1 Cement & 1 Midcap Stocks To Buy From Motilal Oswal For 15 To 29% Returns

Buy Birla Corporation with a target price of Rs 1,835

The stock of Birla Corporation has been recommended for buy by Motilal Oswal with a target price of Rs 1,835 resulting in a gain of 15% over the current market price of Rs 1,518. However, at the time of the brokerage's buy call, the stock was trading at a price of Rs 1,589 on the NSE.

According to the brokerage Birla Corporation's revenue/EBITDA/PAT stood at INR17.0b/INR2.7b/INR0.9b in 2QFY22 (+3%/- 30%/-49% YoY) and missed our estimate by 2%/8%/19 whereas cement volumes remained flat YoY at 3.27mt (est. 3.39mt) as demand was impacted by heavy and prolonged monsoons across its operating geographies.

While the blended realization of Birla Corporation rose 2% YoY to INR5,192/t due to higher jute revenue (+62% YoY / +10% QoQ), cement realization was flat YoY at INR4,878/t (-1% QoQ), says Motilal Oswal.

According to the research report of the brokerage "Blended cost/t of Birla Corporation was up 12% YoY to INR4,375 (up 4% QoQ; v/s our estimate of INR4,234/t) on account of higher fuel costs. The variable cost of production was up 22% YoY / 14% QoQ and EBITDA/t declined 30% YoY to INR817 (v/s our est. of INR860) and OPM fell 7.4pp YoY to 15.7%." The company's 1HFY22 revenue / EBITDA / adj. PAT was +20%/-1%/-2% YoY at INR34.5b/INR6.1b/INR2.3b - as margins declined 3.7pp YoY to 17.7%, while volumes were up 17% YoY to 6.62mt and 1HFY22 OCF/CAPEX/FCF stood at INR4.6b/INR3.7b/INR0.9b v/s INR6.0b/INR3.4b/INR2.6b in 1HFY21, according to the brokerage.

What should investors do?

The brokerage says "We expect a re-rating of the stock's valuations based on the company's continued focus on capacity expansions and improved leverage. Our target multiples for the stock are at a discount to those of its peers due to the higher contribution of government incentives to the company's EBITDA, which could begin declining after FY24E."

Motilal Oswal has clarified in its research report that "At 10.4x/8.4x FY23/24E EV/EBITDA, BCORP trades at a much lower valuation than the average for companies with similar capacities in our Coverage Universe. The stock traded at an average one-year forward EV/EBITDA of 8x over FY14-21. We value BCORP at 10.5x Sep'23E EV/EBITDA to arrive at our Target Price of INR1,835 and maintain a Buy rating."

Buy Essel Propack Limited (EPL) with a target price of Rs 285

Motilal Oswal has recommended EPL stock for buy, with a target price of Rs 285 implying a gain of 29% over the current market price of Rs 216. The stock, however, was trading at Rs 221 on the NSE at the time of the brokerage's buy call.

According to Motilal Oswal, the company's revenue rose 13% YoY to INR8.7b (est. INR8.7b), led by a strong performance from AMESA, EAP, and Americas. EBITDA margin contracted by 330bp YoY to 18.3% (est. 21.9%) on higher RM cost and other expense. EBITDA stood at INR1.6b (down 4.1% YoY). Adjusted PAT fell 24% YoY to INR507m (est. INR885m).

"AMESA: Revenue rose 19% YoY to INR3b in 2QFY22, led by a recovery in the domestic market with the lifting of travel restrictions. EBIT margin contracted by 340bp to 11.4% and EBIT fell 8% YoY to INR352m and EAP: Revenue grew 12% YoY to INR2.1b on the back of a gain in market share. EBIT margin contracted by 420bp to 16.5%, with EBIT at INR353m (down 11% YoY)" says the brokerage.

According to the research report of Motilal Oswal the company's "Americas: Revenue grew 22% YoY to INR1.9b, driven by a pick-up in travel and sample tube sales, given the increase in traveling activity. EBIT margin contracted by 110bp to 9%. EBIT stood at INR168m, up 8% YoY, Europe: Revenue fell 3% YoY to INR1.9b due to a decline in demand from the Personal Care category, which was affected by recent COVID-related restrictions. EBIT margin contracted by 420bp to 4%. EBIT declined by 53% YoY to INR75m and Revenue grew 10% YoY to INR16.7b in 1HFY22, whereas EBITDA/PAT dropped by 3%/15% to INR3b/INR1.1b. CFO stood at INR1.7b in 1HFY22 v/s INR2b in 1HFY21."

What should investors do?

Motilal Oswal says "We expect higher earnings growth over FY23E/FY24E on the back of growing revenue contribution from Personal Care products, gradual shift to Platina tubes from Plastic/Aluminum tubes, a sharp recovery, with the lifting of travel restrictions across the globe, higher revenue sustainability owing to long-term contracts in the Oral Care segment, and customer additions across geographies and greater cross-selling opportunities. Factoring in its 2QFY22 performance, we decrease our FY22E/FY23E earnings estimate by 20%/8% due to higher RM prices and expenses on account of increased freight cost and supply-chain disruption."

"We expect a revenue/EBITDA/PAT CAGR of 10%/13%/18% over FY21-24E. We value the stock at 25x FY23E EPS due to growing revenue share from the Personal Care segment (higher-margin business) and growing shift towards Laminated tubes, which would aid growth. Our TP of INR285/share implies a 29% upside. We maintain our Buy rating" said Motilal Oswal in its research report.

Disclaimer

The above stocks are picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.