Birla Corporation

Investors with a two- year perspective can consider investing in the stock of Birla Corporation, a cement manufacturer whose target markets are the northern, central and eastern regions.

Presence in high-demand markets, aggressive capacity expansion with sufficient cash in the kitty and improving operating efficiency on added captive power sources are key positives.



The company's FY10 numbers showed a 21 per cent growth in sales and 72 per cent growth in after-tax profits.

At Rs 365, the stock trades at five times its trailing earnings of one year, a good discount to comparable peers such as Prism Cement and Hiedelberg Cement.

Demand still alive

Year 2009-10 has been one of high demand and prices for the cement industry.

The current year numbers will, however, not match those of the previous year owing to the bloated base. Also, with close to 50 million tonne of capacity added in 2009-10 and much of this having come into the market, the prices are softening.

Nonetheless, the cement industry is set for volume growth on the back of improved demand from the realty and infrastructure sectors in the current year.

A CMIE survey puts the industry's estimated despatches growth for FY11 at 12.8 per cent (FY10 despatches growth: 10.4 per cent). Companies will see volume, rather than realisation, driven sales growth in 2010-11.

Regional advantage

Birla Corporation is present in the most lucrative regions now — in the central and eastern markets the demand is holding strong and the price dip is not as sharp as in some of the southern and western markets. Central and Eastern India (excluding despatches of ACC and Ambuja Cements in this region) have reported a growth of around 12 per cent and 8 per cent respectively in off-take in the April-June period of the current year.

All-India cement consumption in the same period was 49.83 million tonnes, a 6.6 per cent growth over the previous year. The wholesale price of cement in Kolkata was Rs 285/bag as against Rs 222 in Ahmedabad and Rs 243 in Bangalore.

Birla Corporation's sales have grown at a compounded rate of 16 per cent annually over the last five years while the industry's growth in this period stands at around 10 per cent. For the April-June quarter, the company reported a 17 per cent growth in net sales. The company's current capacity stands at 6.07 million tonnes.

Over the medium term though realisation is expected to remain muted for the company with large scale capacity addition in the industry, sales will receive momentum from higher volumes.

The company intends to increase its capacity by close to 3 million tonnes over the next two years. The work on brownfield expansion at the Chanderia unit of Rajasthan and a 0.6 mtpa grinding unit at Durgapur, West Bengal are progressing as per schedule.

The company's clinker production capacity is also set to go up with the plan for enhancing capacity of the clinker unit in Chanderia from the current 3600 tpd to 6000 tpd. In July, the company had already completed the de-bottlenecking exercise at Satna, which has increased the unit's clinker capacity to 9,600 tonnes per day (tpd) from 7,400 tpd earlier. Operating on outsourced clinker, the company's cost of production had risen sharply in the June quarter; this may however subside now.

To save on fuel costs and optimise the use of resources, the company is undertaking a couple of measures. Birla Corporation is setting up two waste-heat recovery plants having a total capacity of 22.5 MW. It is also planning a captive power plant of 35 MW capacity at Chanderia plant and 17.5 MW at Durgapur.

Birla Corporation is comfortable on the cash and debt front. Cash balance with the company as of end-March FY10 was Rs 339 crore. Debt-to-equity 0.3:1, giving space for debt options for capex.

Margin picture

In 2009-10, the company's margins both at the operating (39 per cent) and net (26 per cent) levels stood around 10 percentage points higher, thanks to the cool-off in fuel prices and improved realisations. But key input costs, including that of fuel and transportation, are inching up.

Margin pressure looks inevitable over the medium term with realisations too coming off from the highs. In the April-June quarter, the company's operating margins shrunk by 12 percentage points to 34 per cent. The net profit margin stood at 21 per cent.