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Impact of Mukutban unit stabilisation mostly behind; maintaining a Buy

The high-cost situation and the Mukutban unit’s pending stabilisation took a toll on Birla Corp’s Q3. High WC requirement kept debt high, however debt repayment to start post Mukutban stabilisation. Aiming at 30m-tonne capacity by FY30, the capacity ramp-up and various costoptimisation measures (coal mines/high AFR use) would aid volume growth and operating efficiency. We retain our Buy rating, with a lower target price of Rs.1270 (earlier Rs1,373).

* Capacity ramp-up to boost volume growth. Aided by 11%/4.9% volume/ realisation growths, revenue grew 15.2% y/y to Rs20.1bn. The company expects flattish prices in Q4, and the strong volume growth to persist on the ramp-up of the Mukutban unit. We expect 8%/11% cement volume/revenue CAGRs over FY22-25

* Weak operating performance continues. The ongoing stabilisation of operations at the Mukutban unit and high costs which could not be passed on led to muted operating performance. EBITDA fell 35% y/y to Rs1.44bn; EBITDA/ton, 43% y/y to Rs367 (excl. Mukutban, 23% y/y to Rs488). Coal from captive mines (Bikram/Sial Ghogri/Marki Barka) would reduce cost and insulate it from fuel-price volatility, while further improvement in profitability would come from higher subsidies (from Mukutban). We expect a 12% EBITDA CAGR over FY22-25.

* Outlook, Valuation. By 31st Dec’22 net debt had risen to Rs41bn and has now peaked. The company may start debt repayments from cash flows from next quarter. The share of renewable power was 22.9% (20.6% the prior quarter). The share of AFR is expected to rise to 12% by end-FY23. With 20m tpa now, the company aims at 30m by FY30. We expect greater profitability on various cost-optimisation steps and higher volume growth on the capacity ramp-ups to drive growth. Valuations continue to remain attractive at 6.2x EV/ EBITDA and US$62 EV/Ton on FY25e. We retain our Buy at a TP of Rs1,270, valuing the stock at 8x FY25e EV/EBITDA. Risks: High pet-coke & diesel prices, slowing demand.

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