Risk reward is now favorable Birla Corp ::HDFC Sec, report

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Risk reward is now favorable Birla Corp (BCORP) posted a weak quarter with EBITDA/t at Rs 143/t (vs.est Rs 191/t, -13.4% YoY, - 52.8% QoQ). This was driven by restricted limestone availability in Chanderia and kiln shut-down for maintenance, leading to flat volumes (0.8% YoY, - 4.7% QoQ). Consequently, this led to higher RM costs and higher stores consumption, driving total costs up ~5.3% QoQ. Realizations remained flat QoQ (Rs 3,786/t, 5.8% YoY). Birla Corp is the only large cement company (9.3 mTPA) with a diverse footprint, competitive cost and solid B/S still trading below US$100/t. Mgmt commentary in the press release suggests much of the cost increases in 3QFY15 could be temporary. Further, any favorable outcome of the Chanderia mining case could lead to multiple benefits and rerating. We believe risk reward is favorable at current valuations (US$65/t) and upgrade to BUY with a TP of Rs 590 (6.0x FY17 EV/EBITDA, US$75/t).  Chanderia limestone mining case : The next hearing for the case is scheduled for 17 Feb. CBRI’s report on full-scale mining was submitted in October. A favorable outcome in this case may allow BCORP to resume full scale mining, thus lowering costs and ensuring better availability of limestone. An adverse outcome will imply status quo i.e., mechanical mining of limestone outside the 2 km radius of Chanderia fort.  Outlook and view : We have lowered our earnings/EBITDA estimate downwards, primarily driven by lower volumes assumptions (~2-3% lower for FY15- 17). Prices in BCORP’s key markets have failed to improve vs 3Q averages, driven by poor demand. As such, 4Q will likely be another tepid quarter with low profitability. However, given the widespread expectation of improving demand and slowing capacity additions in most regions, utilizations are likely to trend higher (expect South), improving pricing ability for the cement makers. BCORP’s costs are competitive despite being hamstrung in Chanderia and it will benefit from better utilizations.

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http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011201