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Slow but steady ramp-up of new plant

Birla corp (BCORP) reported decent numbers for 2QFY24 but progression towards stated goal of achieving Rs850/mt EBITDA looks challenging. Mukutban plant in Maharashtra operated at 40% utilization after a year of operations and has started delivering better EBITDA numbers. We believe that the ramp-up at Mukutban is slow but the strategy to focus on premium products and maximize sales in Maharashtra is delivering good results. As utilization of Mukutban increases, we expect it to be one of the most profitable plants for BCORP given the lucrative incentives associated with it. Overall, utilization at 87% at current levels should necessitate a capex decision from the company soon. The stock remains attractively valued as its still trading at 7.5x FY25 EV/EBITDA. We have tweaked our estimates and now build in slightly higher volumes and lower costs. As a result, our FY24 EBITDA estimate is higher by 1.6% and FY25 estimate is lower by 3.4%. we have rolled our valuation forward to Sep25 and value the stock at 8x Sep25 EV/EBITDA to arrive at our revised TP of Rs1,600 (Rs1,525 earlier). We maintain our Buy rating on the stock.

2QFY24 results highlights

Revenue at Rs22.8bn is up 14.3% YoY and slightly ahead of estimate of Rs22.2bn. Volumes at 4.18mn mt reported 14.8% YoY growth whereas realizations was flat on QoQ basis (Volumes 2.5% ahead of our estimates while realizations were in-line). Operating cost/mt declined by 8.8% YoY on account of lower power & fuel costs. RM cost at Rs901 was Rs126/mt higher than our expectation resulting in lower than expected EBITDA. EBITDA/mt came in at Rs691/mt (up 167.7% YoY on a lower base) against our expectation of Rs748. Adj PAT at Rs586mn as against loss of Rs565mn last year.

Awaiting incentive accrual at Mukutban; new capex at Prayagraj also eligible

One of the key investment argument for Birla corp has been the accrual of incentives from Mukutban. The plant is eligible for incentives for its sales volumes in Maharashtra. The amount could be as high as Rs600/mt for Maharashtra sales. We expect accrual of incentives to start in 2HFY24 which will lead to better profitability. Additionally, the company is starting on a new grinding unit in Prayagraj (UP). This is also eligible for 300% of capital as incentives. The management expects that as Kundanganj incentives expire next year, the new plant will make up for it

Slow but steady ramp up at Mukutban

The Mukutban plant has witnessed reduction in variable cost by 50% from the start. Current capacity utilization is 40% and it is expected to reach 60% by Year end. Captive mining at Mukutban is fully operational now and will result in reduction of RM costs. Out of total sales from the plant, almost 65-70% are in Maharashtra and rest in South MP and Gujarat. Some of the MP markets earlier serviced by the company’s Maihar and Satna plants are now being serviced by Mukutban and some clinker has been freed which is used to address other profitable markets. Premium cement brand Perfect Plus is largely sold through Mukutban and focus is on trade sales only.

Valuation and outlook

We like BCORP for 1) volume growth through Mukutban ramp-up, 2) scope for further efficiency improvement, 3) impending accrual of incentives for Mukutban plant along with higher share of captive coal, 4) deleveraging potential and 5) attractive valuation. We expect earnings momentum to pickup speed from hereon and better pricing coupled with incentives accrual may result in better profitability for the company. We value the stock based on 8x Sep25 EV/EBITDA (rolled forward by 6 months), to arrive at our TP of Rs1,600. Maintain Buy.

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