level, but otherwise it is exactly the same level. Borrowings, we have repaid the amounts and that is the reason why even before our actual repayment began by repaying the short-term loans and also prepaying the Page 8 of 26

9 borrowings from the external commercial source, we could reduce the borrowings. And fixed assets, the depreciation was higher than the replacement of asset, so CAPEX was low, we had already capitalized Dahej, so that is not there anyway, it is already sitting here in one quarter and the depreciation was higher than the new assets replaced, showing a reduction in the net block of fixed assets. With a reduction in borrowings, one of the outcome is that your debt equity ratio becomes 1.2 from 1.4, otherwise you see the equity has not changed, the borrowings which changed the ratio here. No other major change. Return on capital employed, again, worth noting, that is after exceptional item, so it is not really indicative there, it is after the exceptional item it is a 4% increase in ROC. Whatever you saw now, the numbers in the earlier slide is what you see in our annual report, this is exactly what we have put there. And now how that number would look like if it was under IndAS, the Indian Accounting Standard is what we are going to look at. You know by 1st April, 2016, all companies, I mean, companies which are subject to certain thresholds had to submit their numbers in Indian Accounting Standard. And we also do it for a year earlier, 1st April, to have the comparable number s on hand, and you have the comparable numbers and from here it starts, so whatever future slides you see is based on IndAS. And if you have seen our results announced yesterday, that again is fully on IndAS basis and previous year figures have been converted to IndAS, so whatever you see in yesterday's announcement is under IndAS. Sales disclosure, you know this, all the companies are impacted by this. In the case of Indian GAAP, the old GAAP it was net of excise duty, so we were not adding excise duty to sales, we were showing it separately whereas now it is added to the sales and then the next line item reduces. So, no impact on the bottom-line but sales get inflated, and in our case it is around Rs. 400 crores for 2016 financial year. Forward contracts were accounted on gross basis earlier, now we have shifted to net basis. The amortization of premium on the forward contract used to happen through the P&L over the life of the asset, now we shift it to mark-to-market, valuation at the periodical levels and at the P&L. These are not significant impacting items, its sales significantly shows a higher number. And ECB, the external commercial borrowings, earlier under Indian GAAP we were allowed to take this hedging cost and capitalize it, so we were capitalizing the hedging cost of the ECB loan, thereby inflating the asset value and not hitting the P&L. Whereas now under IndAS we are allowed to charge it to the P&L and mark-to-market valuation we do to ensure the entire interest part and the forward cover part is charged to the P&L and the interest really reflects this kind of a borrowing cost for the commercial borrowing. That was qualitative, and now if you see from a quantitative perspective where it is hitting, this row is what you see in our annual report, this is the number. And then if it was under IndAS, this is how it would have looked like and this number you can actually see in our yesterday's publication where we show a full 12 months results. Income from operations, I already explained, around Rs. 400 crores higher because of adoption of IndAS. And depreciation, because we did not capitalize the hedging cost but instead charged it in the P&L, so the asset Page 9 of 26

10 value was also lower and thereby lower depreciation. And consequent to that, since we are not capitalizing it, it was charged as interest and that shows the increase in the interest. So, 46 minus 13 is the net impact of adopting this concept of charging the entire amount to the interest and not capitalizing even the hedging cost of the borrowing. Net impact is (-34), so instead of (-168) which you see in our report, it is (-202) and this is before exceptional item, because then we have a 172 exceptional item here which makes it +4. So, 168 plus 172 exceptional item makes it 4. So instead of (-168) now it will be (-202) for all comparable basis, for all comparable requirement in future it will be this line. The inflation of the top-line increases the material cost consumption from 73% which it was, for the same thing when you recalculate it under the new numbers which was 75% cost. So net, net it is a 2% increase in the material cost. It is only for the presentation sake, but actually you should understand it is a same material, we consider 73% is already there, now when you show it it looks 75%, it is not increase in consumption. Coming to performance review of quarter one. The Board Meeting for this was yesterday and it was approved, we announced it yesterday, so this is what you see in the newspaper today. A 3% increase in the total sales. In the case of agro, which I did not mention earlier, we used to sell in advance the agro products in the market and place the products in the market earlier expecting a good monsoon and hope that there will be good monsoon. So, in 2015 or 2016 we did that and realized if the monsoon fails half of that material will come back to you. So, that was not such a good strategy, so we changed the strategy this time in 2016 season and said we will place it closer to the season, so we know whether it is raining, we know whether it is going to rain and then we are placing it in the market. There are some risks to that strategy also, but then our team is good and flexible to manage that kind of a situation. So, this time the sales, in 2015 the sales was more sitting in this quarter, I am talking about agro only, and in 2016 part of that sale is captured already in June and part will come in the subsequent quarter, because we are placing it closer to the season rather than putting it in advance and then getting it back if the monsoon fails. So, now hopefully monsoon is good and the hope is if it does not flood across the country, because that again is another risk that you run, either drought is a risk, flooding is a risk, something in between is only the right thing that we need, we are hoping for that. Percentage of net sales, it was 77% when Dahej had just started and already that has been brought down by 1% which is a significant improvement if you see, because from 77% to 1% reduction of 1508 means around Rs. 15 crores already added to the bottom-line. Now this is in-spite of starting up a huge plant like Dahej where the material consumption is generally much higher than a optimized plant, for example, Mangalore or Thane where every kg that goes in is measured and everyone knows why it is so much. Whereas, in a plant like Dahej you will end up spending a little more material because to bring that final finished goods it is kind of a trial and error in the beginning. So, all that cost is included, in-spite of that there is a 1% reduction in the material cost, which is for me a very good story. Coming to depreciation, around same, because we had already capitalized it here and we are around there now. And interest, I was talking about what the team could achieve from Rs. 40 Page 10 of 26

11 crores and all these are under IndAS, so you do not have to mentally calculate anything here, already it is recalculated for Indian Accounting Standards and there you see a Rs. 8 crores reduction in the interest. Profit before tax improves, after a long time we have a positive number, even before considering the exceptional items. So, that again is a good story there. We had, again, exceptional item of Rs. 2 crores, we sold one small flat in Mumbai which got us that Rs. 2 crores and interest of transparency we also specifically show that as an exceptional item. Summing up, what I just now talked about. Investing in the growth opportunities, if you go back three - four years and see when did we think of investing in Dahej, a Rs crores plant, not many companies were investing at that time, BASF was one of the very, very few chemical manufacturing units which invested in India at that time. That is because of the faith and trust we had in the market and we continue to invest in the growth opportunities, small construction chemical plants come up, I had showed you about Kharagpur or Nellore or Nalagarh and all these places. Innovating to meet the market demands, definitely that is the key to surviving in a competitive market like this where you innovate, you understand from the customer what is the need and then try to provide that exact requirement and not just say, 'Oh this is a chemical company, you are from Germany, we have a product, please take that'. In a competitive market you have to tailor make your products to the customer and ensure innovation is in place and that we capitalize on the innovation. Capacity utilization is a very clear focus area when you come up with Dahej like plant, you definitely have to ramp it up to 100% as fast as possible, we are not yet there, at one point of time we had to reach there. So that is clearly a focus area. And improving efficiency, because we do not want to lose our site on other plant, we have in Mangalore, we have in Thane, we have elsewhere. So focusing on one big plant also should not mean that we are not focusing on other plants. So, efficiency effectiveness is one thing which is not just in the manufacturing units but also in the functional and marketing teams. So we continuously focus on improving the efficiency. These are the measures which we continuously take to ensure the focus on future and our investments materialize better. That is my super fast presentation on this, because I wanted more time for the question-andanswers. So, you have seen the numbers, you have already analyzed it, you know that, so I do not have to tell you that. Usually in this kind of an interaction they tell me more analysis than I can tell them, so that I will leave to you. Let us open for questions. You mentioned about investment in Kharagpur, the new plant, can you give us the idea how much the investment was, what was the key product? Kharagpur is around Rs. 30 crores to Rs. 35 crores investment and our construction chemical business is where we want to setup the plant, like if you need to focus on the Northeast part of the country, that is the reason why we have it in Kharagpur. Similarly, in Nellore, similarly in Nalagarh. Page 11 of 26

12 You mentioned there was a new business model in automotive coating side, so can you give us the idea what was the shift, what is the new business model like compared to the previous one? Automotive refinish, this is the business that we gave to Würth, you see those shops here, Würth so the automotive refinish. We used to buy and distribute it in the market, now we give it to the Würth takes it from us and then gives it in the refinished business, which is not a focus area for BASF anymore globally so we handed over to Würth Lastly, if you can give some idea on the new product launches in the agrochemical side that you have done last year, how many new products which insecticide, herbicide or? I would not be able to go into the details of that, that is already in the public domain, you can see that. What I can tell you is on a regular basis we keep restructuring the portfolio in such a manner that we are now focusing only on soybean which is our very strong area, last two years we realized when you are focusing so much on one it may not be the right strategy. It takes some time also to get a new product registered in the country. So we have a product pipeline which is available with our global parent company and one by one, depending on the market, depending on the pricing we bring them here and update our portfolio. So, we can expand to other products like corn and rice and other products. Could you share with us the capacity utilization currently at the Dahej plant? We do not talk about the capacity utilization of any plant in BASF, generally we make a general comment on that. So, even for Dahej I can say it started commissioning in July 2014 and up to 2015 we were ramping it up, one by one stabilizing the plant, taking care of all the technological issues, all this were resolved. And now it is ramping up and at a stage where you can say if there is market demand I can supply, we are in fact a stabilize state that is the reason why I could say our plans have been commissioned and stabilized. And from what I understand, Dahej is primarily our setup for import substitution or you are looking at even new products being developed there? Definitely, both will be focused on, there is some import substation that is a good point there. In the earlier period, before Dahej production started we did some pre-marketing by importing the products from BASF Germany or elsewhere from the BASF Group and creating a pre-marketing here, in the sense to make the customers familiarize with our product. So they use it, they are comfortable with that. And then when our production started we could sell from here. So, to that extent it is import substitution and then if there are any local requirements, definitely that also will be developed, we have our development centers here, application centers which continuously work on these things and develop the products in such a manner that you do not Page 12 of 26

13 have to depend entirely on what exactly is available from a global parent but tweak it in such a manner that is sufficient for India also, suitable for India also. So, for certain products you are actually creating a new market, in the sense? Correct. Compared to what the company was doing earlier? Correct. Okay, one more question. This quarter, as in the June 2016 quarter, there is a spike in the profitability of the chemicals business whereas in the March quarter there was a spike in the agrochemical profitability. Could you just throw some light so that we can better our understanding because, I mean, traditionally like the June quarter is a strong quarter for the agrochemicals which of course you explained why it is the reason for the dip. Chemicals, if you see last year same quarter and compared to this year same quarter, there is definitely improvement. Last quarter is the time when the commodity prices were falling and that is one of the reasons why we were impacted there and there was a plant in Dahej also under monomers which comes under chemical segment which also impacted because of the depreciation of that plant which was ramping up was impacted there. As compared to that situation, today if you see in our intermediates and petrochemicals, we have merchandizing, which means we are importing and selling it here. The same products when we were doing it last year, we incurred some losses because of the falling crude, you are importing and it takes two months to sale here from Germany, by the time it reaches here prices of crude have fallen, automatically formula based pricing means your products also gets hit, your sell price also gets reduced. So that impact we had there, which was partially also reimbursed by the parent in the March quarter. To continue to your question why the March quarter was better, because there were some price adjustment from the parent company for all these purchases that we had done on a arms length basis, what you can call ICTP to ensure BASF India is treated like any other third party merchant. And that is the reason why we have some good numbers in the March quarter which improved the results for the whole financial year. And this quarter it is a good performance by intermediates and petrochemical business. But of course the crude has sort of given support and the prices have not fallen, right? Absolutely. What we suffered when it fell, we are making up when it is going. You saw in one of my slides earlier, I showed the fall and the rise, that is exactly how it happened. And chemical sector is something where you cannot escape crude, it is purely formula based, unline Performance Products and Agro where you have the pricing point whereas when it comes to Page 13 of 26

14 chemicals it is generally formula based and any change in the crude, even before we know, our customer calls up and says there is a $1 fall, reduce my price. And the agrochemical business performed again, the profits were very good in the March quarter, the agrochemicals. I mean, I would assume traditionally one does not really expect the March quarter to be good. That again is a price correction there, similar to what I said for the other two segments, agro also had a price adjustment which brought some money to BASF India with adjustment. This is from the parent or? From the Group companies whom we had imported the material. And in this quarter you have a lower agro because we have a Rs. 300 crores sale, but the agro number for the quarter June if you see it is lower because of the high cost of the material that we are holding, you can see it across, probably analyze more agro companies here, you can see the same effect of higher inventory carrying cost which they are carrying from season-to-season when season fails. You have to carry it and then this is the time when we liquidate it and hope the monsoon is good. But you should be able to catch up on sales in the next quarter, right? It is more of a postponement, I would say. In the last year we had sold by this time, expecting a good monsoon, then we learned something that it may not be the right strategy. This time we spread it out a little bit to ensure we have sales in the next quarter. Abhijeet: This is Abhijeet from IIFL, thanks for the opportunity. The Rs crores Dahej CAPEX, if you could just give us the breakdown between which BUs or which plants it went into. I would not be able to give you a breakup of that, I can tell you which are the plants that we have main plants. One is coming from Care Chemicals, this is the one which supplies to your Unilever and P&G and Dabur kind of companies, and then you have Performance Material which is supplying to auto industry, footwear industry, white goods industry, etc. And then you have dispersions which are to paper industry, etc. So these are the three businesses that are existing there which have 10 plants under them. Abhijeet: Is there also a lot of utility or shared infrastructure? Shared information, yes of course. Abhijeet: And would that have been a significant proportion of the overall Rs. 1,000 crores or? Page 14 of 26

15 It is a good portion of the Rs. 1,000 crores and we allocate the utilities to the respective clients because they are finally responsible to earn profit, but these are shared utilities which are setup for the Dahej plant. Abhijeet: And how much more time do you envisage before you hit full capacity utilization at Dahej? And also, do you have an ROC target in mind for the investment? Yes. As soon as the market improves, capacity utilization improves. So you have to tell us when will that market improve, because that 7.5% that we see in the GDP growth is not actually visible in the market. When I talk on one on one basis to everyone of you I get the same impression that nobody sees that 7.5% that is happening, but then we are betting on that. So, whenever the market improves we are there. Abhijeet: The second part of the question was on the return on capital, when I look back over the last, since FY10, your financials, there has been a huge increase in investments since FY10, maybe around Rs. 3,000 crores or so of assets you have added. So again, I mean, which areas has this been in and do you have an ROC target for all these investments? I mean, I cannot definitely talk about the ROC internal target we have. What I can say is this may not be the right time to look into the ROC and say we are just not there, we just started the Rs. 1,000 crores plant so you have this huge impact of that plant going up, you have the agro situation where it is not a good time to be in. And yes, the economic situation outside is also not as good as we expected to be, which all put together is creating that environment where investments have not paid yet the full dividend. Abhijeet: And then lastly, just on agrochemicals, in addition to the bad monsoon has there also been a big impact from generic competition in your key products? I think in my slide I had shown that, I did not go into the details because that is well known, last year we already had this generic competition and that continues, this time also for one of our products, for example, we have a lower selling price of 10% compared to last year same period. So, that generic competition and especially if you ask me where it is coming from, again, it is coming from China, the generic competition is there that is definitely one of the factors that we have to compete. But then, if our product quality is good and if we are able to show the value proposition to the final consumer, who is our farmer in this case, then it should be doing better. Bhavin Chheda: Bhavin Chheda from Enam Holdings. A few questions, thanks for the presentation. Sir, I will go division here, so in the agriculture solution business, when we met at the last analyst meet you gave the number that the herbicide sale had a big decline, Rs. 266 crores versus Rs. 410 crores. So what was the number, if you want to share, in FY16 because post monsoon I think that can see a big jump? And if you can give some thought process on that. Page 15 of 26

16 I do not exactly remember what number I have given last time. Bhavin Chheda: I think in the last analyst meet you gave a number of Rs. 266 crores was the sale in FY15 versus Rs. 408 crores in FY14, the herbicide which is part of agriculture solution business. So, FY16 if you can share the numbers, so we will get the trend how much of that has recovered. And I think this year post monsoon, the outlook would be much better for that part of the business. It is somewhere in between the two, somewhere between the 500 and 200 what you have, because herbicide is one of the main products we have, multiple products, herbicide is not one there are multiple products. And this is the season when we are selling that, monsoon has helped there. Bhavin Chheda: Sir, my second question would be on the business model, as last year you had explained that you had own manufacturing, trading and indent which is a brokerage between global and India and as you said that as Dahej ramps up this indent part of the business will come down. So, since Dahej has done Rs. 570 crores of sales already, can you give FY16 what was the indent number, how much it has gone down and any outlook how much of that part of the business will go down and replace by the Dahej sales? I realized to be very careful when I give numbers, because people come over next year and ask me and I do not remember what I had said last year. Anyway, it is true, as you ramp up your production capacity the indent part model should go down, that is the best way to have it. Because indent gives you the lowest of the commission, you get a very small percentage because you are only brokerage deal between a third party customer and one of the group companies outside, you do not even capture the sales, we just get that percentage margin, that is for indent. Merchandizes, when we buy and when we sell, there you might make a good profit, if things turnout well you may get hit also like last year when we got hit, when the crude fell, that can also happen. So it is kind of a double edge sword where you make money or you lose money in merchandizing. The best is to have OMP, own manufactured product, which is your own product, you take full risk, you get the best raw material, produce it in the most efficient manner and sell it in the market. In here, we have ramped up production in Dahej and today we have around 70% of our total as own manufactured products. And the rest is, I do not want to give a breakup of that, but indent and merchandize, indent share going down. Bhavin Chheda: So the indent amount is accounted in service income, I think it was Rs. 123 crores in FY15, so can you give FY16 number, if you have it ready. It should be there in the comparable numbers. Bhavin Chheda: About Rs. 100 crores, and that will again go down because Dahej will go up? Page 16 of 26

17 Correct, if indent falls then naturally the correlation is with this. Bhavin Chheda: And sir, as I understand this indenting business, correct me if I am mistaken on that, so I understand there is a 2% - 3% margin on this, so when you make Rs. 100 crores or Rs. 120 crores two years back actually you are doing Rs 6,000 crores of sales via indenting in India. So, why I am excited about the company is there is opportunity for the company to make Rs. 6,000 crores manufacturing sales. So, when you setup a Dahej plant and when you setup nine units there, so are these nine units capable of meeting that entire Rs. 5,000 crores - Rs. 6,000 crores number? And if not, I believe that eventually you will try to manufacture everything to replace make indenting zero and make a manufacturing margin of 10%. So, where is that gap and how BASF India and BASF Board sees that opportunity and why not it is presenting it to the global board to take this opportunity in India manufacturing? I wish we could investment Rs. 1,000 crores and get Rs. 6,000 crores sale every year on that investment, I wish it was there, definitely it is not there. To answer your other point, indent becoming zero and we fully manufacturing, I do not foresee it as one of the way forward, we have efficient manufacturing plants globally and it is more efficient to get import it from there, because finally what matters to me is the landed cost of the customer, it does not matter anything else, all customs duty, freight, everything included, what is the landed cost of the customer. So, if I can import it and supply it to the customer, I would rather do it than put up a facility here for doing the same. So, I do not say no but I do not see that kind of a situation where indent becomes zero and we manufacture everything. Bhavin Chheda: That is the correct way to look at it. And sir, in this Rs. 5,000 crores - Rs. 6,000 crores turnover, would that certain part of the turnover would be very specialized and some other part of the world are doing it because of some technology advantage or patented product and that obviously will never come to India, is there some number we can get where it would be very specialized nature? Within BASF Group patent is not an obstruction, if we manufacture we get the patent from the Group Company and for that we pay royalty. So patent, I mean, whatever we are producing in Dahej for example, is technology of BASF, no other company has it of the same technology. And for that we pay royalty, that is the reason if anybody has a question on royalty why royalty is going up, that is because our OMP going up, own manufacturing going up. Bhavin Chheda: And sir last question, we used to be 10% to 12% operating margin and we have been coming down and we are now at 2% and Dahej is already at Rs. 570 crores turnover, so that is still not reflected in the operating margins going up. So, what is the constrain there, how should we look at long-term operating margins of the company? Is there certain element of cost which are still one-off or which would require for the Dahej plant to start, I understand you have nine plants so the capacity utilization of each plant would be separate and there would be startup cost related Page 17 of 26