BSE SENSEX S&P CNX 16,839 5,100 Bloomberg BCORP IN Equity Shares (m) 77.0 52-Week Range (INR) 348/211 1,6,12 Rel. Perf. (%) -5/-19/-25 M.Cap. (INR b) 16.6 M.Cap. (USD b) 0.3 30 July 2012 1QFY13 Results Update Sector: Cement Birla Corporation CMP: INR216 TP: INR277 Buy Birla Corp's 1QFY13 performance was better than we had expected, with EBITDA of INR1.26b (v/s our estimate of INR814m) and PAT of INR847m (v/s our estimate of INR528m), led by higher than estimated cement volumes and realizations, and in-line cost push. Cement volumes grew ~7.1% YoY (declined 1% QoQ) to 1.63m tonnes (v/s our estimate of 1.45m tonnes). Volumes were driven by purchased clinker, following the ban on limestone mining at its Rajasthan facility. Cement realizations increased 17.8% YoY (11.7% QoQ) to INR4,021/tonne (v/s our estimate of INR3,761/ tonne). As a result, cement revenue grew 26% YoY (~11% QoQ). Net sales grew 18% YoY (~1% QoQ) to INR6.6b (v/s our estimate of INR5.7b). EBITDA margin declined 7.4pp YoY (expanded 8.1pp QoQ) to 12%. EBITDA de-grew 15% YoY (grew 61% QoQ) to INR1.25b (v/s our estimate of INR814m), impacted by MTM forex loss of INR122m (v/s gain of INR147m in 4QFY12 and gain of INR16m in 1QFY12). Higher interest due to capitalization of Rajasthan plant restricted PAT to INR847m, down 24% YoY (up 47% QoQ), against our estimate of INR528m. Cement business EBITDA/tonne grew sharply to INR1,011 (v/s our estimate of INR748/tonne and INR678/ tonne in 4QFY12). The strong operating performance is attributable to higher than estimated volumes and realizations, the benefit of which was diluted by in-line cost push. Birla Corp has appealed in the Supreme Court against the High Court order on mining ban at Rajasthan. Lifting of the mining ban would be critical for future volume growth and normalization of profitability. Valuation and view: We are upgrading our EPS estimates for FY13/FY14 by 35%/21% to INR32.5/INR32.7. The stock trades at 6.6x FY14E EPS, and at an EV of 4x FY14E EBITDA and USD33/tonne. Lifting of the mining ban would be the key catalyst for the stock. Maintain Buy with an upgraded target price of INR277 (EV of ~5x FY14E EBITDA). Jinesh Gandhi (Jinesh@MotilalOswal.com) + 91 22 3982 5416 Sandipan Pal (Sandipan.Pal@MotilalOswal.com); +9122 3982 5436 1 Investors are advised to refer through disclosures made at the end of the Research Report.
Higher realizations, volume drive revenues Net sales grew by 18%YoY (~1% QoQ) to INR6.6b (v/s est INR5.7b). Cement volumes grew ~7.1%YoY (-1% QoQ) to 1.63m (v/s est. 1.45mt), despite mining ban on limestone at its Rajasthan plant driven by purchased clinker. Cement realizations improved by 11.7% QoQ (17.8%YoY) to INR4,021/ton (v/s est INR3,761/ton), as result cement revenues grew by 26%YoY (~11% QoQ). Non-cement business (Jute & others) revenues were severely impacted (down 92%YoY/95%QoQ) by the Jute mills operations under suspension during full 1QFY13. Trend in volumes and realizations Trend in revenue mix (INR m) 1Q 1Q YoY 4Q QoQ FY13 FY12 (%) FY12 (%) Cement 6,547 5,188 26.2 5,899 11.0 Contribution (%) 99.5 93.1 90.7 Jute 6 350-98.4 567-99.0 Contribution (%) 0.1 6.3 8.7 Others 28 32-15.1 34-20.1 Contribution (%) 0.4 0.6 0.5 Net Sales 6,580 5,570 18.1 6,500 1.2 Source: Company, MOSL Source: Company, MOSL Higher realization, in line cost boosts profitability EBITDA margins improve by 7.1pp QoQ (down 7.6pp YoY) to 19.1% and EBITDA grew by 61% QoQ (-15%YoY) to INR1.25b (v/s est. INR814m). Adjust for forex loss of INR122m accounted in other expenses, EBITDA would have been INR1.38b. Cement business EBITDA/ton grew sharply to INR1,011 (v/s est INR748/ton v/s INR678/ton in 4QFY12). Strong operating performance was attributable to higher than estimated volumes and realizations, benefit of which was diluted by in line cost push. Energy cost was impacted due to higher cost of linkage coal, while purchase of clinker for Trend in EBITDA Trend in cement EBITDA (INR/ton) Source: Company, MOSL 30 July 2012 2
Rajasthan plant (where limestone mining is banned) continues to remain an overhang on RM cost. Higher interest due to capitalization of Rajasthan plant restricted PAT to INR847m, down 24%YoY/up 47%QoQ (v/s eat. Of INR528m). Trend in PBIT mix (INR m) 1QFY13 1QFY12 YoY (%) 4QFY12 QoQ (%) Cement 1,411 1,454-2.9 848 66.3 Contribution (%) 104.9 101.2 102.8 Jute -58-13 363.2 13-548.8 Contribution (%) -4.3-0.9 1.6 Others -8-4 85.4-11 -33.3 Contribution (%) -0.6-0.3-1.4 Total 1,346 1,437-6.4 826 63.0 Source: Company, MOSL Mining ban at Rajasthan plant appealed in the Supreme Court Birla Corp's Rajasthan plant (~2mt capacity) operation are impacted w.e.f 27/August/ 2011 due to mining ban order within 10Kms of the Chittorgarh Fort. Based on the High Court directive the Indian Bureau of Mines has conducted inspections and test, and has already submitted its report to the court - following which the court has cancelled the mining leases and levied a compensation of INR45m on 25Th May-12. The company has appealed against the verdict at Supreme Court and since then the levy has been stayed. Resolution of mining ban would be critical for future volumes growth and normalization of its profitability. Our estimates partly factors in for no-resolution of the ban in foreseeable future, resulting in higher RM Cost. Progress in aggressive capex plans broadly in line; received approval for coal block at MP The company had undertaken capex plan with total investment of INR16b, taking total capacity to 10.8mt (incl 1.5mt at Chanderia) and enhance supporting infrastructure by FY13-14. This is the most aggressive capex undertaken by the company in last few years. Its capex plans include following key projects: Modification of cement mills at Satna, together with clinker and fly ash silo 0.5mt coal washery along with wagon tippler at Satna (Oct-12) 0.7mt brownfield expansion at Durgapur commissioning in 2QFY13 0.5mt split grinding unit at Kota. 35MW CPP at Satna, 50MW CPP at Chanderia and 17.5MW at West Bengal. 22.5MW waste heat recovery based power plants (of which 15MW commissioned operations in 3QFY11). 1.5mt brownfield expansion at Chanderia (dependent on restoration of mining ban at its Chanderia plant). 1mt greenfield plant in Assam in a JV with Assam Mineral Development Corporation, although work is yet to be started. 3mt Greenfield plant in Satna, MP, which was not pursued due to litigation. The litigation on limestone mine allocation is being heard in the MP High court. The court has upheld the right of the company subject to final orders. 30 July 2012 3
It would be funding its capex plans largely through internal accruals, as it has net cash of ~INR3.6b (Mar-12) and would generate cash flow from operations of INR3-4b p.a. The company has been allotted the Bikram coal block in MP and administrative approval for mining leases has been granted by Union Ministry of Coal. The forest and environmental clearances are being followed up. The company has also received mining lease for coal and limestone in Ethiopia to set up cement plant and further steps will be taken once feasibility study concludes. Outlook cautious amidst expectation of demand growth; Supply and cost pressure are near term overhangs "With Government impetus for development of the infrastructure, including housing and roads, demand for cement is likely to increase by 8% to 9% per annum. However, with the additional capacity coming up over the days a surplus scenario may continue for some more time. Further, input cost pressure, aided by inflation, will continue to impact margins." Upgrading estimates We are upgrading our EPS estimates for FY13/FY14 by 35%/22% to INR32.6/INR32.9, to factor in for higher than estimated volumes and realizations. We are factoring in for volume growth of 5%/8% for FY13/FY14 to 6.26mt/6.76mt. We are now factoring in for realizations improvement of ~INR28/bag (v/s INR15/ bag) in FY13 and ~INR10/bag (unchanged) in FY14. Revised Forecast (INR m) FY13E FY14E Rev Old Chg (%) Rev Old Chg (%) Net Sales 24,243 24,114 0.5 27,537 27,681-0.5 Net Profit 2,511 1,856 35.3 2,532 2,072 22.2 EPS (INR) 32.6 24.1 35.3 32.9 26.9 22.2 Source: MOSL Valuation and view It is investing aggressively in business with capex plans ofinr16b over next 3 years, which would be funded from internal accruals. Deployment of excess cash in business would drive improvement in capital efficiency over next 2-3 years. Despite significant capex program, we expect its FY13 net debt to be insignificant and peak net debt to be under ~INR3b (in FY14). Resolution of mining ban would be the key catalyst for the stock, as ~30% of its capacity is impacted by this mining ban. The stock trades at 6.6x FY14E EPS, 4x EV/EBITDA and USD33/ton. Maintain Buy with target price of INR277 (~5x FY14 EV/EBITDA). 30 July 2012 4
Birla Corporation: an investment profile Company description Birla Corp, established in 1919, is a part of the MP Birla group. It manufactures cement, jute products, synthetic viscose and cotton yarn. Cement constitutes about 85% of its revenues. It has cement plants at Rajasthan, MP, UP and West Bengal. Key investment arguments Among the key cement producers with a capacity of 8.1m ton with 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. New capacity of 3.3mt to drive volume growth in FY13 onwards. Key investment risks Delay in capacity expansion would result in time and cost overrun, as well as muted volumes growth Increase in energy cost would impact over profitability. Restoration of limestone mining at Rajasthan plant would be critical for improvement in profitability. Comparative valuations Birla Corp Shree Cement India Cement P/E(x) FY13E 6.6 11.8 6.6 FY14E 6.6 10.3 5.0 P/BV(x) FY13E 0.7 3.7 0.5 FY14E 0.6 3.0 0.5 EV/Ton (USD) FY13E 33 118 56 FY14E 33 109 51 EV/EBITDA(x) FY13E 4.2 6.4 4.5 FY14E 4.0 5.2 3.6 Recent development It has appealed in the Supreme Court against the High Court order for mining ban at its Rajasthan plant. Valuation and view The stock trades at 6.6x FY14E EPS, 4x EV/EBITDA and USD33/ton. Maintain Buy with target price of INR277 (~5x FY14 EV/EBITDA). Sector view We believe we have already witnessed bottom-ofthe-cycle utilization & profitability, and it should gradually improve hereon given sustainable demand drivers. Structural increase in cost base would necessitate higher cement prices. Continued revival in cement demand, witnessed in 2HFY12, would be key catalyst for the stock performance. EPS: MOSL forecast v/s consensus (INR) Most Consensus Variation Forecast Forecast (%) FY13 32.6 32.9-1.0 FY14 32.9 38.9-15.5 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 216 277 28.2 Buy Stock performance (1 year) Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter 62.9 62.9 62.9 Domestic Inst 14.4 14.4 13.2 Foreign 6.8 6.9 7.7 Others 15.9 15.9 16.2 30 July 2012 5
Financials and Valuations 30 July 2012 6
N O T E S 30 July 2012 7
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