BSE Sensex S&P CNX 20,224 6,157 Bloomberg BCORP IN Equity Shares (m) 77.0 M.Cap. (INR b)/(usd b) 20.5/0.4 52-Week Range (INR) 342/202 1,6,12 Rel. Perf. (%) 6/-15/-23 Financials & Valuation (INR b) Y/E March 2013 2014E 2015E Sales 25.6 27.7 32.0 EBITDA 3.5 3.1 4.9 NP 2.7 2.3 3.6 Adj. EPS (INR) 35.0 30.0 47.3 EPS Gr. (%) 12.8-14.5 57.9 BV/Sh. (INR) 318.2 338.8 375.6 RoE (%) 11.0 8.8 12.6 RoCE (%) 10.8 9.6 13.1 Payout (%) 24.9 31.2 22.1 Valuations P/E (x) 7.6 8.9 5.6 P/BV (x) 0.8 0.8 0.7 EV/EBITDA (x) 4.5 4.8 2.7 EV/Ton (x) 31 29 26 21 May 2013 4QFY13 Results Update Sector: Cement Birla Corporation CMP: INR266 TP: INR352 Buy Results below expectations: Birla Corporation's (BCORP) 3QFY13 performance was marginally below expectations. Net sales grew 2.4% YoY (8.7% QoQ) to INR6.7b (v/s our est. of INR6.8b) and EBITDA declined 17% YoY (29%QoQ) to INR663m (v/s our est. of INR706m). EBITDA margin expanded 1.6pp YoY (contracted 2.3pp QoQ) to 10%. Higher other income and lower interest cost resulted in PAT of INR726m (v/s our est. of INR433m). Cement volumes higher than expected: Cement volumes grew 4.6% YoY (9.1% QoQ) to 1.71m tons (v/s our est. of 1.61m tons). Growth in FY13 dispatch volumes was above par (on low base of FY12), despite ban on limestone mining at its Rajasthan (Chanderia) plant. Full-year volumes grew 8.5% to 6.47m tons, including 2.5m tons at Chanderia plant (78% utilization). Profitability lower than estimated: Realizations declined 0.9% YoY (4.5% QoQ) to INR3,581/ton (v/s our est. of INR3,959/ton). Cement revenue grew 3.7% YoY (4.2% QoQ). EBITDA/ton was INR507 (v/s our est. of INR606/ton, INR447/ ton in 3QFY13). Lower than expected profitability is attributable to sharp decline in realizations (INR8.5/bag QoQ), albeit partially offset by QoQ moderation in variable cost and positive operating leverage. Resolution of mining ban crucial: CBRI has sought further time for submitting report on the impact of mechanized mining at Chanderia on Chittorgarh Fort, with next hearing scheduled on July 2013. Resolution of mining ban is critical for future volume growth, capacity addition and normalization of profitability. Downgrading estimates; maintain Buy: We are downgrading our EPS estimates for FY14/15 by 15.7%/5.3% to INR30/INR47.3, to factor in for INR6/bag price decline in FY14 and INR15/bag improvement in FY15. The stock trades at 5.6x FY15E EPS, and EV of 2.7x FY15E EBITDA and USD26/ton. Maintain Buy, with a target price of INR352. The board has announced a dividend of ~INR7/share (including interim dividend of INR2.5/share) as against INR6/share last year. Jinesh Gandhi (Jinesh@MotilalOswal.com) + 91 22 3982 5416 Sandipan Pal (Sandipan.Pal@MotilalOswal.com); +9122 3982 5436 1
Trend in volumes and realizations Revenue in line, as higher volumes offset dip in realizations Net sales grew 2.4% YoY (8.7% QoQ) to INR6.7b (v/s our estimate of INR6.8b) in 4QFY13. Cement volumes grew 4.6% YoY (9.1% QoQ) to 1.71m tons (v/s our estimate of 1.61m tons). Growth in FY13 dispatch volumes was above par (on low base of FY12), despite ban on limestone mining at its Rajasthan (Chanderia) plant. Full-year volumes grew 8.5% to 6.47m tons, including 2.5m tons at Chanderia plant (78% utilization). Cement realizations declined 0.9% YoY (4.5% QoQ) to INR3,581/ton (v/s our estimate of INR3,959/ton). Cement revenue grew 3.7% YoY (4.2% QoQ). Non-cement business (jute and others) revenue declined 10% YoY but improved sequentially to INR541m. The jute mill at Birlapur resumed operations in mid- November 2012. Trend in revenue mix (INR m) 4QFY13 4QFY12 YoY (%) 3QFY13 QoQ (%) Cement 6,116 5,899 3.7 5,872 4.2 Contribution (%) 91.9 90.7 95.9 Jute 511 567-9.9 228 124.1 Contribution (%) 7.7 8.7 3.7 Others 31 34-11.3 26 19.6 Contribution (%) 0.5 0.5 0.4 Net sales 6,658 6,500 2.4 6,126 8.7 Source: Company, MOSL Cost push moderates, yet realization decline dents profitability EBITDA margin expanded 1.6pp YoY (declined 2.3pp QoQ) to 10%. EBITDA declined 17% YoY (grew 29% QoQ) to INR663m (v/s our estimate of INR706m). Cement business EBITDA was INR507/ton (v/s our estimate of INR606/ton, INR447/ ton in 3QFY13 and INR678/ton in 4QFY12). Lower than expected profitability is attributable to sharp decline in cement realizations (INR8.5/bag QoQ), albeit partially offset by sequential moderation in variable cost and positive operating leverage. Higher other income and lower interest cost resulted in PAT of INR726m (v/s our estimate of INR433m). Purchase of clinker for Rajasthan plant (where limestone mining is banned) remains an overhang on RM cost. Trend in EBITDA Trend in cement EBITDA (INR/ton) 21 May 2013 2
Trend in PBIT mix (INR M) 4QFY13 4QFY12 YoY (%) 3QFY13 QoQ (%) Cement 594 848-30.0 415 43.2 Contribution (%) 98.8 99.8 103.4 Jute 16 13 24.8-17 -193.1 Contribution (%) 2.7 1.5-4.3 Others -9-11 -24.6-7 26.5 Contribution (%) -1.4-1.3-1.7 Total 601 850-29.2 401 49.9 Source: Company, MOSL Interim approval for mechanical mining at Rajasthan plant Operations at BCORP s Rajasthan plant (capacity: ~2m tons) have been impacted with effect from 27 August 2011 due to ban on mining within 10km of the Chittorgarh Fort. On 8 March 2013, the Supreme Court permitted mine operations using mechanical means without blasting for four weeks, during which period CBRI would carry out a study on the impact of mechanized mining at Chanderia on Chittorgarh Fort. CBRI has sought further time for submitting its report to the Supreme Court. The next hearing of this case is scheduled for July 2013. Resolution of the mining ban would be critical for future volume growth, capacity addition and normalization of profitability. Resolution of the mining ban would be critical for future volume growth and normalization of profitability. The company is prepared for brownfield expansion of 1.5m tons, with 50MW CPP at Chanderia, subject to the Supreme Court allowing mechanized mining. Our estimates factor in no resolution of the ban in the foreseeable future, resulting in higher RM cost. Downgrading EPS estimates, target price We are downgrading our EPS estimates for FY14/15 by 15.7%/5.3% to INR30/INR47.3, to factor in lower realization estimates. We factor in volume growth of 7%/8% for FY14/15. We now factor INR6/bag decline (v/s INR8/bag increase earlier) in FY14 and INR15/ bag improvement (v/s INR12.5/bag earlier) in FY15. This translates into 6% downgrade in target price to INR352 (v/s INR374 earlier). Revised Forecast (INR m) FY14E FY15E Rev Old Chg (%) Rev Old Chg (%) Net Sales 27,658 28,711-3.7 31,952 32,784-2.5 EBITDA 3,124 4,255-26.6 4,929 5,434-9.3 Net Profit 2,307 2,738-15.7 3,644 3,847-5.3 EPS (INR) 30.0 35.6-15.7 47.3 50.0-5.3 Source: MOSL 21 May 2013 3
Maintain Buy Favorable market mix (North, East and Central India) and efficient operations impart strong resilience to operating performance, if demand weakens further. Resolution of mining ban would be the key catalyst for the stock, as ~34% of its capacity is impacted by this ban. Its further capex plans are marred by ongoing litigation (~1.5m tons at Rajasthan due to mining ban; 3m tons plant at Satna awaiting mine allocation). We believe BCORP has the potential to drive strong operating performance (EBITDA/ton of over INR1,000 by FY15, adjusted for loss due to mining ban). Balance sheet remains strong, with net cash of INR5.2b. The stock trades at 5.6x FY15E EPS, and EV of 2.7x FY15E EBITDA and USD26/ton. Maintain Buy with a target price of INR352 (EV of ~4x FY15E EBITDA). 21 May 2013 4
Birla Corporation: an investment profile Company description Birla Corporation (Bloomberg: BCORP), established in 1919, is part of the MP Birla group. It manufactures cement, jute products, synthetic viscose and cotton yarn. Cement constitutes about 85% of its revenue. It has cement plants in Rajasthan, Madhya Pradesh, Uttar Pradesh and West Bengal. Key investment arguments Among the key cement producers, with a capacity of 8.1m tons, having strong presence in North, East and Central India. Strong balance sheet, with zero net debt. Provides good platform to grow organically as well as inorganically. Recently added capacities to drive volume growth from FY13 onwards. Key investment risks Delay in capacity expansion would result in time and cost overruns, as well as muted volume growth. Increase in energy cost would impact profitability. Restoration of limestone mining at Rajasthan plant would be critical for improvement in profitability. Recent developments CBRI has sought further time for submitting its report on the impact of mechanized mining activity at Chanderia on Chittorgarh Fort. The next hearing of this case is scheduled for July 2013. The board has announced a dividend of ~INR7/share (including INR2.5/share of interim dividend) as against INR6/share, last year. Valuation and view The stock trades at 5.6x FY15E EPS, and at an EV of 2.7x FY15E EBITDA and USD26/ton. Maintain Buy with a target price of INR352 (EV of ~4x FY15E EBITDA). Sector view Unusual price weakness of 4QFY13 is expected to prevail in 1HFY14, as demand is expected to pick up only post monsoon. Structural increase in cost base (both capex and opex) would necessitate higher cement prices. Revival in cement demand would be the key catalyst for stock performance. Comparative valuations Birla JK Lakshmi Dalmia Bharat Corp Cement Cement P/E(x) FY14E 8.9 5.6 6.3 FY15E 5.6 4.3 5.1 P/BV(x) FY14E 0.8 0.8 0.3 FY15E 0.7 0.7 0.3 EV/Ton (USD) FY14E 29 45 42 FY15E 26 39 40 EV/EBITDA(x) FY14E 4.8 3.5 4.5 FY15E 2.7 2.7 4.1 EPS: MOSL forecast v/s consensus (INR) Most Consensus Variation Forecast Forecast (%) FY14 30.0 40.5-25.9 FY15 47.3 51.5-8.1 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 266 352 32.3 Buy Stock performance (1 year) Shareholding pattern (%) Mar-13 Dec-12 Mar-12 Promoter 62.9 62.9 62.9 Domestic Inst 15.9 16.0 14.4 Foreign 5.1 4.8 6.8 Others 16.1 16.2 15.9 21 May 2013 5
Financials and Valuations 21 May 2013 6
N O T E S 21 May 2013 7
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