Rajasthan mining approval from Supreme Court, right investments prop up Birla Corp stock

In the past three months, Birla Corp has outperformed the ET Cement index, an amalgamation of major cement stocks across India. While Birla Corp shares have jumped 25% in this period, the index has remained flat.

Besides being a cost-efficient and debt-free company, there are two factors that have majorly influenced interest in this stock.

The company has received an interim order from the Supreme Court allowing it to mine limestone beyond two kilometers from the Chittorgarh Fort at Chanderia in Rajasthan.

Birla Corp’s cement plant at Chanderia accounts for close to 45% of the company’s total capacity of 9 million tonnes a year, and getting a key raw material nearby means it could save on transportation cost. Also, the stock’s valuation is still attractive compared with its mid-size rivals.

In the quarter ended September 2013, the company’s raw material cost equaled 17% of its net revenue.

Freight and fuel expenses – which together formed transportation cost –were close to 44% of its net revenue.

Historically, the company’s transportation cost has been equal to 23-25% of its net sales, and the recent jump in its transportation cost was due to a ban on mining near the Chittorgarh Fort.

Lowering transportation cost would help the company better execute its capital expenditure plans. The company has a capex plan of Rs 950 crore to increase its capacity to 13.5 million tonnes. It plans to set up three grinding or blending units in Madhya Pradesh, and one grinding unit each in Bihar, Uttar Pradesh and Jharkhand.

Its presence in high-growth regions such as north, central and east -- where the per capita consumption of cement is lower than the national average -- is likely to benefit the company once construction activity picks up in these regions.The stock is also attractively valued.