Highlights:
- Strong double-digit volume growth aided topline
- Operating margin improved to 16.5 percent
- Demand continues to remain strong in the central region
- High leverage and capacity constraints limit stock upside
-------------------------------------------------
Cement manufacturer Birla Corporation (CMP: Rs 556, market capitalisation: Rs 4,286 crore) shaped up well on the earnings front as double-digit volume growth and cost control measures drove the show in the quarter gone by, with operational parameters playing ball.
Key result highlights- Revenue growth (13 percent year-on-year) was driven by 13 percent increase in cement volumes to 3.85 million tonne (MT). Earnings before interest, tax, depreciation and amortisation (EBITDA) increased 20 percent as margin expanded by 320 basis points (100 bps=1 percentage point) to 16.5 percent. However, net profit was almost flat after higher tax outgo
- Stable raw material costs, along with internal operating efficiencies, drove profitability metrics for January-March. Despite a sharp rise in unitary power and fuel costs (up 13 percent YoY), the company reported EBITDA per tonne of Rs 804, a multi-quarter high
- Prices continued to remain firm and strong demand for cement in the central region aided volumes. In terms of distribution channel, the share of trade segment touched 80 percent of sales volumes, of which the premium segment accounted for 38 percent
- The company is setting up a waste heat recovery system as well as a solar power plant to reduce its power and fuel expenses. These plants are expected to be operational by H2 FY20 and should aid margin expansion going forward
Other key takeaways- Driven by higher volumes, capacity utilisation for the quarter stood at 99 percent and the same for the full year was closer to 88 percent
- Birla Corp’s jute division (five percent revenue share) continues to underperform and remains a drag on margin and profitability. In Q4, the segment’s EBIT margin further fell to just a percent from three percent in Q3
Outlook and recommendation- Large scale infrastructure development activities (freight corridor, metro network and industrial parks) continue to stoke demand for cement in the central region. Given the current regional capacity utilisation levels (around 80 percent) and limited capacity additions, cement realisation in the central region remains fairly attractive vis-à-vis other areas- While the company will continue to reap the benefits of its strong geographical positioning in the central region, growth in the cement business will be capped by capacity constraints. Given the current capacity utilisation levels, near-term volume upside seems limited as the new capacity is anticipated to be operational by March 2021.
- The stock has seen a gradual correction in the past one-year and current valuations (FY19 EV/EBITDA of 7.8 times) seems more or less in line with similar-sized peers. In our view, subdued growth prospects, along with high leverage (consolidated debt of nearly Rs 3,500 crore with net debt-to-EBITDA of around four times) will continue to have a bearing on the stock's performance. Hence, we suggest investors remain on the sidelines.
For more research articles, visit our Moneycontrol Research page
Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
