The company has done well to maintain operating margins despite rising input costs.
India’s biggest paper manufacturer, Ballarpur Industries (BILT), which re-listed at the end of March, 2008, has posted a reasonably good operating margin of nearly 26 per cent for the year ended June 2008. It may be recalled that the firm was recently restructured after which the management had undertaken a buyback of shares as also reduced the face value of its shares to Rs 2.
The management has said that the results for the year to June 2008 are not strictly comparable with those of the previous year because of the extensive restructuring that has taken place. Nevertheless, at a consolidated level, net sales of Rs 2,831 crore, registered an increase of 22 per cent y-o-y, while the operating profit was Rs 724 crore.
The operating margins were stable for the year at 25.57 per cent. But the cost of operations, at the unit acquired in Sabah, Malaysia, was adversely affected by rising crude prices since the plant uses furnace oil, the price of which is linked to the price of crude.
In July, 2008 BILT increased prices of coated paper by about 10 per cent to Rs 5,000 per tonne and that of uncoated paper by 4-5 per cent to Rs 2,000 per tonne. Analysts believe most of the cost increases have already taken place and the price hikes will help improve the operating margins from here on.
The management believes demand should be robust : the growth of the Indian paper industry is pegged at around 6-8 per cent, among the highest in the world. However, domestic consumption is still one of the lowest, a trend that BILT believes will change in the next few years.
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During the June 2008 quarter, sales of timber were strong which boosted the top line. However, the operating profit was impacted by the higher cost of production. Since sales of times are a seasonal business, margins should not be affected for the rest of the year. BILT is expected to add capacity of 85,000 tonnes out of which 75,000 tonnes will be at its plants in India and the rest in Sabah.
Expansion at the Bhigwan and Ballarpur plants would result in a volume growth of about 13 per cent in FY09 which, the company believes, will boost the top line along with the price hikes. The company raised a sum of Rs 700 crore though a placement of 21 per cent of its equity in its subsidiary Ballarpur Paper Holding (BPH).
That translates into a value for BPH of Rs 3,300 crore. Post relisting the stock has risen around 18 per cent, to Rs 33, outperforming the market which has fallen by 10 per cent since the end of March. At the current price of Rs 33 the stock trades at 5.7 times its estimated FY09 earnings and is attractively valued.