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Best rerating candidate in cement space

Birla corp (BCORP) reported good set of numbers for 3QFY24 with EBITDA of Rs3.8bn against our expectation of Rs3.3bn driven by lower costs and better than expected realizations. The company reported one of the lowest power & fuel costs in the industry on Rs/kcal basis at Rs1.58/kcal driven by higher domestic coal usage. Additionally, the management has implemented ‘Project Shikhar’ to improve efficiency which has started bearing results. The company reiterated its guidance of reaching 30mn mt capacity by FY30 (CAGR of ~7%) and 25mn mt by FY27 which will provide volume growth visibility. The rampup at Mukutban plant in Maharashtra is satisfactory as it has reached 65% utilization and is expected to drive volume growth and profitability improvement for the company in near term. The stock is currently trading at 7x FY26 EV/EBITDA which we believe is undemanding and offers further scope for rerating. We have increased our EBITDA estimate by 6% and 5% for FY25/FY26 respectively. We also raise our EV/EBITDA target multiple to 9x from 8x to factor in improved capex visibility and reduced profitability gap with peers. We maintain Buy with revised TP of Rs2,000.

3QFY24 results highlights

BCORP reported good set of numbers with EBITDA of Rs3.8bn, up 162% YoY and 14% ahead of estimate. Volumes at 4.2mn mt are up 13% YoY and 2.6% ahead of our estimate. Realizations are also up 2% QoQ at Rs5316/mt. Operating costs at Rs4604/mt declined by 8.5% YoY and 3.6% QoQ. Lower fuel prices and improved fuel mix resulted in sharp decline in power & fuel costs. EBITDA/mt came in at Rs901 against our expectation of Rs813. PAT at Rs1.1bn is 39% ahead of our estimate.

Mukutban plant incentives to start accruing from 4Q

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. The management guided that incentives will start to accrue from 4QFY24 which will aid EBITDA/mt further. 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.

Guidance maintained for FY24

The management reiterated its guidance for FY24 with EBITDA/mt of Rs850 and marginally reduced its volume growth guidance to 13% growth vs 15% earlier. The company has delievered 13.3% growth in volume and EBITDA/mt of Rs755 in 9MFY24. The company needs to achieve 5mn mt of volumes and ~Rs1100/mt EBITDA/mt in 4QFY24 to meet its guidance.

Valuation and outlook

We like BCORP for 1) volume growth through Mukutban ramp-up, 2) scope for further efficiency improvement, 3) 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. Given the capex guidance of 30mn mt of capacity by 2030, volume growth visibility is there for medium term. We have raised our target multiple from 8x to 9x to factor in better growth visibility and bridging of profitability gap with peers. Maintain buy with revised TP of Rs2000.

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