Buy Bajaj Corp:: Cost efficient player- Motilal Oswal

Cost efficient player
Possible resolution of mining ban, a key trigger; Buy
 Birla Corp (BCORP) is one of the most cost efficient cement producers, with average
cost of production being consistently 8-10% lower than the MOSL Cement Universe.
 We expect strong scale-up in BCORP's volumes over FY12-15 on the back of stabilization
of recently added capacities and favorable market mix.
 The ban on limestone mining at its Rajasthan plant has impacted its volumes and cost
adversely. Resolution of the mining ban would be a key trigger.
 Strong balance sheet renders flexibility to expansion as both expansion plans marred
by litigation. We value BCORP at INR464/share (4x FY15E EV/EBITDA with implied EV/
ton of USD52). Maintain Buy; our target price implies 46% upside.

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Capacity addition, favorable market mix to aid volume growth
BCORP has posted subdued dispatch growth (CAGR of 2.7%) over FY10-12 due to
capacity constraints. However, we expect strong scale-up in volumes over FY13-
15 (8.7% CAGR), despite mining ban on the back of stabilization of recently added
capacities (1.7mtpa in Satna, 1.2mtpa in Chanderia and 0.6mtpa in Durgapur in
3QFY12) and favorable market mix. BCORP's sales mix is concentrated in North,
Central and East India, where demand-supply outlook remains healthy. We
expect favorable market mix to drive ~9.5% CAGR in average realization over
FY13-15 (INR29/15/10 per bag increase in FY13/14/15).
Cost efficient player; resolution of mining ban key trigger
BCORP is highly cost efficient cement producers, with average cost of production
being consistently 8-10% lower than the MOSL average. The cost advantage is
attributable to high dependence on linkage coal (~65%), superior fuel efficiency
and low cost power generation (captive power accounts for 66% of requirement).
The recently imposed ban on limestone mining at its Rajasthan plant has impacted
its volumes and cost adversely. Resolution of the mining ban would be critical
for future volume growth and normalization of profitability. While BCORP is also
in the process of setting up two CPPs at Chanderia (50MW) and Satna (35MW),
we are yet to account for any benefit due to lack of visibility on the timeline. We
expect EBITDA/ton to improve to INR1,019 in FY15 from INR660 in FY12 (16%
CAGR).
Strong balance sheet, FCF generation to support growth
BCORP's both the expansion plans are marred by litigation. However its healthy
cash surplus of ~INR5.1b as of FY14E, coupled with strong FCF visibility of ~INR9.2b
over FY13-15 offers healthy growth potential here on. We model in for likely
expansion in capital efficiencies(RoCE/RoE by 4.3/3.8pp) on the back of
deployment of surplus cash.
Trading at steep discount; reiterate Buy
BCORP trades at FY15E EV of USD32/ton (v/s USD64/ton for MOSL Mid Cap Cement
Universe and USD111/ton for MOSL Cement Universe) and 2.4x FY15E EBITDA (v/

3.9x FY15E EBITDA for MOSL Mid Cap Cement Universe and 5.9x FY15E EBITDA for
MOSL Cement Universe). We expect revenue/EBITDA/PAT CAGR of 16%/30%/31%
over FY13-15. We value BCORP at INR464/share (4x FY15E EV/EBITDA with implied
EV/ton of USD52). Maintain Buy; our target price implies 46% upside.
About Birla Corp
 Birla Corp (BCORP) is a part of the MP Birla group. It has cement capacity of 9.3mtpa
across plants located in Rajasthan, Madhya Pradesh, Uttar Pradesh and West Bengal.
 BCORP's ownership is sub-judice, as the will of Late Mrs Priyamvada Birla bequeathing
all M.P.Biral group property to Late Mr Rajendra Lodha is being contested by Birla
family.
 Strong balance sheet, steady volume growth, cost leadership and attractive valuations
position BCORP as one of our preferred bets in the mid cap universe.