Birla Corporation Ltd Margins Remains Under Pressure In March Quarter 2012

Birla Corporation, a flagship company of the M P Birla Group, has reported modest results for the March 2012 quarter  margins remained under pressure. The net sales of the company rose by 9.7 per cent on a YoY basis to Rs 651 crore while the net profit declined by 9 per cent on a YoY basis to Rs 57 crore. Further, the operating margins of the company declined by 200 bps on a YoY basis to 14.5 per cent. The jump in sales has been due to an increase in demand during the quarter. However, due to an increase in the raw material cost (up by 34 per cent YoY) such as coal, power and freight charges the profit of the company declined. Also, the disruption of the clinker producing unit at Chandaria impacted the production of the company which suffered substantially by almost 50 per cent of the capacity.

However, even with all such issues the company could increase the production of blended cement to 89.08 per cent in 2011-12 (the highest ever) as against 86.37 per cent in the previous year, which had helped partially mitigate the situation. On a QoQ basis the company has done well on the back of revival in demand and a jump in the cement prices during the quarter. The net sales jumped by 23 per cent and the net profit shot up by 31.4 per cent on a QoQ basis and despite the increase in costs the operating margins of the company improved by 130 bps.

As per a company statement released post the result, the first nine months of the fiscal year remained under pressure owing to poor demand from the infrastructure and real estate sector. High borrowing cost and the economic slowdown brought down the demand. However, since January this year, there has been a revival in demand. As for the outlook, the company expects the demand momentum to continue in the next fiscal year as the Union Budget has focused on developing infrastructure and boosting investment in affordable and rural housing.

Cost pressure, however, will continue to be a matter of concern. The rise in rail freight and excise duty and the expected volatility of prices in the light of growing regulatory risks may squeeze the operating margins. Coal is set to become dearer as the government has approved the revision in royalty rates to 14 per cent on an ad valorem basis. In conclusion, the company is facing severe problems over the ongoing mining issues in Chandaria which has impacted the production of the company. Further, the increase in the raw material prices has dampened the profitability of the company.

The June quarter will see further erosion of the margins due to a decline in cement prices as a result of the weak demand condition. With the onset of the monsoon the demand will decline in the June quarter due to lower infrastructure and construction activity. In view of such a scenario we expect the company to report muted earnings in the June 2012 quarter.

However, as mentioned earlier, we believe that the demand for the fiscal year 2013 will remain better than FY12 and is expected to grow by 8-9 per cent. The growth will be driven by higher infrastructure spending by the government and higher investment in the development of rural and affordable housing. The company at present is trading at PE of 8.11x with annualised EPS of Rs 31. We believe that the company is trading at a fair valuation. That said, the mining issue and the lower activity during the monsoon will lead it to report weak Q1FY13 results. Therefore our recommendation is to stay away from the stock from a medium-term perspective.