Pulp fiction

BS Compass

According to news reports, ITC is buying Bilt Industrial Paper Company from the L M Thapar group. Bipco, which was called Servall Paperboard before it was acquired by the Thapar group in late 1999, makes duplex paperboard and reportedly has a capacity of around 66000 tonnes.

The plant, which is based in Coimbatore and is currently shut, is incurring huge losses when the Thapars had acquired it about four years back. ITC, however, has an estimated 18 per cent market share in the duplex board segment, and is consequently expected to be in a better position to turn the plant around.

Also, according to the news report, Bipco has been valued at Rs 265 crore, which means ITC will have to pay around Rs 135 crore for the 51 per cent stake held by the Thapar group. However, funds are hardly a problem, since ITC's paperboard and speciality papers division alone generates cash flows of approximately Rs 150 crore a year.

Apart from this acquisition, ITC is expanding its capacity by about 40 per cent to 300,000 tonne, and according to industry sources, this should cost the company around Rs 350 crore.

The optimism seems to stem from the current uptrend in both demand and prices - in the year ended March 2003, the production of paperboard and speciality papers division increased to 2,33,237 tonne, well over the installed capacity of 2,12,500 tonne. Besides, with the share of value-added products jumping to nearly 50 per cent, even profitability has been on an upswing.

The only issue is that the paperboard business is relatively much more capital intensive compared with the company's core cigarettes business. For perspective, while this division accounts for approximately 10 per cent of the company's profit (before interest and taxes), over 30 per cent of the company's capital is employed in it.

From the company's point of view, however, although its ROCE is considerably lower, the paper business helps its primary purpose of diversifying and mitigating the risk in the core cigarettes business.

ONGC

Bharat Petroleum Corporation Ltd's (BPCL) inclusion in Oil and Natural Gas Corporation's (ONGC) new exploration blocks is a move to lower the risk inherent in exploration. In return, BPCL will get an assured supply of crude at a preferential price.

The upshot for BPCL will be a considerable boost to profitability compared with other refining majors since a large part of its crude requirement is sourced from ONGC, although this advantage will be somewhat mitigated owing to a preferential price for sale of products to ONGC.

Nevertheless, there will remain an advantage to both players since globally, crude and petroleum products prices do not always move together. For ONGC, the tie-up is also a way to further its presence in the downstream sector, in addition to its stake in the 9 million tonne MRPL.

ONGC also has plans to foray into the downstream petrochemicals segment with an extraction plant for ethane and propane. This marks a logical extension for the company since both ethane and propane are derivatives of natural gas.

Currently, while both the ethane and propane markets are in excess supply, the natural gas market is in deficit. Why should ONGC intend to get into a business with the wrong products? Clearly, ONGC has a different view of the long-term prospects for these products.

Gas supply is expected to mushroom over the next couple of years. Further, with adequate gas supply, the stage will be set for ONGC to produce value-added products such as polyethylene (PE) and polypropylene (PP). Both PE and PP markets are in a state of excess supply.

But demand for the products is growing at around 15 per cent annually owing to their increasing use in a variety of products. The excess supply situation is not likely to last, and the PE and PP markets are expected to be in deficit over the next few years. Thus, ONGC's decision to expand into downstream products will come at a time when the market is in a deficit state.

With contributions from Mobis Philipose and Sameer Ranade