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Initiating Coverage
March 23, 2011
Rating Matrix
Rating : Buy Birla Corporation (BIRCOR)
Target : | 343
Target Period : 12-15 months | 309
Potential Upside : 11%
Nurturing capacities to drive growth…
Annual Performance (| Crores)
Birla Corporation (BCL), promoted by the MP Birla group, derives ~93%
| Crore FY09 FY10 FY11E FY12E FY13E of its total revenue from the cement segment and ~6% from the jute
Net Sales 1791 2157 2127 2583 3166 segment. The company is well placed in the high growth markets of
EBITDA 426 705 427 415 582 northern, central and eastern region where the high utilisation rates will
Net profit 324 557 322 234 349 enable the company to increase volumes and better realisations. BCL
Current & target multiple has increased its cement capacity by ~1.7 MTPA to reach 7.5 MTPA by
Q3FY11. Further expansion of 1.8 MTPA by Q2FY12E would increase its
FY09 FY10 FY11E FY12E FY13E
installed capacity to 9.3 MTPA. These expansions are expected to drive
EPS 42.0 72.4 41.8 30.4 45.4
its volume growth at ~12% CAGR in FY10-13E. We expect net sales to
P/E (x) 7.4 4.3 7.4 10.2 6.8
grow at ~14% CAGR (FY10-13E). The operating margin is expected to
EV/EBITDA (x) 4.2 2.3 4.8 5.5 3.3
improve in FY13E after facing pressure in FY11E and FY12E due to
P/BV (x) 1.8 1.3 1.2 1.1 0.9
better realisations. The company has a strong balance sheet and is
Target P/E (x) 8.2 4.7 8.2 11.3 7.6
expected to generate cash flow from operations of ~| 1400 crore in
Target EV/EBITDA (x) 7.2 4.1 7.8 8.5 5.5 FY10-13E with net cash of | 444 crore in FY13E (| 58 per share).
Target P/BV (x) 2.8 2.0 1.8 1.6 1.4
Capacity expansion to drive volume growth
Stock Data
BCL is expanding its clinker capacity by ~2 MTPA to ~6.3 MTPA by
Bloomberg Code BCORP IN FY12E through brown field expansions at Satna (MP) and Chanderiya,
Reuters Code ADYA.BO Rajasthan. Also, it is expanding its cement grinding capacity by ~3.5
Face Value (|) 10 MTPA to ~9.3 MTPA by FY12E. On the back of capacity expansions, we
Promoters Holding (%) 62.9 expect cement sales volumes to grow at ~12% CAGR during FY10-13E to
Market Cap (| Crore) 2379.6 7.8 MTPA in FY13E from 5.6 MTPA in FY10. Along with volume growth,
52 Week H/L 448 / 292 we believe the company’s presence in high growth regions like north,
Sensex 18206 central and east would help it to increase its realisations on account of
Average Volumes 3062 increasing utilisation rates in the regions.
Comparative return matrix (%) Strong balance sheet provides enough room to expand
1M 3M 6M 1 Yr On account of ~| 1300-crore expansion plans, we expect the company’s
Birla Corp -3.5 -10.1 -23.7 -16.6 debt-equity ratio to increase from 0.40 in FY10 to 0.51 in FY12E, which is
Heidelberg -2.8 -14.8 -25.5 -26.3 still at a very comfortable level. With a low debt-equity ratio, we feel the
JK Cement -4.6 -12.3 -21.6 -30.0 company would not find it difficult to go ahead with its expansion plans
JK Lakshmi 2.2 -16.6 -26.8 -38.8 despite the expected decline in its operating profit in FY11E and FY12E.
Mangalam 3.6 -15.5 -28.8 -36.4 Valuations
At the CMP of | 309, the stock is trading at EV/EBITDA of 5.5x and 3.3x
Price movement its FY12E and FY13E EBITDA, respectively. On a replacement cost basis,
7,000 500 BCL is trading at $54 per tonne and $46 per tonne its FY12E and FY13E
6,000 capacities, respectively. We value the cement business at $50/tonne to
400
5,000 its FY13E capacity of 9.3 MTPA, which is nearly a 58% discount to the
4,000 300 current replacement cost of $125/tonne. Hence, we are initiating
3,000
coverage on the stock with a BUY rating and target price of |343/share.
200 Exhibit 1: Valuation Metrics
2,000
100 | Crores FY08 FY09 FY10 FY11E FY12E FY13E
1,000
Net Sales 1724.8 1790.7 2157.0 2127.4 2583.0 3165.7
0 0 EBITDA 575.4 425.8 705.1 427.1 414.9 581.6
Apr-10 Jul-10 Sep-10 Dec-10 Mar-11 Net Profit 393.6 323.5 557.2 321.6 234.0 349.3
Price (R.H.S) Nifty (L.H.S) P/E (x) 6.0 7.4 4.3 7.4 10.2 6.8
Analyst’s name Target P/E (x) 6.7 8.2 4.7 8.2 11.3 7.6
EV/EBITDA (x) 3.5 4.2 2.3 4.8 5.5 3.3
Vijay Goel
vijay.goel@icicisecurities.com P/BV (x) 2.4 1.8 1.3 1.2 1.1 0.9
RoNW (%) 39.2 25.1 31.1 15.6 10.5 13.8
Rashesh Shah
rashes.shah@icicisecurities.com RoCE (%) 41.8 24.4 26.0 12.0 9.6 13.4
Hitesh Taunk Source: Company, ICICIdirect.com Research
hitesh.taunk@icicisecurities.com
Investment Rationale
Birla Corporation is expected to post cement sales volume growth of
~12% CAGR during FY10-13E due to grinding capacity addition of ~3.5
MTPA during the period. The company has a presence in the high
growth markets of the northern, central and eastern region. We believe
it will enable BCL to increase volumes and better its realisations. Along
with strong volume growth, we expect cement realisations to increase
by 7% YoY in FY12E and 9% YoY in FY13E. We expect net sales to grow
at 14% CAGR during FY10-13E from | 2157 crore in FY10 to | 3165.7
crore in FY13E. We expect the EBITDA margin to decline in FY11E and
FY12E to ~20% and ~16%, respectively, from ~33% in FY10 on account
of rising costs and low realisations. However, the margin is expected to
improve in FY13E to 18% as better realisations would help to offset the
higher cost of production. Also, the company has a strong balance sheet
and is expected to generate cash flows from operations of ~| 1400
crore in FY10-13E with net cash of | 444 crore in FY13E.
The company is expanding its clinker unit capacity at Exhibit 5: Capacity expansion schedule
Chanderiya by 0.8 MTPA to 3 MTPA. This will lead its overall
Million Tonnes
clinker capacity to 6.24 MTPA in FY12E. At the same time,
Clinker Capacity Location FY10 FY11E FY12E FY13E
the company is also expanding its grinding capacity by 1.2
Satna Madhya Pradesh 2.48 3.24 3.24 3.24
MTPA and 0.6 MTPA at its Chanderiya and Durgapur unit to
Chanderia Rajasthan 1.92 2.20 3.00 3.00
bring the total grinding capacity to ~9.3 MTPA
Total 4.40 5.44 6.24 6.24
Central, Central,
38% 36%
Others, 14 Others, 9
Uttar Pradesh,
Uttar Pradesh, Delhi, 6
27
Delhi, 4 30
Haryana, 8
Haryana, 8
Madhya
Madhya Pradesh, 9
Pradesh, 6
Rajasthan, 14
Bihar, 8
Rajasthan, 18 Bihar, 13
West Bengal, West Bengal,
Source: Crisil ICICIdirect.com Research Source: Crisil, ICICIdirect.com Research
Northern region
We expect cement demand in the northern region to grow at a CAGR of
~7% during FY10-13E. Rajasthan, Punjab, Haryana and Delhi are the key
cement consuming states in this region. Going forward, also, we expect
these states to contribute significantly to overall cement demand in the
northern region. We expect the capacity utilisation rate to improve from
FY12E as consumption growth will outpace effective capacity addition.
Exhibit 11: Demand supply matrix of northern region
Uttar Pradesh (UP) and Madhya Pradesh (MP) are the major cement
consuming states in the region contributing ~70% and ~30% of the total
consumption in the central region, respectively. Lower per capita cement
consumption in MP and UP (137 kg/capita in MP and 104 kg/capita in UP)
indicates sustainable future growth in demand. Government housing
projects (rural and urban) and hydro power projects are the major
demand drivers in the region, backed by key government projects such as
Pradhan Mantri Gram Sadak Yojna, Bharat Nirman and Indira Awaas
Yojna.
Eastern region
We expect the cement demand in the eastern region to grow at a CAGR
of ~7% during FY10-13E. We expect the capacity utilisation rate to
improve to 89% in FY12E from 84% in FY11E.
Exhibit 13: Demand-supply matrix of eastern region
285
265
245
225
205
185
165
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
West North East Central South All India Avearge
500 0.6
0.5 376.7
400
The free cash flow is expected to come to the positive zone 270.1 0.5
300 200.5
in FY13E to | 376.6 crore after completing the expansions 200 134.7 0.5
0.4
in FY11E and FY12E 100 0.3 0.4
| Crores
0.4
0 0.3
-100 FY08 FY09 FY10 FY11E FY12E FY13E
-200 0.2 0.2
-156.5
-300 0.1
-400
-500 -456.0 0.0
Assumptions
Cement Business
Exhibit 16: Assumptions for cement segment
5000
3826
4000 3605 3516
3103 3275
3011
| per tonne
3000
2000
1078 1082
797
1000 580 456 600
0
FY08 FY09 FY10 FY11E FY12E FY13E
Jute Business
Exhibit 18: Assumptions for jute segment
Exhibit 19 shows the impact on EBITDA per tonne and EPS of the
company in FY11E, FY12E and FY13E under the following situations:
| per tonne
$ per tonne
120
2500
100
2000
80
60 1500
40 1000
20 500
0 0
Nov-08
Nov-09
Nov-10
Mar-08
May-08
Jul-08
Sep-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Jan-11
Mar-11
Australia - Newcastle
South Africa - Richards Bay (CV 6000)
Domestic Coal (Grade A)
Exhibit 21: Birla Corp’s change in coal mix impact on per tonne
Increase in proportion of imported
1200 coal led to increase in power & fuel
1003
cost 920 933
1000
768 774 806
800 687 708
665
| per tonne
633 611
600
400
200
0
Q1FY10
Q2FY10
Q3FY10
Q4FY10
FY10
Q1FY11
Q2FY11
Q3FY11
FY11E
FY12E
FY13E
Financials
Topline to grow at 14% CAGR in FY10-13E
We expect net sales to grow at 14% CAGR in FY10-13E from | 2157 crore
in FY10 to | 3165.7 crore in FY13E. The topline growth will be driven by
sales volume growth of 12% CAGR to 7.8 MT in FY13E from 5.6 MT in
FY10. We expect realisations to increase by 7% YoY in FY12E and 9%
YoY in FY13E on account of the company’s presence in the high growth
markets of the central region and to offset continuously rising input cost.
In addition, the contribution of the jute segment in total revenues is
expected to decline due to lower sales volume. However, this risk will be
mitigated by addition of cement and power capacity, going forward.
3600 3165.7 25
20
2583.0
2400 2157.0 2127.4 15
1790.7
| Crores
1724.8
10
%
1200 5
0 -5
FY08 FY09 FY10 FY11E FY12E FY13E
116.8
2993.7
1200 2451.0
2006.5 1949.6
1586.0 1642.1
700
200
Cement Jute
600 557.2 30
500 25
393.6
400 349.3 20
323.5 321.6
| Crores
300 15
%
234.0
200 10
100 5
0 0
FY08 FY09 FY10 FY11E FY12E FY13E
600 557.2 30
500 25
393.6
400 349.3 20
323.5 321.6
| Crores
300 15
%
234.0
200 10
100 5
0 0
FY08 FY09 FY10 FY11E FY12E FY13E
45 41.8
40
35 39.2 31.1
30 25.1
25
26.0
%
20 24.4 15.6
13.8
15 10.5
10 13.4
12.0
5 9.6
0
FY08 FY09 FY10 FY11E FY12E FY13E
Valuation
We expect BCL’s net sales to grow at ~14% CAGR (FY10-13E) and
EBITDA margins to improve in FY13E on account of increasing cement
realisations. This would help to offset higher cost of production. The
return ratios are also expected to improve from FY13E on account of
increasing profitability.
The company has grown itself in terms of growing its sales volumes,
improving operating margins and cash generation over the last 10 years.
In the last down cycle phase of the Indian cement industry (FY01-03), the
company was trading at nearly ~$10-30 per tonne on account of its low
operating margins (5-6%), negative return on equity ratio and leveraged
balance sheet (D/E of 1.3-2.0) during the period.
At the CMP of | 309, the stock is trading at 10.2x and 6.8x its FY12E and
FY13E earnings, respectively. It is trading at 5.5x and 3.3x its FY12E and
FY13E EBITDA, respectively. On a replacement cost basis, the stock is
trading at $54 per tonne and $46 per tonne at its FY12E and FY13E
capacities, respectively.
We have used the SOTP based valuation methodology to value the stock.
We have valued the cement business on a replacement cost method and
assigned a value of $50/tonne to its FY13E capacity of 9.3 MTPA, which is
at nearly 60% discount to the current replacement cost of $125/tonne. For
the jute and others segment, we are assigning market cap/sales multiple
of 0.2x its FY13E sales. Hence, we are initiating coverage on the stock
with a BUY rating and target price of | 343 per share.
Exhibit 29: EV/tonne chart
4000
$100
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
EV 50 70 100 30 10
6000.0
5000.0
7.9x
4000.0
| Crores
7x
3000.0
4.3x
2000.0
1000.0 1.6x
0.7x
0.0
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Remarks
Cement Capacity (FY13E) MTPA 9.3
Target EV/Tonne $ 50
Cement EV | Crore 2129.8
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.
research@icicidirect.com
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research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to
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