Upcoming Capacity Expansion At Kundanganj Will Alleviate Constraints By Q1 FY '26

Key Takeaways

• High capacity utilization at Mukutban and strategic upgrades are boosting volume growth and profitability, enhancing earnings.
  
• Expansion plans at Kundanganj and focus on premium product sales are set to drive revenue and protect net margins.
  
• Birla faces challenges from intense competition in core markets, regional pricing pressures, and reliance on government spending, impacting revenue growth and margins.

Catalysts

Manufactures and sells cement and clinker in India and internationally.

• The Mukutban plant, which was previously a drain on resources, is now operating at high capacity utilization in the high 60s. Continued improvement in this utilization rate is expected to contribute significantly to both volume growth and profitability, enhancing overall earnings.
  
• The company's success in integrating and upgrading the premium positioning of the Reliance portfolio is noteworthy. Their ability to maintain and even enhance brand equity across various segments, including the introduction of Samrat Advanced in the mid-price segment, is likely to drive revenue growth moving forward.
  
• The anticipated completion of a new production line at Kundanganj by Q1 FY '26 is expected to alleviate capacity constraints and enable volume growth. This planned expansion will likely support increased revenue and market share.
  
• The company's strategic focus on maintaining a high proportion of premium product sales (58% premium volumes) and penetrating new market territories like those in Maharashtra with a strong blend segment is anticipated to protect and potentially expand net margins.
  
• Incremental benefits from cost initiatives and expected government incentives are projected to support improvements in profitability. The focus on optimizing costs and ongoing initiatives signal potential enhancement in the EBITDA margin in upcoming quarters.

Birla Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Birla's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 7.5% in 3 years time.
• Analysts expect earnings to reach ₹8.5 billion (and earnings per share of ₹110.08) by about May 2028, up from ₹2.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.2x on those 2028 earnings, down from 35.2x today. This future PE is lower than the current PE for the IN Basic Materials industry at 33.6x.
• Analysts expect the number of shares outstanding to decline by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.99%, as per the Simply Wall St company report.

Birla Future Earnings Per Share Growth

Risks

• Birla's core markets in Central India have faced severe competition and pricing pressures due to oversupply, which could impact revenue and margins.
  
• The entry into new regions like Mukutban, while a potential growth engine, comes with the challenge of lower net realization due to regional market pricing, affecting top-line growth and margin improvement.
  
• The company's reliance on government spending in the rural region and the risk of delays or lower-than-expected disbursement could impact volume growth targets and overall revenue.
  
• The slower capacity expansion timeline could result in lower volume growth than the industry's average, potentially affecting future market share and revenue trajectory.
  
• Limited headroom at existing plants and dependence on new capacity additions to meet growth could restrict immediate earnings growth if expansions are delayed.

Valuation

• The analysts have a consensus price target of ₹1412.571 for Birla based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1550.0, and the most bearish reporting a price target of just ₹1220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹112.6 billion, earnings will come to ₹8.5 billion, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 15.0%.
• Given the current share price of ₹1059.45, the analyst price target of ₹1412.57 is 25.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.