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Improved performance; valuations below fair levels
Birla Corporation is an MP Birla group company that commenced operations as a jute manufacturer and has over time evolved into a cement major with the jute business having a nominal contribution. Having acquired the cement arm of Reliance Infra, Reliance Cement Corporation (RCCPL), the company’s cement capacity surged from 9.8 MT to 15.4 MT. Since the acquisition, the company has consolidated the acquired capacity and ramped up production. While the cement industry struggled with volume growth in H1FY20, Birla Corp managed to report 4% volume growth. It ended FY19 at ~90% utilisation with stable EBITDA margins YoY compared to ~170 bps contraction in the margins of the I-direct cement coverage universe.
Strong retail presence leads higher share of premium products
Birla Corp has a strong presence on the retail front owing to its distribution network and focus on trade sales, which have a share in excess of 80% of total volume sales. Further, the company has been pushing more of premium cement via its trade channels and higher ad spends. This has led premium products to form 35-50% of trade sales. In turn, this has enabled the company to improve its realisations, which have growm at 6% CAGR over FY16-19, putting the company in the ranks of industry giants, UltraTech and ACC. This, combined with 19% volume CAGR has contributed to revenue CAGR of 26% to | 6549 crore over FY16-19.
Company specific cost pressures to recede
Earlier, in 2011, Birla Corp’s mining operations in Chanderia were suspended following the Jodhpur High Court order. The Supreme Court granted the company partial relief subject to certain conditions. Suspension of blast mining operations and usage of heavy earth moving machinery for mining had led to inflated RM cost for Birla Corp. Currently, based on the report of Central Building Research Institute (CBRI), the company has sought relief for blast mining. Once received, this would bring down RM costs significantly. It is also setting up a waste heat recovery (WHRMS) at its Maihar plant that could lead to savings of ~| 35 crore. Further, at its upcoming plant at Mukutban, Maharashtra, it is setting up 40 MW CPP and ~11 MW WHRMS that would entail further savings. Thus, we believe company specific cost pressure would recede and production cost should top out, if not reduce.
Pursuing capacity expansion; aims to reach 25 MT by 2025
Based on current utilisation levels, Birla Corp has limited headroom for growth, thus calling for capacity expansion. The company has undertaken greenfield as well as brownfield expansion at a total estimated capital outlay of ~| 2700 crore. Via a brownfield expansion at its Kundanganj plant, it will add 1.2 MT of grinding capacity. It is also setting up a greenfield integrated cement plant at Mukutban, Maharashtra with a capacity of 3.9 MT. This plant would help the company increase its presence in the western region. Currently the company’s major markets are North, Central and East India.
Valuation and Outlook
Despite cost pressures, the company has managed to improve its EBITDA margins from 9% in FY16 to 14.5% in FY19, led by increasing sale of premium products. While the company had been saddled with significant debt owing to the RCCPL acquisition, over FY17-19, debt/equity has improved from 1.3x to 0.9x while debt/EBITDA is expected to improve as well from 5.3x in FY18 to 3.8x by FY21E. Current valuation of 7.5x EV/EBITDA on FY21E numbers make the company well placed for a meaningful upside. We maintain a BUY rating on the company with a target price of Rs 760/share.
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