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Higher opex hurts; capacity expansion to aid growth

Higher energy costs impact profitability

* Birla Corporation (BCORP)’s 2QFY22 result highlights the impact of energy cost inflation, as variable cost of production increased 14% QoQ. The EBITDA margin declined 7.4pp YoY to 15.7% and EBITDA/t 30% YoY to INR817/t. Volumes remained flat YoY at 3.27mt v/s the est. of 3.39mt.

* The ongoing 3.9mtpa greenfield expansion at Mukutban (to be commissioned in 4QFY22) provides volume growth visibility for FY23E/FY24E. It also completed debottlenecking at the Chanderiya plant, which led to an increase of 0.63mtpa in clinker capacity (5,500tpd from 3,600tpd).

* We raise our FY24E EBITDA estimates by 5%, factoring in better realization and lower costs (considering decline in energy costs). Valuations are attractive at 10.4x/8.4x FY23/FY24E EV/EBITDA. We reiterate our Buy rating.

Volumes flat YoY; earnings miss our estimates on higher costs

* Revenue/EBITDA/PAT stood at INR17.0b/INR2.7b/INR0.9b in 2QFY22 (+3%/- 30%/-49% YoY) and missed our estimate by 2%/8%/19%.

* Cement volumes remained flat YoY at 3.27mt (est. 3.39mt) as demand was impacted by heavy and prolonged monsoons across its operating geographies. This was further accentuated by sand unavailability issues in the key markets of Bihar and Eastern Uttar Pradesh.

* While blended realization rose 2% YoY to INR5,192/t due to higher jute revenue (+62% YoY / +10% QoQ), cement realization was flat YoY at INR4,878/t (-1% QoQ).

* Blended cost/t was up 12% YoY to INR4,375 (up 4% QoQ; v/s our estimate of INR4,234/t) on account of higher fuel costs. Variable cost of production was up 22% YoY / 14% QoQ.

* Thus, EBITDA/t declined 30% YoY to INR817 (v/s our est. of INR860) and OPM fell 7.4pp YoY to 15.7%.

* 1HFY22 revenue / EBITDA / adj. PAT was +20%/-1%/-2% YoY at INR34.5b/INR6.1b/INR2.3b – as margins declined 3.7pp YoY to 17.7%, while volumes were up 17% YoY to 6.62mt.  1HFY22 OCF/capex/FCF stood at INR4.6b/INR3.7b/INR0.9b v/s INR6.0b/INR3.4b/INR2.6b in 1HFY21.

Highlights from management commentary

* The 3.9mt greenfield project at Mukutban, Maharashtra, is expected to be commissioned in 4QFY22. 

* Tax incentives for its Maihar unit expired in July’21, while the expansion of the Chanderiya, Chittorgarh plant would be eligible for tax benefits from 2HFY22.

* It is expediting the development of captive coal mines at Vikram and Brahampuri (secured through auction in CY19) and has also taken steps to increase coal production at its Sial Ghogri coal mine (from 2HFY22).

* In 2QFY22, demand was impacted on account of extended and heavy monsoons across its operating geographies. The key markets of Eastern Uttar Pradesh and Bihar also faced sand unavailability issues, which are expected to normalize in 3QFY22.

* To maintain its capacity utilization, the company sold outside its core markets and thus clocked 84% capacity utilization in 2QFY22 (v/s 92%/84% in 1QFY22/2QFY21).

* Sales dispatches were also impacted by an extended shutdown at New Chanderia Cement Works (NCCW) due to the commissioning of an expansion project.

* Premium cement accounted for 53% of trade sales volumes v/s 48% in 2QFY21. Trade sales accounted for 79% of sales volumes v/s 80% in 2QFY21. Blended cement accounted for 91% of sales volumes v/s 93% in 2QFY21.

Valuation and view

* We expect a re-rating of the stock’s valuations based on the company’s continued focus on capacity expansions and improved leverage.

* Our target multiples for the stock are at a discount to those of its peers due to the higher contribution of government incentives to the company’s EBITDA, which could begin declining after FY24E.

* At 10.4x/8.4x FY23/24E EV/EBITDA, BCORP trades at a much lower valuation than the average for companies with similar capacities in our Coverage Universe. The stock traded at average one-year forward EV/EBITDA of 8x over FY14–21. We value BCORP at 10.5x Sep’23E EV/EBITDA to arrive at our Target Price of INR1,835 and maintain a Buy rating.

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