Birla Corp to Boost Capacity as Real Estate Recovers

Birla Corp., an Indian cement maker that reported its first profit increase in three years this week, plans to spend 22 billion rupees ($397 million) to add capacity, forecasting demand will revive.

The company, based in Kolkata, will increase its capability to make the construction material by 48 percent to 13.8 million tons a year by 2015, Executive President G. Jayaraman said in an interview in Hyderabad. Birla, which sells 80 percent of its cement to home builders, will set up three plants to add to its seven factories, he said.

Birla, founded in 1919 as a maker of jute products, and larger rivals including Holcim Ltd. are expanding on optimism lower borrowing costs will rekindle demand from homebuyers after a slowdown propelled unsold apartments to a record in the final quarter of last year. The Reserve Bank of India may cut its policy rate by another quarter point in 2013 after three reductions since January, economists’ forecast.

“The RBI has finally started cutting rates, which will allow young, aspirational buyers to look to invest in real estate,” Jayaraman said. “We have seen our fair share of slowdown in the last few years. Now, the time has come to head upwards.”

The maker of Samrat and Chetak brands of cement forecasts sales will increase 56 percent to 40 billion rupees by the year ending March 31, 2016, according to Jayaraman.

The company’s profit rose 13 percent to 2.7 billion rupees in the 12 months to March 31, the first increase since 2010, according to data compiled by Bloomberg.

Analyst Recommendations

Birla’s shares, which have dropped 11 percent this year, rose 0.9 percent to 267.65 rupees at 9:48 a.m. in Mumbai. All 11 analysts covering the company recommend investors buy the stock, data show.

The shares trade at 5.7 times its 12-month earnings, according to data compiled by Bloomberg. That compares with 17.9 times for UltraTech Cement Ltd., India’s biggest maker of the construction material by market value, and 15.8 times for ACC Ltd.

ACC, controlled by Holcim, the world’s biggest cement maker, is spending 33 billion rupees to add 5 million tons of capacity by 2015, it said in its annual report. Birla is awaiting government approvals before starting work on the new factories planned in the states of Madhya Pradesh, Assam and Rajasthan, Jayaraman said.

Home Prices

Home prices in Mumbai, India’s most expensive real estate market, rose to a record 11,626 rupees a square foot in the quarter ended March 31, according to data from Liases Foras Real Estate Rating & Research Pvt., driven by speculation demand will pick up.

Total unsold inventory of residential stock in the six major cities tracked by Liases Foras climbed to 100 million square feet (9.3 million square meters), the highest since 2009.

Property developers such as Parsvnath Developers Ltd. are introducing new plans for buyers to sweeten offers, including one that allows buyers to pay 25 percent of the property’s cost on booking, and the rest while taking possession with no extra cost built in and no loans involved.

The property sector will show a much faster recovery than the demand to build roads and ports “because it doesn’t face the regulatory hurdles like land acquisition and environmental issues that infrastructure projects do,” Jayaraman said. “That augurs well for us as we are focused on real estate.”

Court Order

Birla’s sales fell for the first time in seven quarters on lower prices of the construction material. The company’s earnings before interest, taxes, depreciation and amortization fell 19 percent to 388 rupees a ton, Ankur Kulshrestha, an analyst with HDFC Securities Ltd. said in a note to investors yesterday.

A court order banning mining of limestone at its biggest plant in Chanderia in Rajasthan state may affect profitability. The company had to purchase raw material at a “substantially higher cost,” which “severely dented margins,” Birla said in a statement on May 20. The nation’s top court asked the Central Building Research Institute to report on the effect of the company’s mining on a nearby fort built in the 7th century.

If and once they allow mechanical mining, “we will be able to meet our requirements,” Jayaraman said.

Operating Margin

An adverse court ruling will prompt the company to seek raw material from at least 10 kilometers (6.2 miles) away, said Milind Raginwar, an analyst with SBI Capital Markets Ltd. Birla’s operating profit margin narrowed to 11.3 percent in the year ended March 31, while UltraTech’s widened to 18 percent.

“Their raw material cost is higher, due to the ban on mining at Chanderia unit,” said Raginwar. “If this continues, the margins will remain under pressure vis-a-vis the industry.”

The cement maker, part of the Madhav Prasad Birla group which also runs a maker of optical fiber cables, forecasts economic expansion will help improve profitability amid rising costs. India’s $1.8 trillion economy may expand as much as 6.7 percent in the year that started April 1, Finance Minister Palaniappan Chidambaram said last month.

Gross domestic product increased 5 percent in the previous 12 months, the smallest gain since 2002-2003, official estimates released in February show. The central bank may cut its benchmark interest rate to 7 percent by the end of the year from

7.25 percent to boost growth, according to a median forecast of 38 economists in a Bloomberg survey.

“We haven’t had too much of joy in terms of pricing recently given the demand scenario,” Jayaraman said. “But, with sentiment improving, we may be able to pass on some of our cost burden to the consumers.”