IGI Logo

Expansion plans provide growth visibility

Birla Corporation (BCORP), the flagship company of M.P. Birla Group, primarily manufactures cement (its core business activity). It has a presence in the Jute industry as well and generates ~5% of its revenues from this segment.

Capacity expansion provides strong volume growth visibility:

BCORP targets expanding grinding capacities to 30mtpa by 2027 vs. current capacity of 15.6mtpa. The capacity will get increased to 19.5mtpa after commissioning of integrated plant with a grinding capacity of 3.9mtpa in Mukutban, Maharashtra by FY22E and 20.5mtpa after expansion of Kundanganj, Uttar Pradesh grinding capacity by 1mtpa in FY23E. The debottlenecking of clinker capacity in Chanderia, Rajasthan is nearly complete and will lead to clinker capacity increase of 0.4mtpa.

This will help to meet the additional clinker requirements of Kundanganj plant. Although plans are yet to be disclosed, we believe that the company may set up a third clinker line at Maihar, Madhya Pradesh. New capacities would aid volume growth for the company as its current capacities are operating at 90%+ capacity utilization (barring COVID-19 related distribution). We expect a 10% volume CAGR over FY21–23E.

Higher share of premium products to support realization:

Blended Cement accounted for 92% share in 1QFY22 (v/s 94% in 1QFY21) and trade sales were at 83% (v/s 85% in 1QFY21). Premium Cement accounted for 51% of trade sales volumes (v/s 43% in 1QFY21). The higher share of Premium products (~50% of trade sales) should support realization. On the other hand, the higher share of Blended Cement (92% of volumes), rising share of waste heat recovery systems (WHRS) and solar power should help to control opex. The share of green power improved to 22% in 1QFY22 (v/s 20% in FY21). Increase in usage of alternative fuels and start of mining from coal blocks in Madhya Pradesh will also help to contain energy costs.

Demand to remain strong:

Cement demand has remained strong post FY18 (barring Covid-19 related disruptions) and we expect demand momentum to remain strong led by a) strong rural demand, b) recovery in organized real estate and c) government’s continued focus on infrastructure development. Better monsoon, increase in the minimum support price (MSP) and rural wages will continue to drive rural demand. Government infra projects have continued at a good pace across regions despite the COVID-led disruptions.

Overall, we expect a 10% demand CAGR over FY21–23E, which should help the industry clinker utilization (ex-South) to remain over 80% (and ~ 85% in Northern and Central India). Prices are expected to see an upward revision, driven by an uptick in demand. Around 55% of BCORP’s capacity is in central India (preferred market), which is encouraging for the margin outlook.

Valuation and view:

The ongoing 3.9mtpa greenfield expansion at Mukutban (due to be commissioned in 4QFY22) provides strong volume growth visibility for FY23E. Rising coal/pet coke prices may restrict strong earnings upside in the near-term and we forecast EBITDA CAGR of 3% over FY21– 23E (on a strong base of FY19-21 as EBITDA increased at a CAGR of 20% in this period).

The valuation is attractive at 8.0x FY23E EV/EBITDA (~10% discount to its 10-year average) and USD85/t of capacity (~15% discount to its replacement cost). We value BCORP at 10x Sep’23E EV/EBITDA to arrive at TP of INR1,696. Maintain Buy rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer