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Sunday, Sep 01, 2002

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Birla Corp: Hold

S. Vaidya Nathan

Birla Corp, which kicked off the Birla Group's operations decades ago, is now largely a pure cement player and is in trouble.

BIRLA Corporation (Birla Corp) shareholders can stay invested as there could be room for some gains if the company succeeds further in its approach to cut losses. This could be risky as the drought and lower cement prices could affect the company's ability to emerge out of the red in 2002-03.

Fresh exposures can be avoided as it is difficult to see where substantial earnings growth would come from as the company operates in some of the most competitive and supply-intense markets in the industry. Birla Corp is basically a cement-centred company as this contributes 85 per cent of revenues and much of the cash profits as well. It has a presence apart from jute in such product areas as auto rims, calcium carbide, industrial gases, vinoleum, synthetics and steel foundry.

The non-company specific factor that could provide a one-time trigger for the stock price is the possibility of the company becoming a part of the consolidation activity underway in the cement industry, especially those involving interested MNCs. But, so far, Birla Corp has shown no signs of wanting to be a part of the consolidation game. This is in contrast to the approach of other Birla companies such as Century Textiles and Kesoram Industries which have done so and then withdrawn for want of takers for the cement units.

Size, no protection

Until three years back, a company with a capacity of close to five million would have been considered an industry major, likely to survive and grow over the long term. But that has not been the case with Birla Corp. It posted losses in each of the last five years. The aggregate loss during this period was Rs 156.6 crore and reserves were down to Rs 154.6 crore now from Rs 255.6 crore in 1995-96. In the block of five years between 1997-98 and 2001-02, at least two years were good for the industry and yet the company ended up with a splash of red. Even in 1999-2000, when industry volumes rose 15 per cent, Birla Corp ended the year with loss of Rs 38.4 crore.

Location-inspired problems

If despite such a sizeable capacity, the company has missed out on making profits, it has much to do with the location of its plants. With three of its units located in Rajasthan, Madhya Pradesh and Andhra Pradesh — three States with huge over-supply and catering to markets where there is intense competition for volumes — Birla Corp has had little breathing space.

Barring Grasim, no major company catering to these markets has made money in the business.

The likes of Birla Corp, Century Textiles, Jaiprakash Industries and Kesoram, among others, have no such sources of comfort. This explains the series of losses that Birla Corp has been incurring. The fact that it made a profit of Rs 43.8 crore in 1994-95 when the cement industry had a good year also indicates the change in the industry environment.

Large-scale consolidation

Courtesy, a spate of acquisitions and strategic stakes, the Grasim-L&T and Gujarat Ambuja-ACC combines have emerged as players that control close to 45 per cent of the market.

Other players such as Zuari-Italcementi and Lafarge have emerged as major players with the muscle to tackle protrated periods of difficulty.

India Cements too has ramped up capacities to around 10.5 million tonnes and then sold off Sri Vishnu Cements to solve its problem of debt — around Rs 1,500 crore — after the proceeds of the sale were used to cut debt.

The consolidation activity has given the big two access to almost of all key regional markets.

This has made it difficult for smaller players, which now cover even those with capacity of four to five million tonnes.

The over-supply and battle for markets share has affected profitability for these players; Birla Corp has, for instance, had low operating profit margins ranging from 2.5 per cent to 6.4 per cent in the last five years.

A glimmer of hope

The one encouraging note is the manner in which the company has managed to cut its losses sharply in the last two years.

Losses in 2001-02 were down to Rs 76 lakh from Rs 12.7 crore in 2000-01 and Rs 38.36 crore in 1999-2000.

The performance in 2001-02 was helped by the prevalence of cement prices at higher levels across almost all the major markets in the first two quarters.

But the last two quarters witnessed pricing pressures enveloping the industry and, eventually, a loss, albeit a modest one.

A combination of cost-control measures and lower interest costs have also aided Birla Corp to cut its losses to modest levels in 2001-02.

These are early days for making a call on cement price trends with the uncertainty of the monsoon set to affect demand in rural markets.

Key markets of Birla Corp are likely to be affected by the delayed rains and this cannot but have a bearing on profitability in fiscal 2002-03.

With prices likely to be lower on an average, Birla Corp may be hard-pressed to bring down its losses to the 2001-02 levels. But it may also not slip to 1997-2002, when its losses were significant.

When cement price levels improve, Birla Corp is close to moving out of the red and that is when the valuation levels may pick up (this may also happen in the event of restructuring).

Shareholders can wait for this turn of events and contemplate paring exposures in the stock.

They should also keep an eye on acquisitions and consolidation that are taking place more gradually now.

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