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Birla Corporation Ltd Market Impact Note Q3FY20 For Target Rs.1122 - HDFC Securities
Key highlights of the quarter:
* Birla Corporation Ltd (BCorp) reported strong set of numbers for Q3FY20, which were higher than the market expectations. Revenue/EBITDA/PAT for the quarter grew by 10.2%/42.2%/197.8% YoY respectively.
* Cement segment revenue grew by 11.3% YoY to Rs.16.3 bn where volumes grew by 6.9% YoY to 3.43 mn ton (MT) and realization was up by 4.2% YoY to Rs.4743/ton. Jute segment revenue was down by 7.2% YoY in Q3FY20.
* Strong volume growth was due to increased market share in West Bengal and Bihar by expanding its distribution reach and leveraging cross-branding from multiple plants of its own and its subsidiary, Reliance Cement.
* The blended EBITDA/ton thereby increased sharply by 33.1% YoY to Rs.859/ton. The sharp growth in EBITDA/ton was also driven by reduction in blended Operating cost per ton, down by 1.5% YoY to Rs.4141/ton. In the cost breakup, Power & Fuel/Freight/ Raw material cost was down by 11.4%/0.9%/2.4% YoY respectively. However, Other expense was up by 8.2% YoY to Rs.893/ton.
* BCorp has sustained the growth momentum during the nine months till December despite sluggish market conditions as volumes during the 9MFY20 were up by 4.4% YoY. Similarly, average realization for 9MFY20 period is up by 7.3% YoY to Rs.4857/ton. This was mainly on the back of steady cement prices in North, Central and West India where BCorp has large presence.
* Management highlighted that the sharp growth in cement revenue for Q3FY20 was mainly due to higher capacity utilization of 87%-among the highest in the industry- and also five percentage points higher YoY.
* Further, management highlighted that the growth in realization was inline with North and Central India cement companies. However, some part was driven by higher premium cement sales accounting for 41% in Q3FY20 vs 37% in the same period last year and also trade segment volume increasing to 79% of total and was up by 4% YoY.
View: BCorp continued to deliver strong operating performance for the cement business in Q3FY20 as well on the back of improved efficiency and better realizations led by improved product mix and better cost efficiencies. Additionally, stead cement pricing seen in the last few months, especially in North and Central India markets augurs well for the company given the higher share of revenue from these regions. Further, company’s plan to expand its capacity by ~4 MTPA at Yavatmal, Maharashtra also looks attractive given the greenfield expansion cost of USD 90/ton. Also, the central location of the new 4 MTPA plant from key markets of Hyderabad, Bhopal and Maharashtra augurs well for the company. We have a positive stance on cement sector in near to medium term and currently have a Buy rating on the stock with a target price of Rs.1122 at 8.5x FY21E EV/EBITDA multiple. However, any changes to the price target would be hinged upon changes in business momentum/economic cycle, capex execution issues and acceleration of cost optimization initiatives.
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