Ballarpur Inds: Raw deal

THE COMPASS

Paper companies have not been able to pass on the rising cost of raw materials to the end-user entirely.

Despite a robust volume growth of 12.3 per cent in paper sales and a 4 per cent increase in realisations, Ballarpur Industries' (Bilt) operating profit margin was dented due to rising cost of raw materials in the year ended June 2007.

Its net sales went up 15.4 per cent y-o-y in FY07, while operating profit was up 14.5 per cent. Paper companies have not been able to pass on the rising cost of raw materials to the end-user entirely. In case of Bilt, raw material costs increased by 190 basis points y-o-y and power costs rose 123 basis points. The company increased product prices four times in the year, which checked the fall in operating profit margin at 30 basis points y-o-y to 26.2 per cent.

Bilt's consolidated results include the financials of its Sabah Forest Industries in Malaysia from March 16, 2007. Ballarpur Paper Holdings (BPH), where Bilt has an 80 per cent stake, owns 98 per cent in Sabah Forest. The consolidated operating profit margin stood at 24.7 per cent.

The company also announced a restructuring plan in July 2007 by which it will transfer three manufacturing units to a separate company called Bilt Graphic Paper Products, which will be transferred to BPH after court approval. Ballarpur will receive Rs 1,950 crore, of which Rs 940 crore is to be used for buying back shares and the rest to retire debt. In order to pay Bilt Rs 1,950 crore, BPH will raise equity and debt. By this exercise, Bilt will transfer the commodity business, which is capital-intensive, to BPH. Bilt will focus on the speciality and consumer-focused products business. The restructuring will make Bilt leaner on both assets and liabilities, while BPH will be able to attract foreign investments and scale up faster, and even list abroad.

The paper demand in India is growing at 8 per cent, and Bilt is well-positioned in the industry with a 17 per cent market share by volume and 26 per cent by value. At about 10 times FY07 earnings, Bilt appears attractive.

Tyre sector: Spot gain

Tyre companies continue to leverage weaker spot rubber prices. The average spot price of this input from the start of Q2 FY08 till date is at Rs 83.4 per kg levels, compared with Rs 95.5 per kg a year ago. For a tyre company, rubber as a percentage of net sales, typically constitutes about 65 per cent.

This improvement in the operating environment has not gone unnoticed by the street stocks such as Apollo Tyres have gained nearly 30 per cent in the past two months, as compared to a 4.6 per cent rise in the Sensex. Ceat is up 4 per cent while MRF is down about 5 per cent.

Meanwhile, in the June 2007 quarter, MRF had leveraged weaker input prices on a y-o-y basis. As a result, its operating profit grew 87.8 per cent y-o-y to Rs 113.6 crore in the June 2007 quarter, while its net sales improved 13.9 per cent to Rs 1,133.4 crore. Its operating profit margin also expanded 390 basis points y-o-y to 10 per cent in the last quarter. Apollo Tyres' standalone operating profit margin also expanded 400 basis points y-o-y to 11.5 per cent in Q1 FY08. Going forward, this improvement in margins is expected to continue on a y-o-y basis.