Ballarpur Industries Limited (BILT), the flagship company of US $ 3bn Avantha Group, is the undisputed leader in the Indian Paper Industry. It is the largest integrated paper manufacturer of India. The company primarily deals in industrial, specialty, writing and printing paper. BILT is the only Indian paper company to rank amongst the top 100 paper companies in the world.

Key Highlights:

The Paper sector is in the midst of cyclical upswing driven by improved demand and increase in the price of the products. BILT is the market leader in the Indian paper industry and would be the key beneficiary from the positive outlook for the sector.

The improved performance of Bhigwan and Ballarpur plant will drive higher volume and improved performance of the company.

There is an expectation of increase in paper prices by 2000-2500 per ton; this will further improve profitability of the company.

Copiers and coated papers are the fastest growing segments, at an annualized rate of 15-20 %, while high-quality packaging boards are growing at about 12%.

The company is considering diversifying into manufacturing of container board and corrugated boxes, through brownfield expansion to cut on the acquisition costs.

Future Outlook (Consolidated)

At the current price of Rs 35, the stock is available at 10.35x of its FY09 earnings, 7.5x of its FY10E earnings and 5.96x of its FY11E earnings. We recommend BUY with a price target of Rs43-46, given that the company’s future shows potential.

Equity Dilution:

The company has decided to make an allotment of 45mn equity shares of face value 2 and 55mn ZCCB on preferential basis to Ballarpur paper holding, at a price of Rs 30per share or the price decided by SEBI. This has resulted in an increase of promoters’ holding from 40.3% to 49.4%. This is a confident move of management and reflects that the management believes in business model of the company.

Key Concerns:

BILT is dependent on external suppliers for bamboo and wood for the production of pulp. Any adverse price movement of raw material will have a negative impact on the operating margins

Escalation in energy cost, primarily coal, which account for nearly
25% of the total cost involved in the production of papers, could impact the margins.

With huge capacity expansion plans of major paper players in India, the paper industry may face a situation of oversupply which may lead to fall in paper prices, thus, affecting the margins of the company.

Paper industry is cyclic in nature; any adverse movement in international or domestic paper price may negatively affect the profitability of the company.

Growth of paper products in developed countries is adversely affected by increased penetration of internet.

QUARTERLY ANALYSIS (Consolidated):

During the quarter ended 31st Dec, 2010, the net sales of the company witnessed a growth of 36 %( y-o-y) to Rs 8798.2mn as against Rs 6463.1mn during the corresponding period last year, largely driven by volume growth in paper and pulp segments. However, the paper realization declined as the paper price fell.

The operating profit of the company during the quarter grew by 17% to Rs 1948.4mn as against Rs 1665.9mn during the same period last year. However the operating profit margins of the company witnessed a fall of 402bps. The subdued performance of operating margins was largely on account of increase in input cost during the quarter and fall in net realization in paper prices. The raw material cost as a percentage of sales rose by 390bps to 32.80% as against 28.90% during the corresponding period last year.

During the quarter ended 31st Dec, 2009, the PAT after minority interest was flat at Rs 455.6mn as against Rs 459.1mn during the corresponding quarter last year. The increased depreciation and rise in the interest cost of the company has led to the subdued bottomline performance of the company.

ANALYSIS & REPORT

Why to invest in shares of Ballarpur Industries Limited?

Growth Drivers: - Indian Paper Industry:

India is the fastest growing market for paper globally. From the last few years, the Indian Paper Industry has grown at an average rate of 6-7% whereas the paper market in developed countries has been stagnant at 2%. During the period 2002-07, newsprint, writing & printing, containerboard, carton board and others registered growths of 13%, 5%, 11%, 9% and 1% respectively.

The Indian Paper Industry accounts for about 1.6% of the world’s production of paper and paperboard. The estimated turnover of the industry is Rs 2, 50,000Mn (USD 5.95 billion) approximately. The industry provides employment to more than 1.2 lakh people directly and 3.4 lakh people indirectly. The industry was delicensed effective from July, 1997 by the Government of India.

For manufacturing of paper, variety of raw material is used like wood, bamboo, recycled fibre, bagasse, wheat straw, rice husk, etc. approximately 35% are based on chemical pulp, 44% on recycled fibre and 21% on agro-residues.

As per industry estimates, paper production is likely to grow at a CAGR of 8.4% while paper consumption is expected to grow at a CAGR of 9% till 2012-13. The import of pulp & paper products is likely to show a growing trend.

Foreign funds interest in the Indian paper sector is also growing. IFC, the investment arm of the World Bank is already associated with at least three of the IPMA member mills.

Demand for paper products like tissue paper, tea bags, filter paper, light weight online coated paper and medical grade coated paper, etc. is growing. These developments are expected to give a fillip to the industry. Current consumption of paper is at 8.50 million tones a year, the paper industry is expected to grow to10 million tones by 2010 and to 15 million tones by 2015. Factors favoring growth are increased spending on education, higher literacy levels, improved standards of living, a booming retail sector etc.

As the future growth depends upon imported market pulp due to serious shortage of wood in the country, strengthening of Indian rupee is favoring the paper manufacturers as they can import the raw material at lower prices. COMPANY:

Market Leader:

Ballarpur Industries Limited is the market leader in the Indian paper industry, with over 50% of coated wood free grade rolling out of its plant. The company enjoys near monopoly in Bond Paper market and nearly 45% share of the hi-bright Maplitho market in India. Expansion Plans:

The company is considering increasing its paper capacity by 200000 tones, which is to be commercialized by the mid of 2012, with an investment of Rs 10-12bn.

The pulp making capacity in Malaysia is also to be doubled from 120000 tones pa, by investing Rs 8100mn. This addition of capacity would contribute to the revenues of the company by April 2011. The capacity expansion will improve the operating margins of the company by 125-150bps.

The company will also spend Rs 8000mn for the modernization of existing and new pulp making capacity at Ballarpur plant, which will aid in strengthening the position of the company. Funds for the expansion plan would be arranged through internal sources.

The company is also planning to acquire a 150,000-200,000 tone capacity long-fibre pulp mill overseas to meet its growing requirement of long-fibre.

FUNDAMENTALS:

Backward Integration:

BILT is planning to become a fully integrated paper player in the industry. For that BILT has entered into 10 year contract with the Maharashtra government for ensuring cheap and regular supply of Bamboo. The company has also initiated farm forestry for cheaper raw materials and has cornered Indonesia and Malaysia for this activity due to its strategic geographic location.

BILT is also involved into Farm Forestry for planting of tree species that are suitable for industrial wood. BILT is currently operating its farm forestry programs in the states of Orissa, Chhattisgarh, Andhra Pradesh and Maharashtra.

Capacity Expansion; The company has nearly doubled its production capacity to over 1 million ton per annum. It has taken aggressive steps to penetrate the market with new capacity. With the increase in paper prices, company is placed well to encash on the increased capacity, which will now come into play.

Value Unlocking:

The group company Avantha Power has filled DRHP for an Initial public offer for Rs 12500mn, BILT owned 5% in the company, going forward we expect the company to get more value among the peers.

BILT is also planning to get its Sabah’s Dutch Holding company listed in overseas market, which will enable them to raise money from overseas markets at a comparatively low cost. The company has 80% stake in Sabah Forest Industries. It is the Malaysia’s largest pulp and paper mill.