Beyond a pulp and paper plant, the acquisition of Malaysia's Sabah Forest Industries (SFI) will help Ballarpur Industries (Bilt) gain access to a fairly large raw material base. |
For domestic paper mills, raw material sourcing and costs have been a problem, and South East Asia, with its rich forest reserves, is an ideal hunting ground. |
With SFI, Ballarpur will have forest concessions of 289,000 hectares, along with a jetty, a power plant and a steam generation plant. |
For SFI's parent Lion Forest Industries, the paper and pulp business formed a significant portion of the revenues at about 65 per cent of consolidated sales in year ended June 2005, which is understood to have been ailing this year. |
Ballarpur will pay about $1100 a tonne for the paper capacity, considering the same value of the forest reserves at about $106 million that SFI had attributed in June 2005. |
Ballarpur's per tonne capacity of paper based on its enterprise value is estimated at about $1500. Analysts expect new paper capacity to cost about $2500 per tonne, so the deal seems good for Ballarpur. |
Ballarpur will pay about $207 million over the next 18 months for the 77.8 per cent stake in SFI, with JP Morgan buying the remaining 20 per cent. Funding this acquisition is not going to be too difficult for Ballarpur. The company had raised $60 million through FCCBs in December 2005. |
The company's cash flows are healthy; it had generated Rs 450 crore from operations in 2004-05. Even if it raises new money, the acquisition will make Ballarpur larger. |
Since the pulp plant has a capacity of 120,000 tonne, Ballarpur is likely to invest further so that it can source more raw material. In India, it has a capacity of over 400,000 tonne. |
In the March 2006 quarter, Ballarpur's operating profit improved by 17.43 per cent while sales increased 13.71 per cent. Operating profit margin also improved by 84 basis points to 26.38 per cent. Without the SFI acquisition, the stock trades at about 9 times estimated FY07 earnings. |
Glenmark Pharma: Relying on partners |
Pricing pressure in the US generics market has made domestic pharmaceutical companies increasingly leverage the partnership model to share risks and at the same time grow sales in that market. |
Of course, a partnership model limits aggressive profit expansion, as players have to share profits. As part of this strategy, Paul Capital Partners Royalty Fund will invest $27 million to finance the development of 16 dermatological products by Glenmark for the US market. |
Glenmark's US subsidiary will get necessary statutory approvals, market the product and, in return, Paul Capital will receive royalty for sales in the US. The Glenmark stock gained nearly 3 per cent to Rs 322 on Monday, in contrast to the broad sell-off witnessed on the street. |
This is not the first time that Glenmark Pharma has used the partnership model in the US. Glenmark's US subsidiary had also recently entered into an agreement with Aspen and Lehigh Valley Technologies and InvaGen in December 2005. |
As part of these agreements, the profits would be shared between Glenmark and the respective partner. |
Although, not strictly comparable, the much-larger Dr Reddy's Laboratories (DRL) has followed the partnership-based model with venture capital companies to lower its R&D costs. As a result, in FY06, DRL's consolidated R&D expenses fell 23.2 per cent to Rs 215.3 crore. |
In addition, Cipla has used the partnership model, whereby the foreign partner registers and markets the products in overseas markets, and the profits are shared jointly. In terms of valuation, the Glenmark stock trades at about 15 times estimated FY07 earnings. |