The hopes of a re-rating in the Indian paper sector following the announcement of a high-value deal early this year has failed to materialise. After gains of up to 20 per cent in days after the deal was announced, paper companies are back to square one.
Moreover, the open offer by International Paper for acquiring a 21.5 per cent stake in Andhra Pradesh Paper has yet not received approval of the Securities and Exchange Board of India (Sebi).
In March-end, US-based International Paper had announced purchasing a majority stake in the 250,000-tonne Andhra Pradesh Paper Mills by paying a 180 per cent premium to the promoters and shareholders. The $423-million deal is the biggest so far in the Indian paper sector.
In addition to acquiring the Andhra Pradesh Paper stake through an open offer, International Paper will acquire another 53.5 per cent stake from the Bangurs, the promoters.
An executive of Lazard India, the firm managing the open offer on behalf of International Paper, said the open offer letter was given to Sebi on April 15 for approval. “We are still awaiting the Sebi nod,” he said. It usually takes less time (about a month) for Sebi to clear open offers.
The delay has caused a decline in Andhra Paper’s share price by 10 per cent to Rs 374 from a high of Rs 415 in the days following the announcement.
A day after the deal was announced, shares of leading paper companies like Bilt and JK Paper rose sharply. However, most of the gains are lost by now. The deal had promoted Bilt, the country’s biggest paper company, to put on hold the IPO plans of its UK subsidiary, scheduled in April. It now plans to pursue listing on the London Stock Exchange in the next financial year.
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Industry experts, however, maintain that significant foreign interest has been generated following the International Paper-Andhra Paper deal. “A number of paper companies, including ours, have got enquiries from foreign companies who are eyeing a presence in the Indian paper sector through an acquisition or joint venture,” said K L Chandak, CFO and Executive Director at West Coast Paper Mills.
Chandak said companies in Japan, Indonesia and the US were keen to be a part of the booming Indian paper sector since their domestic consumption was sluggish.
India is one of the fastest growing paper markets, with the government’s thrust on education and a sizeable budgetary allocation. The domestic paper industry is estimated at 10 million tonnes. Of this, the writing and printing paper segment accounts for 3.8 million tonnes, packaging grade paper segment around 4.5 million tonnes and the newsprint industry about 1.7 million tonnes. All segments of the industry are growing at 8-9 per cent or above annually.
Paper companies have been able to pass on the price increases at regular intervals. The market has also been able to absorb new capacity additions faster than expected.