Buy Birla Corporation, target price Rs 650: Anand Rathi

Anand Rathi has given a buy rating to Birla Corporation with a target price of Rs 650 based on 7 times FY22e EV/EBITDA and an EV/ton of $55.

According to the brokerage, despite eight days production loss, Birla Corp EBITDA/PAT grew 11 per cent/52 per cent year on year on higher realisation, operational and tax savings. The Kundanganj expansion has been postponed; the Yavatmal and Chanderia expansions will continue, keeping leverage high. The strong brand focus, cost-saving measures and rising blended/trade sales will help the company.

With lost business in April and an expected weak second quarter in FY21 (monsoon, labour and logistics issues), the brokerage expects volumes to dip 8.6 per cent year on year in FY21 and grow 7 per cent year on year in FY22.


Investment Rationale

The brokerage believes that the company will benefit from its strong brand focus, higher blended cement/trade sales and investment in WHRS/CPP. It expects EBITDA/ton of Rs 851 and Rs 983 in FY21 and FY22 (vs. Rs 965 in FY20)

The brokerage says a judicious geographic- and product-mix aimed at increasing the share of blended and premium cement within its portfolio are positives for the company. Birla Corp’s strong brand focus, various cost saving initiatives (WHRS/solar plant/railway siding at Kundanganj) would help, operationally. The company postponed the Kundanganj expansion; however, the Yavatmal and Chanderia expansions will keep the leverage high.

The adoption of the new tax regime (Section 115 BAA of The IT Act, 1961) by three subsidiaries (RCCPL, Birla Jute Supply, Lok Cements) of seven will bring some tax savings.

The brokerage has broadly maintained our revenue and EBITDA estimates. However, it raised FY21e/22e PAT 31 per cent/17 per cent on expected tax savings on the adoption of the new tax regime by three subsidiaries.

Risks: High pet-coke and diesel prices, extension of the lockdown.

Financials

For the quarter ended March 31, the company reported consolidated sales of Rs 1689.97 crore, down -1.46 per cent from last quarter sales of Rs 1715.05 crore and down -9.76 per cent from last year's same quarter sales of Rs 1872.76 crore. The company reported net profit after tax of Rs 194.73 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 62.89 per cent stake in the company as of March 31, 2020, while FIIs held 4.17 per cent, DIIs 15.32 per cent and public and others 17.63 per cent.