75% upside! Should you invest in this potential rerating candidate from the cement sector?

Birla Corporation, which generates nearly 95 per cent of its revenue from the cement business, recently hogged the limelight on Dalal Street after Centrum Broking initiated coverage on the stock with a target price of Rs 1,550, indicating an upside of 75 per cent.

The brokerage believes that Birla Corporation is a potential rerating candidate due to consistent addition in capacity leading to higher than industry volume growth, modernisation and upgradation of plants through continuous investments leading to further improvement in cost structure, expansion of return ratios and substantial deleveraging over FY22‐25.

Of late, the company reported a consolidated net loss of Rs 49.91 crore for the quarter ended December 2022 against a profit of Rs 60.45 crore in the corresponding quarter a year ago. For the nine months ended December 2022, Birla Corporation posted a loss of Rs 44.45 crore against a profit of Rs 287.51 crore a year ago. With a fall of 18 per cent, shares of the company also underperformed the benchmark equity index BSE Sensex (up 9 per cent) during the past one year.

While sharing its view on results, Centrum Broking said, “The near-term earnings of the company were adversely impacted by higher startup costs related to the newly commissioned 3.9mn mt Mukutban plant in Maharashtra which coincided with a sharp uptick in input costs. Going forward, as the Mukutban plant ramps up, we expect most cost parameters to improve, further aided by efficiency improvement measures undertaken by the company along with softening input costs.”

Centrum Broking expects the company to double its EBITDA to Rs 1,900 crore in FY25 from Rs 840 crore expected in FY23, driven by higher volumes and lower costs. Choice Broking in February also gave a ‘Buy’ call on Birla Corporation with a target price of Rs 1,007.

It thinks that the consensus is underestimating the earnings potential of the company given the accretion of sizeable incentives from FY24 and the increased share of domestic coal from captive mines.

Commenting on the sector, Centrum Broking added that the cement sector in the country is likely to witness the twin advantage of better demand and softening of operating costs, thereby leading to the recovery of margins. Over the past year, the industry had faced challenges related to surging operating costs due to coal and pet coke prices.

“We believe that the sector has managed to balance the cost pressures and demand well. Margin recovery has already started from Q3FY23 and we expect normalisation of margins in FY24 given softening costs and better realizations,” Centrum Broking said in a report.

The brokerage also has a ‘Buy’ rating on stocks like ACC (target price: Rs 2480), Ambuja Cement (Rs 378), UltraTech Cement (Rs 8,880) and JK Lakshmi Cement (Rs 900).

Also read: YES Bank shares brace for selloff as lock-in period ends today: Stock has 64% 'sell' calls

Also read: Adani Enterprises, Adani Power, Adani Green, Ambuja Cements: Adani group shares in focus on debt payments, stake sale report