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Despite an incredible operating margin of 31% and RoE of 42%, Birla Corp is cheaper than its peers
Birla Corporation makes cement, jute goods, auto-trim parts (car interiors) and iron & steel castings. Cement, its main business, contributed 85% of the total revenue in the December 2009 quarter. Power is the second-largest contributor to the total revenue; jute and other businesses reported losses in this quarter. Birla Corp is rationalising some of the products for which demand has dropped over the years. It has cement units in Madhya Pradesh, Uttar Pradesh, Rajasthan and West Bengal with a total capacity of seven million tonnes. It has been allotted coal blocks in Madhya Pradesh for captive coal mining in FY08-09. Its subsidiary, Talavadi Cements, has been recommended allotment of 2,130 hectares of land for mining limestone by the Madhya Pradesh government. But this approval has been challenged in court. The company, controlled by Harsh and Aditya Lodha (sons of the late RS Lodha who inherited the MP Birla group companies from Priyamvada Birla), has been quietly expanding. It plans to invest Rs2,350 crore to enhance its annual cement manufacturing capacity to 11.5 million tonnes over the next four years which includes setting up a 1.2-million-tonnes plant along with power generation from waste heat recovery and a 35MW captive power plant at Chanderia, Rajasthan. Additionally, it will increase the grinding capacity by 600,000 tonnes and install a 17.5MW captive power plant at Durgapur; and replace its cement ball mills and set up a coal washery and a 35MW captive power plant at Satna. After a brief lull late last year, cement demand is rising again. In January 2010, cement despatch registered a new high. The company sold 18.19 million tonnes (mt) in January, surpassing its earlier high of 18.1mt in March 2009. Demand is expected to be on the higher side in the January-March 2010 quarter on increasing infrastructure activity. The industry has added around 22mt of new capacities this fiscal which has increased its overall capacity to around 245mt. Buoyed by strong demand, large cement companies have increased prices by Rs3-Rs5 per 50kg bag from 1st February which has pushed up the average national price to Rs235 per bag from Rs210-Rs215 per bag in November 2009. Having a strong presence in central and eastern India, and a fairly good presence in north India, has been advantageous. The recent pick-up in demand has come from those parts of the country. Rising expenditure is another concern but it is expected to decrease once the captive power plants, waste recovery systems and blocks allotted for captive coal mining come on stream. The five-quarter average sales and operating profit growth are 22% and 47%, respectively. For a commodity company, Birla Corporation has an incredible operating margin of 31%. Return on equity in FY09-10 is expected to be 42%. The stock is not expensive. Its market-cap is 1.32 and 4.32 times its sales and operating profit, respectively. The average of these two measures for the cement companies in the Moneylife sample is 1.5 and 5.18, respectively. Buy the stock at the current price.