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Capacity expansion to support volume growth

* Birla Corporation’s (BCORP) consolidated EBITDA declined 33% YoY/17% QoQ to Rs2.2bn, 9% and 20% below our and consensus estimates, owing to higher-thanexpected cost inflation. Blended EBITDA/ton fell 29% YoY/19% QoQ to Rs664 (Emkay est.: Rs715).

* Factoring in higher input cost inflation, we cut our FY22E-24 EBITDA estimates by 3- 18%. We also reduce our fair value EV/EBITDA multiple to 9x from 9.5x, based on marginally higher WACC/CoE. We roll forward to Mar’23E from Dec’22, and cut our TP to Rs1,675 (Rs1,825 earlier).

* BCORP has commissioned an integrated capacity of 3.9mt at Mukutban, Maharashtra, in Jan’22, increasing its capacity by 25% to ~20mt. Besides, its aim to achieve a 30mt capacity by FY27E should dispel concerns about long-term growth, in our view. Maintain Buy.

* Revenues declined by ~2% YoY to Rs17.5bn.

Cement revenues declined ~2% YoY, while Jute revenues increased 17% YoY to Rs1bn. Cement volumes declined 6% YoY to 3.35mt, implying capacity utilization of 86%. Extended and heavy monsoon as well as the shortage of sand in its key markets (UP and Bihar) have impacted volumes in the quarter. Reported cement realization increased ~3% YoY/~1% QoQ to Rs4,899 despite a lower share of trade mix (declined 200/400bps YoY and QoQ) to 75% and nearly 300bps YoY/QoQ decline in the share of premium products to 50% in Q3FY22.

* EBITDA declined 33% YoY/17% QoQ to Rs2.2bn.

Total cost/ton increased by 12% YoY/~4% QoQ to Rs4,560. Accordingly, blended EBITDA/ton declined 29% YoY/19% QoQ to Rs664, while cement EBITDA/ton declined 36% YoY/16% QoQ to Rs638. Adjusted PAT declined 64% YoY to Rs535mn. The exceptional item of Rs70mn pertains to a compensation claim received from concerned party on account of damages.

* BCORP has commissioned 3.9mt Mukutban plant, Maharashtra in Jan’22, which

has increased its total cement capacity to 20mt. The new plant is expected to support volume growth and help maintain BCORP’s volume market share. In addition, we estimate sustainable cost savings of ~Rs50/ton from coal mining through allotted blocks, freight optimization with the commissioning of new plants, and an increasing share of green power and of premium products in its portfolio.

* Other takeaways:

1) BCORP has taken measures such as scaling up of captive coal mining, which rose 8% YoY in Q3, increasing transportation of fly ash to Maihar (largest plant) and increasing share of renewables (300bps YoY) to mitigate the impact of rising commodity prices; 2) Management expects demand recovery in Q4FY22 except for Uttar Pradesh (due to state elections); 3) Price hikes have been implemented from the third week of Jan’22 and they are expected to remain firm going ahead. However, higher input costs remain a concern.

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