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Capacity expansion should drive rerating; initiate with Buy
* BCORP, the flagship company of M. P. Birla Group, has its presence in North, Central and East regions. It is expanding grinding cement capacities by 33% in West/Central regions, which should help it achieve 20mt capacity and aid volume growth by mid-FY22/23E.
* The stock is trading at 7.2x FY22E EV/EBITDA and EV/ton of USD72 on FY22E capacities, much lower than other companies with similar capacities. We believe that the focus on capacity additions without straining the balance sheet should drive a stock re-rating.
* Incentives from various state governments should boost EBITDA by 12-16% till FY23E. Improvement in clinker utilization in North, Central and East regions during FY20-22E should help in improving/stabilizing cement prices in these regions.
* We expect the company’s EBITDA/net profit to witness a CAGR of 14.7%/20.2% over FY19-FY23E. Net D/E should be at 0.9x in FY22E despite the ongoing capex. We initiate coverage on BCORP with a Buy rating and a TP of Rs967, which offers a 40% upside.
Expansions should aid volume growth; incentives and cost saving strategies to help profits: BCORP operates its plants at a high capacity utilization of 89.7%/88.9% in FY19/9MFY20. The company is expanding cement capacities by 33% by FY22E will help volumes growth in H2FY22/FY23E. Incentives from state governments constituted 17.7% of BCORP’s EBITDA in FY19 and will continue to constitute 12-16% of EBITDA till FY23E. Cost savings strategies (installation of WHRS, Solar plants and mining of coal though allotted blocks in e-auction) should also support profits of the company.
Available at attractive valuations; capacity additions should drive re-rating: BCORP is trading at 7.2x FY22E EV/EBITDA and EV/ton of USD72 on FY22E capacities, which is lower than the average valuation of our coverage universe and companies with similar capacities. We believe that the valuation multiple for BCORP will re-rate gradually as the company continues with capacity expansion plans. In the sector, companies that expanded capacities have generated higher stock returns (see Exhibit 5 and 6).
Clinker utilization improvement in its markets should support cement prices: BCORP derives 43% of its sales volumes from the Central markets (26.6% in UP and 16.6% in MP), 25% from North markets and 29% from the East. We expect an improvement in clinker utilization by 6.9pp in the North, 8.5pp in the East and 9.1pp in the Central region over FY20- 22E, which should help improve/stabilize cement prices.
Outlook and valuation: The stock trades at 7.6x/7.2x FY21/22E EV/EBITDA and USD84/USD72 FY21/22E EV/ton. We expect EPS to witness a CAGR of 20.2% over FY19- FY23E. Even after the completion of its ongoing capex, leverage should remain under control at 0.9x in FY22E, in our view. We value BCORP at 9x FY22E core EBITDA and value posttax incentives at a WACC of 11%. We arrive at a TP of Rs967, which offers a 40% upside from CMP. We initiate coverage on the stock with a Buy rating.
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