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In?line Revenue but profitability impaired by cost escalation

Result Synopsis

Birla Corporation (BCORP) reported weak performance, where EBITDA/te declined by 68% y/y (38% below YSECe) as cost/te escalated by 20% y/y (5% above YSECe). Similarly, EBITDA Margins contracted by 1104bps y/y to 4.6% (YSECe 7.7%) against 11.8% in last quarter. With the commercialization of Mukutban unit, the BCORP registered volume growth of 11% y/y to 3.6MT (5% below YSECe) and NSR increase by +6% y/y (2% above YSECe) pushed revenue higher by 18% y/y (3% below YSECe). BCORP reported net loss of Rs565mn (v/s YSECe +Rs34mn) owing to higher interest & depreciation costs by +47% & 28% y/y respectively. BCORP ramped up production from its captive coal mine (Sial Ghoghri produced 89.6KT in Q2FY23) to mitigate fuel prices volatility by reducing its dependence on imported fuels. In Oct’22, BCORP secured a new coal mine at Marki Barka, MP with reserve of 70MT (G6 grade & paid 6% premium) with peak production rate of 1MTPA likely to be operational by FY25?26E.

BCORP implements several steps to improve efficiency: 1) high use of AFR (9% in Q2FY23 v/s 6% in Q2FY22). 2) Acquired new coal block; higher captive coal mine utilization to insulate operations from fuel prices volatility 3) Consistently raising its share of renewable energy (WHRS & solar) scaled up to 20.6% in Q2FY23. Owing to the newly added 3.9MTPA of Mukutban unit in Maharashtra with strong demand momentum from its key markets (UP & MP), we believe the volumes are expected to grow at 15% CAGR over FY23? 24E. Recent CAPEX peaked the Net Debt/EBITDA to 3.3x in FY22, while we believe BCORP to generate healthy operating cash flow of Rs22bn over FY23?24E, tends to deleverage its B/S and lowerthe Net Debt/EBITDA to 1.7x by FY24E. At CMP stock trades at 7/6x EV/EBITDA for FY23/24E. Therefore, we retain our BUY recommendation with a TP of Rs1500, valuing the stock at 8x EV/EBITDA on the FY24E.

Result Highlights

* Posted a revenue growth of 18% y/y (?9% q/q; 3% below YSECe) to Rs20bn as Volume/NSR increased by 11/6% y/y. While sequentially, volumes/NSR declined by 7/2% owing to excessively heavy rainfall in its key markets.

* Total cost/te witnessed an uptick of 20% y/y and 6% q/q (5% above YSECe) due to increase in unitary power/freight/others by +62/15/20% y/y and +7/2/8% q/q in Q2FY23 respectively.

* NSR growth of Rs302/te y/y was inadequate to offset the total cost increase of Rs861/te y/y dented the EBITDA to Rs258/te (YSECe of Rs416/te). Excluding Mukutban, EBITDA declined by 50% y/y to Rs409/te in Q2FY23.

* Sequentially muted volume (?7%) and NSR decline of Rs113/te coupled with cost escalation of Rs288/te impaired the EBITDA to Rs940mn decline by 65% y/y and
64% q/q, while reported net loss of Rs565mn (v/s YSECe +Rs34mn).

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