Birla Corporation

Presence in the Central Indian market which has high demand potential, low debt on the balance-sheet that supports the company’s various capex initiatives, including power (60 MW) and cement capacity (3.4 million tonne) and other cost-cutting initiatives lend confidence to investing in the stock of Birla Corporation.

At the current price of Rs 301, the stock trades at price-to-earnings ratio of seven times trailing earnings at discount compared to peers of the same size. The company’s enterprise value per tonne is Rs 3,842, placing its valuation among the lowest in the industry.
Regional diversification

Birla Corporation, an M.P. Birla group company engaged in the production of cement, jute goods, PVC goods, auto trim parts (car interiors) and iron and steel castings derives close to 90 per cent of its revenues from the cement division. Birla Corporation operates almost similar capacities in Central, North and Eastern India with cement units in Madhya Pradesh, Uttar Pradesh, Rajasthan, and one also in West Bengal. Central India looks a promising market for cement with year-to-date (till June) despatches growth in the region of 10 per cent and year-on-year growth in June at a strong 17 per cent. It is the one region that saw units operate at over 100 per cent capacity utilisation in June. Compared to the South, the Central region is also likely to see lower new capacity additions for the year, suggesting lower risk to prices.

Birla Corp is present in some Northern markets too and the demand growth is promising in this region with many government-led infrastructure activities. The Northern region witnessed despatches growth of over 19 per cent in April and May. As a market, East is rewarding its players with good price; a 50 kg cement bag quoted at Rs 275 in May, the highest in the country next to South (Rs 277/bag in May). Central India’s low supply build-up, Eastern India’s strong price and Northern pocket’s strong demand growth, all give Birla Corporation an edge over players that are centric to a specific region.
Capex backing

Birla Corporation’s current capacity stands at 5.29 million tonnes. This will increase to 7.5 million tonnes by end-FY10 as the capacity enhancement at the Satna plant, Madhya Pradesh, completes. The first phase of expansion work is over at Satna and the second phase work has commenced. The company is also planning a 1.2-million tonne brownfield expansion at Chanderia, Rajasthan, and a 0.6 million tonne grinding capacity expansion at the Durgapur unit, West Bengal.

Plans for setting up a waste heat recovery system and a 30 MW power plant, one each at Satna and Chanderia, are also on the anvil. These projects are likely to be completed in two years. The company also has captive power units which meet power requirements partially.

In FY-09, the company was allotted coal blocks in Madhya Pradesh for captive coal mining. Work is on for getting the necessary approvals and clearances to begin mining in this block. Further, Birla Corporation’s subsidiary, Talavadi Cements Ltd, has been recommended allotment of 2,130 hectare of land for mining limestone by the Madhya Pradesh government. But this approval has been challenged by some parties in the court. The company is mulling a three-million tonne plant in the Satna district, as this issue gets sorted out, at an investment of Rs 1,200 crore. The company enjoys a comfortable debt-to-equity ratio of 0.2. Cash balance in the company’s book as on end-March 31, 2009 was Rs 319.7 crore, up from Rs 31.5 crore at end last fiscal year. Higher cash balance appears buttressed by lower investment activities during the year.
Cost-cutting initiatives

Birla Corporation’s March 2009 quarter sales were 17 per cent higher than the previous year’s. However, the mounting raw material cost and employee expenses and losses in jute and other non-cement businesses (excluding power) ate into profits. Raw material cost, as a percentage of sales, was up from 10 per cent last year to 15 per cent in the March quarter. The company’s employee expenses were up 47 per cent to Rs 45 crore on higher provisioning. Power and fuel expenses stood reduced by 6 per cent on the several cost-cutting initiatives.

Birla Corporation’s power business reported a 11 per cent fall in revenues and 29 per cent fall in operating profits in the March quarter of 2009. Revenues from the cement segment were up 19 per cent for the quarter and operating profits of the division were up 20.6 per cent. The company’s overall profit after tax was Rs 90.6 crore, up 5 per cent. Higher expenses, however, saw profit margins squeezed by 2 percentage points.

However, the waste heat recovery system, captive power plants and blocks allotted for captive mining of coal, all are to bring in cost savings for the company in the coming quarters. However, unavailability of linkages (to meet the entire requirement) for quality coal might force the company to source coal from the market, increasing fuel costs.