Birla Corporation: Result Review For June Quarter 2012

Birla Corporation, the flagship company of the M P Birla Group, has reported weak results for the June 2012 quarter. The net sales of the company rose by 18 per cent on a YoY basis to Rs 658 crore while the net profit declined by 24 per cent on a YoY basis to Rs 84 crore. However, on a QoQ basis the net profit has jumped by 47 per cent. Further, the operating margins of the company declined by 700 bps YoY to 20.35 per cent. The jump in sales has been due to the increase in demand and the rise in realisation during the quarter.

In a press release issued post the results, Harsh V. Lodha, chairman of the company, has stated that the profitability of the company continued to be affected due to the closure of its limestone mining operations at its Chanderia units on account of the order of the High Court at Jodhpur. The company is procuring limestone, a major raw material for making clinker, from the open market at a higher price, thus affecting the profitability.

Further, the judgement of the High Court has come against the management’s expectation. In fact the court has prohibited mining and blasting within 10 kms from the wall of the Chittorgarh Fort and ruled that the mining leases granted in such areas be cancelled with a penalty clause. In reaction, the company has filed a special leave petition before the Supreme Court, challenging the aforesaid order. The SLP was admitted and the levy of compensation was stayed.

As for the outlook, the company sounded quite positive on the demand side due to the government’s impetus for development of the infrastructure, including housing and roads in the fiscal year. There is also a mention about the surplus scenario due to recent capacity additions which may continue to impact the cement companies for some more time. Meanwhile, the input cost pressure, aided by inflation, will continue to impact the margins. The increase in rail freight and excise duty as well as the expected volatility of prices in the light of growing regulatory risks may add pressure to the operating margins.

In our opinion, the scenario will worsen in the coming quarter on the back of the monsoon season. The upcoming quarter will see further erosion of the margins due to a decline in the cement prices and the weak demand situation. Also, in view of the ongoing mining issues and the procurement of raw material at higher prices, we expect the company to report muted earnings in the September quarter. The company at present is trading at a PE of 8.11x with annualised EPS of Rs 28, which implies that it is trading at fair valuation. But in anticipation of the weak Q2FY13 results, we suggest staying away from the stock from a medium-term perspective.