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Birla Corporation - Ride Infrastructure Growth Story

The cement sector is poised for high growth. Buy for at least three years

Birla Corporation Ltd (BCL) was established in 1919. The MP Birla group is its promoter. It manufactures cement, jute products, synthetic viscose and cotton yarn. Cement manufacturing accounts for the predominant 85 per cent of its revenue. The company’s seven cement plants are situated in states such as Rajasthan, MP, UP and West Bengal. It caters mainly to north and central India. It is among India’s top 10 cement producers with current capacity of 7.5 million tonnes.

Strengths
Cash rich: Between the FY10 and FY12 the company is expected to generate free cash flow (after accounting for capital expenditure) of Rs350 crore. So it will be able to fund its expansion plans largely through internal accruals.
High returns ratios: Between the FY05 and FY10, the company has maintained a high return on capital employed (ROCE) ranging from 17.76 per cent to 41.23 per cent.
Low debt: Birla Corporation is a low-debt company. At the end of FY10 it had a very low debt-to-equity ratio of 0.36.

Weaknesses
Realisations under pressure: In Q2FY11 the average realisation was Rs3,119 per tonne. This was 13.9 per cent lower than the realisation in Q2 FY10.
Rising expenditure: In Q2FY11 the company’s total expenditure was 30.59 per cent higher than in Q2FY10. Its raw material costs increased because it had to purchase clinker as its Satna unit was shut down. Higher cost of imported coal was also responsible for rising expenditure.
Lower realisation and higher costs are expected to result in lower profit after tax in FY11. According to analysts at Motilal Oswal, profit after tax in FY11 will be to almost 23.9 per cent lower than in FY10.

Opportunities and growth drivers
Higher demand: The government is expected to give a major push to infrastructure development. In the 12th five-year plan total investment on infrastructure will be double the expenditure during the 11th five-year plan. Demand from real estate (especially housing) is also set to increase. All these factors are expected to drive the demand for cement. Moreover, most of the ongoing capacity expansion initiatives will get completed by FY12. The industry is likely to see very little capacity addition after FY12. Hence, overcapacity is likely to end while realisations are expected to improve in future.
Capacity expansion: One of the major growth drivers for the company will be expansion of cement capacity. The company plans to invest Rs2,300 crore to augment its total capacity to 13.8 million tonnes by FY14.

Threats
Delay in expansion: Any delays in capacity expansion plans will cause cost overruns. The expected benefits from selling higher volumes will then not accrue to the company.
Higher fuel costs: High cost of coal also has the potential to affect the company’s margins.

Valuation
The company is trading at a 12-month trailing PE ratio of 6.55. This is slightly above its five-year median PE of 5.55. Its five-year compounded annual growth rate in EPS is 38.6 per cent. This gives it a PEG ratio of 0.17 which is quite attractive. You may buy the stock with at least a three-year investment horizon.