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BIRLA CORP 2QFY11: Below est; Lower realizations, higher cost push; Downgrading EPS; Maintain Buy
Birla Corp's (BCORP IN, Mkt Cap US$705m, CMP Rs406, Buy) 2QFY11 performance was below estimates, with EBITDA of Rs766m (vs est 1.2b). However, higher other income and lower tax boosted reported PAT to Rs690m (vs est Rs843m). Key highlights:
- Cement volumes grew 7.6% to 1.39mt (vs est 1.3mt). Realizations declined by 11% QoQ (~13.9% YoY) to Rs3,119/ton (vs est Rs3,310/ton).
- Net sales de-grew 4% to Rs4.8b (vs est Rs4.7b), with cement revenues de-growing 7% YoY (~17% QoQ).
- EBITDA margin declined 12.8pp QoQ (~22.8pp YoY) to 15.8% and EBITDA declined 53% QoQ (~60% YoY) to Rs766m (vs est Rs1.2b).
- Higher other income and lower taxation boosted PAT to Rs690m (vs est Rs843m), de-growth of 55% YoY (~42% QoQ).
- The company declared interim dividend of Rs2.5/share.
Higher volumes and higher jute revenues restrict revenue de-growth to 4%
- Net sales de-grew 4% YoY to Rs4.84b (vs est Rs4.68b).
- Cement volumes grew by 7.6% to 1.39mt (vs est 1.3mt). Volume growth was driven by ramp-up of new capacity at Rajasthan and purchased clinker (due to shutdown at Satna plant).
- However, realizations declined by 11% QoQ (~13.9% YoY) to Rs3,119/ton (vs est Rs3,310/ton). As a result cement revenues de-grew 7% YoY to Rs4.3b (vs est Rs4.3b).
- Jute business revenues grew 36% YoY to Rs497m (vs est Rs350m), boosting overall revenues.
Lower realizations, higher cost push impact profitability
- EBITDA margins declined 12.8pp QoQ (~22.8pp YoY) to 15.8% (vs est 25.9%) and EBITDA declined 53% QoQ (~60% YoY) to Rs766m (vs est Rs1.2b).
- Cement business performance was severely impacted due to lower realizations and higher cost. Cost push was in form of higher RM cost (due to purchased clinker as Satna plant was shut down) and higher energy cost (increase in pet coke and imported coal price). As result, EBITDA/ton declined ~Rs50/bag YoY (~Rs27/bag QoQ) to Rs623/ton.
- Higher other income and lower taxation (due to commissioning of new plants and Sec 80IA benefit for CPP) boosted PAT to Rs690m (vs est Rs843m), a de-growth of 55% YoY (~42% QoQ).
Aggressive capex plans to invest Rs23b over next 3 years
The company has undertaken aggressive capex plan with total investment of Rs23b, taking total capacity to 13.8mt by FY13-14. This is the most aggressive capex undertaken by the company in last few years. Its capex plans include:
- 2.7mt brownfield expansion at Chanderia, with commissioning by June-12 (enhanced from 1.2mt earlier)
- 0.6mt brownfield expansion at Durgapur, commissioning by June-11
- 3mt brownfield plant at Satna; orders would be placed upon resolution of dispute over allotment of mining leases
- 0.5mt coal washery at Satna
- 35MW CPP at Satna and 50MW CPP at Chanderia commissioning by June-12 (enhanced from 35MW earlier) and 17.5MW at West Bengal.
- 22.5MW waste heat recovery based power plants to commission operations by 3QFY11.
It would be funding its capex plans largely through internal accruals, as it has net cash of ~Rs7.3b (Sep-10), and would generate cash flow from operations of ~Rs2.5-3b p.a. at least.
Downgrading EPS
- We are downgrading our EPS estimates for FY11 by 8.7% to Rs55 and by 7.8% to Rs58.2 for FY12, to factor in lower than estimated 2QFY11 results, lower realizations and higher cost push.
- Our estimates factors in for Rs4/bag QoQ increase in cement prices in 3QFY11 and another Rs5/bag QoQ increase in 4QFY11. For FY12, we are modeling in cement price increase of Rs4/bag over average of FY11.
Valuation and view
- Birla Corp has a very strong balance sheet with net cash of Rs100/share in FY10 and Rs149/share in FY11 (~35% of market cap).
- The stock trades at extremely attractive valuations of 7x FY12E EPS, 4x FY12E EV/EBITDA and at EV/ton of US$68 (on expanded capacity of 7.5mt), which is at a significant discount to comparable peers.
- We believe the discount is not justified and valuations, based on earnings as well as replacement cost, are extremely attractive. Maintain Buy with target price of Rs490 (~5x FY12E EV/EBITDA).
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