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In-line quarter; long-term growth trajectory intact

* Birla Corporation’s (BCORP) consolidated EBITDA of Rs2.7bn (declined 30% YoY/22% QoQ) was broadly in line with consensus estimates.

* BCORP expects a 30% increase in capacity to 20mt by early FY23. Besides, its aim to achieve a 30mt capacity by FY27E should dispel concerns about long-term growth, in our view.

* We believe strong cash-flow generation is likely to deleverage the balance sheet, while the upcoming expansion is unlikely to strain financial performance. Moreover, improving profitability should help to regain double-digit RoIC from FY24E.

* We broadly maintain our FY23E-24E EBITDA estimates with an unchanged TP of Rs1,825 (Dec’22E). Our DCF-based TP implies a 1-year forward EV/EBITDA of 9.5x. Maintain Buy.

* Please find our recent initiation report

* Revenues increased by 3% YoY to Rs17bn. Cement revenues were broadly flat YoY, while Jute revenues increased 62% YoY to Rs1bn. Cement volumes stood flat YoY at 3.27mt, implying capacity utilization of 84%. Extended and heavy monsoon, shortage of sand in its key markets (UP and Bihar) and extended shutdown at its new Chanderia Cement Works (NCCW) have impacted volumes in Q2FY22. Cement realization was flat YoY/ declined 1% QoQ to Rs4,878, as the company channelized its products outside its core markets.

* EBITDA declined 30% YoY/22% QoQ to Rs2.7bn. It included a forex loss (part of other expenses) of Rs100mn, which is expected to be reversed in H2FY22. Total cost/ton increased by 12% YoY/4% QoQ. Accordingly, blended EBITDA/ton declined 30% YoY/20% QoQ to Rs817, while cement EBITDA/ton declined 34% YoY/24% QoQ to Rs762. PAT declined 49% YoY to Rs856mn.

* In H1FY22, FCF stood at negative Rs861mn post working capital blockage of Rs1.2bn and capex spend of Rs3.7bn. Accordingly, net debt increased by Rs1.6bn to Rs36bn as of Sep’21 post dividend payment of Rs770mn.

* The 4mt greenfield Mukutban project is on track to be commissioned in Q4FY22E, which will support volume growth and help to maintain BCORP’s volume market share. Besides, 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) Trade sales declined 150bps YoY to 79%, while premium product sales increased 500bps YoY to 53%. 2) Increased cement prices and optimization of geographical mix to improve realization in H2FY22E. 3) Tax incentives for the Maihar unit expired in Jul’21; expansion of NCCW eligible for tax breaks from H2. 4) Availability of raw jute has dried up from Oct’21 and the unit may have to scale back production in H2FY22E.

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