| Backward integration with the Sabah acquisition is essential for Ballarpur Industries' (BILT) long term prospects.
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| Does size matter? Well, it does in case of Ballarpur Industries (BILT). By virtue of being the largest player in the industry, BILT becomes the biggest beneficiary of not only the growth but also the price increases being witnessed in the sector.
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| Analysts estimate the demand for paper to grow at 7 per cent in the next five years. Now, BILT's product range includes premium value added products that enable it to get higher realisations.
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| While the average realisation for the industry is Rs 32,600 per tonne, the average realisation for BILT is Rs 36,460 per tonne.
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| "BILT will grow at a faster rate than the industry average, due to its presence in premium and value-added segments," says Rohan Gupta, an analyst at Emkay Share and Stock Broking.
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BILT is India's largest manufacturer and exporter of printing and writing paper (PWP) with a capacity of around 4 lakh metric tonnes per annum (mtpa). It leads the market with a 17 per cent share.
| PEER COMPARISON | | P/E (Trailing 12 months) | | BILT | 9.05 | | J K Paper | 6.38 | | TNPL | 8.13 |
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| The company has planned to increase its capacity to cater to the rising demand for paper. This will be done by merging APR Packaging with itself and increasing capacity at the Yamunanagar and Bhigwan plants. This will increase the company's total production capacity by 20 per cent taking it to around 8 lakh mtpa by FY08.
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| "In fact, post FY08 (June ending), growth will be driven by the 3 lakh mtpa brownfield expansion at the Bhigwan plant," says Gupta. To bring in more focus to the core business, BILT has decided to hive off its captive power and real estate divisions.
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| Recently, the company acquired a 77.8 per cent stake in Malaysia-based Sabah Forest Industries (SFI) for about Rs 954 crore.
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| The acquisition is the largest ever by an Indian company abroad in the paper and pulp industry and will place BILT amongst the top 10 companies in Asia. This acquisition is expected to be partly funded by the Rs 276 crore FCCBs raised in December.
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| Apart from a pulp and paper plant, the acquisition of SFI will help BILT gain access to a large raw material base. For domestic paper mills, raw material sourcing and costs have been a problem.
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| "The cost of wood and bamboo in Malaysia, the major raw materials for producing paper, is almost half of that in India. This should influence margins substantially given that raw materials account for around 30 per cent of the total costs," says Gupta.
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| The acquisition of Sabah will enable BILT to secure future stock of raw material. BILT will get over 2.89 lakh hectares of forest land (leased till 2094), apart from paper capacity of 1.44 lakh mtpa, pulp capacity of 1.2 lakh mtpa, a jetty, a power plant and a steam generation plant.
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| The Bhigwan plant currently has no pulp capacity. The pulp requirements of this plant are being met through pulp imported from South-East Asia. The pulp prices are highly volatile in global markets, thus making margins vulnerable.
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| Analysts are expecting that initially the pulp capacity at Sabah will be raised to cater to the requirements for the excess capacity at the Bhigwan plant. Wood and bamboo prices in Malaysia are far lower than that in India, thus providing a competitive edge to BILT.
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| The acquisition will therefore reduce BILT's dependence on external sources. And further if some excess quantity of pulp is left over, it can not only be sold in the domestic markets but also in countries like China and Japan.
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But the benefits from Sabah are expected to accrue only after 3-4 years, more so as the additional capacity at Bhigwan is going to be operational from end of FY08 (June ending).
| FINANCIALS | | (Rs crore) | Q3FY06 | Q2FY06 | Q1FY06 | Q4FY05 | | Net Sales | 472.69 | 436.32 | 435.88 | 472.34 | | Q-o-Q growth (%) | 8.34 | 0.10 | -7.72 | -8.56 | | Operating Profit | 128.07 | 118.47 | 116.60 | 115.41 | | Q-o-Q growth (%) | 8.10 | 1.60 | 1.03 | -0.97 | | OPM (%) | 27.09 | 27.15 | 26.75 | 24.43 | | Net Profit | 52.52 | 47.40 | 44.20 | 40.47 | | Q-o-Q growth (%) | 10.80 | 7.24 | 9.22 | -8.46 | | NPM (%) | 11.11 | 10.86 | 10.14 | 8.57 |
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| "The expected turnover of Sabah in FY08 would be Rs 500 crore. Net profit is pegged at Rs 50 crore. Post-consolidation, around 75 per cent of this net profit would come to BILT," says Gupta.
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| After BILT takes charge, the working will improve resulting in better quality of paper which would lead to better margins which in turn means more earnings for BILT.
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| In all, the impact of the acquisition on the earnings is going to be positive for BILT. As an analyst puts it, fibre is in short supply everywhere and thus any paper mill that integrates backward and secures its raw materials will definitely emerge as the winner.
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| In addition to this, BILT could be in the driver's seat as it has the best operating margins in the industry. The company's EBIDTA margins are around 10 percentage points higher than average EBIDTA for similar players in the industry.
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| BILT has with itself the advantage of fully integrated plants that have captive pulp capacities, power facilities, chemicals arrangements alongwith proximity to both, markets and raw material supplies.
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| BILT has entered into 10 year contracts with the governments of Maharashtra and Orissa to secure bamboo at a fixed price of Rs 650 per mt which in a way hedges the company against future price fluctuations and secures its future requirements.
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| The company will be procuring 2 lakh mtpa from Maharashtra and 1 lakh mtpa from Orissa. Another initiative taken to secure future fibre requirement is the Farm Forestry Programme.
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| Under this scheme, BILT provides high quality seeds, saplings and clones to the local farmers for plantation of trees. This will facilitate the company in the procurement of low cost pulp by using the unproductive and marginal land.
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| Also, paper prices in general have been rising across the industry on account of increase in raw material prices alongwith increase in demand. But this has more to do with higher margins (due to premium products) than operational efficiency.
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The company commands leadership positions in various premium segments.
| KING OF PAPER | | Segment | Market Size
('000 mt) | Market Share
(%) | Rank | | Printing & writing Paper | 2371 | 17 | 1 | | Business Stationery | 12 | 78 | 1 | | Wood-free coated | 290 | 43 | 1 | | Hi-Bright Maplitho | 381 | 37 | 1 | | Copier | 169 | 25 | 2 | | Low-Bright Maplitho | 319 | 15 | 3 | | Creamwove | 1200 | 3 | 3 | | Source: Emkay Share and Stock Broking |
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| BILT dominates the market in categories like wood-free coated paper, hi-bright maplitho and business stationary products.
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| The company has the second largest market share in the copier segment at 25 per cent, it ranks third in the low-bright maplitho and creamwove segments.
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| At the current market price of Rs 102.55, the stock gives a trailing P/E of 9.05. Based on Emkay's estimates, the stock trades at 7.47 times and 7 times its expected earnings of FY07 and FY08 respectively. |
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