Buy Birla Corporation: TP: INR466: Motilal oswal,

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Birla Corp's 2QFY12 performance was below estimates, with EBITDA of INR316m (v/s est INR715m) and PAT of INR261m
(v/s est INR584m), impacted by lower volumes, higher costs and forex loss.
 Cement volumes grew just by 2% YoY (-7% QoQ) to 1.41mt (v/s est 1.45mt). Realizations declined by 6% QoQ
(+3% YoY) to INR3,213/ton (v/s est INR3,023/ton), benefitting from improvement in market mix. Net sales grew by
6% YoY (-8% QoQ) to INR5.2b (v/s est INR4.9b).
 EBITDA margins declined by 20.4pp QoQ (-970bp YoY) to 6.1% (v/s est 14.6%) and PAT de-grew by 77% QoQ (-
62% YoY) to INR261b.
 Cost/ton has increased by INR565/ton QoQ (+INR420/ton YoY, v/s est increase of INR200/ton QoQ), driven by higher
RM, energy cost and other expenses (due to Fx loss of INR138m).
 Its Rajasthan plant (~2mt capacity) operation are impacted w.e.f 20/August/2011 due to mining ban order within
10Kms of the Chittorgarh Fort. While its 2QFY12 volumes would have limited impact due to clinker inventory, prolong
ban would severely curtail its operation at Rajasthan plant. It has appealed the order and expects it to be heard in
Dec-11.
 The board has announced interim dividend of INR2.5/share.
 We are marginally downgrading our FY12 EPS by 1% for FY12 to INR50.2 and FY13 by 5% to INR55.2, to factor in
for higher energy cost and RM cost (due to mining issue at Rajasthan plant). The stock trades at 5.9x FY13 EPS,
4.1x EV/EBITDA and USD54/ton. Maintain Buy with target price of INR466 (5x FY13 EV/EBITDA).
Mining ban at Rajasthan plant to hurt volumes, profitability
 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.
 While its 3QFY12 volumes would have limited impact due to clinker inventory, prolong
ban would severely curtail its operation at Rajasthan plant. It lost production of 0.115mt
of clinker and 0.08mt of cement during September 2011
 It has appealed the order and expects it to be heard in December 2011.
 It is comfortably placed till December 2011 with supply of clinker from Satna plant
and purchases from open market, albeit at higher cost and lower profitability.
 Our estimates factors in no impact on volumes due to mining ban, but increase in cost
as volumes are supplemented by purchased clinker and from Satna.
Aggressive capex plans to invest INR16b over next 3 years
The company has undertaken capex plan with total investment of INR16b, taking total
capacity to 10.8mt 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:
 2.7mt brownfield expansion at Chanderia, with commissioning from Mar-12 onwards
(Phase-I of 1.2MT in Mar-12 & Phase-II of 1.5MT in FY13). This expansion would
be dependent on restoration of mining ban at its Chanderia plant.
 0.6mt brownfield expansion at Durgapur commissioning by Mar-12
 0.5mt coal washery at Satna
 35MW CPP at Satna, 50MW CPP at Chanderia and 17.5MW at West Bengal (awaiting
regulatory clearance for all three).
 22.5MW waste heat recovery based power plants (of which 15MW commissioned
operations in 3QFY11).
 1mt greenfield plant in Assam in a JV with Assam Mineral Development Corporation.
 Developing coal block in MP with reserves of 21mt, with expected mining from FY14.
It would be funding its capex plans largely through internal accruals, as it has net cash of
~INR3.9b (Mar-11) and would generate cash flow from operations of INR4-5b p.a atleast.

Valuation and view
 We are marginally downgrading our FY12 EPS by 1% for FY12 to INR50.2 and
FY13 by 5% to INR55.2, to factor in for higher energy cost and RM cost (due to
mining issue at Rajasthan plant).
 It has very strong balance sheet with net cash of INR50/share in FY11, enabling it to
invest for future growth without put pressure on balance sheet.
 The stock trades at 5.9x FY13 EPS, 4.1x EV/EBITDA and USD54/ton, which is at a
significant discount to its 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 INR466
(5x FY13 EV/EBITDA).