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S. Vaidya Nathan

INVESTMENTS can be considered in the Birla Corp stock as it may benefit from the gradual improvement in cement prices. Higher demand in the north and the eastern regions are likely to restore better balance between demand and supply earlier than in the other regions. This may lead to better pricing power in the hands of producers and stability in prices. As Birla Corp caters mainly to markets in these regions, it may be among the beneficiaries.

The two big combines — Grasim-L&T and Gujarat Ambuja-ACC — have a dominant presence in these regions and would be the price setters. They are bound to be aggressive with their focus on enhanced market share. This would put pressure on smaller players. But as cement prices could improve steadily , smaller companies such as Birla Corp may also benefit.

A few years ago, Birla Corp, with a capacity of about five million tonnes, would have been viewed as a major player with clout in the marketplace.

A spate of acquisitions, as part of the consolidation exercise underway in the industry, has altered this status. In this backdrop, companies such as Birla Corp, Century Textiles and Kesoram, to name a few, would be hard-pressed to survive with healthy profitability across business cycles in the cement industry.

Over the next six to nine months, with the industry outlook likely to look up on the pricing front, Birla Corp may be able to scale up its earnings.

This would be a break from the past when the company struggled to post profits even when the industry was on an upswing; in 1998-99, when the industry volumes rose by 15 per cent, Birla Corp finished with a splash of red on its earnings card. Over a five-year period between 1997-98 and 2001-02, the company incurred losses of about Rs 150 crore. But the turnaround that was evident in FY 2003 may gather momentum despite a loss of about Rs 4 crore in the July-September quarter. This is usually a weak period for cement companies due to the monsoons, which affect construction activity and demand for cement. That cement prices declined by a few percentage points also affected its profitability, after a smart show in the April-June quarter when its earnings exceeded those of FY 2003.

The debt levels continue to be a cause for concern. A steady reduction in interest costs, that has been evident over the past few quarters, suggests progress in the replacement of high-cost debt with funds sourced at finer rates. If the trends over the past two quarters are maintained, interest costs in FY 2004 may well be lower by about 20 per cent. This, coupled with modest improvement in cement prices, may leave Birla Corp with profits it has not seen since the mid-1990s.

The possibility that Birla Corp could become part of the consolidation game is bound to be a strong factor in the pricing of the stock. The stock, which languished even in the bullish phase of 1999-2000, now trades at about Rs 80. As profitability and valuation improve, interest that may be evinced by potential MNC aspirants could be examined . Birla Corp's capacity would be an attraction .

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