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Ballarpur Industries Limited

Industry

The global paper market is dominated by North America, Europe and Asia. Broadly, the industry is classified into two segments—paper and paperboard (writing, printing, packaging and tissue), and newsprint. The writing and printing paper market is further divided into coated and uncoated segments, each with their own market characteristics.

Industry estimates peg annual global paper and paperboard consumption at around 340 million MT, which is expected to grow to 402 million MT by 2010. One continues to witness the changing structure of global paper consumption in terms of geographies. With higher growth rates in the fast developing Asian markets, their share in global consumption is expected to rise to 34 per cent by 2010 from the existing 32 per cent, while the share of mature markets like North America and Europe is expected to fall to around 50 per cent by 2010 from the existing 59 per cent. Indeed, as in many other sectors, it is the markets of Asia that present vibrant growth opportunities for the world’s paper manufacturers.

Asia’s principal markets are China, Japan, India, Malaysia, Singapore and Thailand. Japan enjoys the highest per capita consumption (249.66 kg), followed by Singapore (228 kg), Malaysia (101 kg), China (28 kg), Indonesia (22 kg) and Philippines (11 kg). India’s per capita consumption is estimated to be as low as 7 kg. With social development in terms of increased education levels, there is considerable headroom for increasing this low-level per capita paper consumption in India.

Paper industry in India is the 15th largest paper industry in the world. It provides employment to nearly 1.5 million people and contributes Rs 25 billion to the government's kitty. The government regards the paper industry as one of the 35 high priority industries of the country.

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Paper industry is primarily dependent upon forest-based raw materials. The first paper mill in India was set up at Sreerampur, West Bengal, in the year 1812. It was based on grasses and jute as raw material. Large scale mechanized technology of papermaking was introduced in India in early 1905. Since then the raw material for the paper industry underwent a number of changes and over a period of time, besides wood and bamboo, other non-conventional raw materials have been developed for use in the papermaking. The Indian pulp and paper industry at present is very well developed and established. Now, the paper industry is categorized as forest-based, agro-based and others (waste paper, secondary fibre, bast fibers and market pulp).

In 1951, there were 17 paper mills, and today there are about 515 units engaged in the manufacture of paper and paperboards and newsprint in India. The pulp & paper industries in India have been categorized into large-scale and small-scale. Those paper industries, which have capacity above 24,000 tonnes per annum, are designated as large-scale paper industries. India is self-sufficient in manufacture of most varieties of paper and paperboards. Import is confined only to certain specialty papers. To meet part of its raw material needs the industry has to rely on imported wood pulp and waste paper.

Indian paper industry has been de-licensed under the Industries (Development & Regulation) Act, 1951 with effect from 17th July 1997. The interested entrepreneurs are now required to file an Industrial Entrepreneurs' Memorandum (IEM) with the Secretariat for Industrial Assistance (SIA) for setting up a new paper unit or substantial expansion of the existing unit in permissible locations. Foreign Direct Investment (FDI) up to 100% is allowed on automatic route on all activities except those requiring industrial licenses where prior governmental approval is required.

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Growth of paper industry in India has been constrained due to high cost of production caused by inadequate availability and high cost of raw materials, power cost and concentration of mills in one particular area. Government has taken several policy measures to remove the bottlenecks of availability of raw materials and infrastructure development. For example, to overcome short supply of raw materials, duty on pulp and waste paper and wood logs/chips has been reduced. Indian has a total installed capacity of 8.5 million metric tons per annum (MTPA) of paper, paperboard and newsprint. Over the last three years, volume growth in paper production has been around 5.5 per cent and demand is estimated around 7 million MTPA. The domestic demand for paper and paperboards is expected to rise at a CAGR in excess of 6 per cent up to 2008-09, while capacity expansion is estimated to grow at only 3.7 per cent. This ought to keep the paper prices firm at least over the next couple of years on account of domestic demand outpacing out pacing supply and with international paper prices remaining firmer than usual.

While international market dynamics affect the Indian coated paper market and there is a sizable amount of imports, the uncoated segment continues to be largely insulated from global price movements. As expected, the reduction in import duties in the last Union Budget brought in greater competition from imports in the coated segment, mainly from China and Asian countries. Equally, however, it needs to be stated that domestic paper companies benefited from a reduction in excise duty rate from 16 per cent to 12 per cent. The net effect was, if anything is neutral.

In terms of production technology, there is a shift towards high value, better quality blade coating. The blade coated paper market grew at 17.6 per cent in 2005–06, while that for blade-coated board increased by 12.8 per cent. With both growth rates being higher than the aggregate growth of coated paper, the share of two side blade coated papers in the overall coated products market in India increased from 40 per cent in 2004–05 to 43.3 per cent in 2005–06 and that of blade coated boards increased from 17.4 per cent in 2004–05 to 18.1 per cent in 2005–06. Charts C and D show that BILT continues to be a dominant player in this higher value segment with shares over 50 per cent.

While the segment remained attractive in terms of growth, it was a fact that coated products faced stiff competition from imports mainly from China and South-East Asia. With good quality coated paper imports making their presence felt in the Indian market, the segment is increasingly becoming commoditised—and costs and service will play a greater role in maintaining competitiveness. While the high global prices prevailing in 2005–06 helped maintain Indian price levels, there were nevertheless some pressure on domestic prices due to competition.

The Indian uncoated market comprising low bright and hi bright segments grew by 6 per cent to 814, 080 MTPA. The uncoated wood-free segment, with paper cut in sizes and characteristics provided to best suit desktop printing and copying. It is another fast growing segment. The mill pack copier market in India grew by 12 per cent during 2005–06 to an estimated 190, 400 MTPA.

Company Background

Ballarpur Industries Limited, also known as BILT is a Thapar group company. The main flagship company of BILT is its paper divisions, of which the Ballarpur, based mill gives the organisation its name. The current chairman of the company is Gautam Thapar. The company is a leader in the Indian paper market. Its other initiative is BILT Tree Tech, which is a backward integration company that looks into creating high yield saplings of trees that can be used for raw material. it has both captive farms for this as well as tie ups with farmers.

Financials

Ballarpur Industries reported a surge in net profit at Rs73.97 crore for the quarter ended September against Rs58.51 crore for the corresponding period last year. The company follows a July-June financial year. Total income of the group also rose to Rs715.49 crore for the quarter compared with Rs583.50 crore for the same quarter a year ago. The company says that the consolidated results are not comparable, as the group had acquired Malaysia-based Sabah Forest Industries in March. The stand-alone profit of the company also shot up to Rs69.02 crore for the first quarter. It was Rs58.26 crore in the year-ago period. The stand-alone income for the quarter stood at Rs612.54 crore against Rs580.40 crore in the year-ago quarter. Shares of the company were trading at Rs138 on BSE, up 0.25%.

Valuation

At the current price the stock is trading at a P/E of 7.9x FY08E and 7.4x FY09E and EV/EBITDA of 5.1x FY08E and 5.5x FY09E. Higher volumes and realizations would have a multiplier effect on its earnings. BILT is rated as an Outperformer.

Outlook

A report by Jaakko Poyry Consulting expects Asian countries to grow by 4.5% per annum as compared to world average growth of 2.2% per annum over the period of 2003-15. Among Asian countries they expect that India will grow by 6.1% per annum. The government’s thrust on education, rise in per capita consumption and higher GDP growth are expected to be the major growth drivers for Indian paper industry.

The domestic demand for paper is expected to grow at a CAGR of 6.1% from 5.7 million tonne in 2004-05 to 7.7 million tonne in 2009-10 while supply is expected to increase at a CAGR of 3%. Strict enforcement of pollution control norms is expected to restrict supply, as huge investments would be required to meet these norms, resulting in fewer capacity additions, especially by smaller players who will be constrained by the lack of adequate capital. With demand expected to outpace supply, the demand-supply gap will contract over the next few years, resulting in operating rates of up to 96% by 2009-10.

APR packaging capacity of 40,000 million tonne of industrial paper has been converted to 55,000 million tonne of W&P paper facility. This is the major capacity contributor to BILT apart from 5,000-6,000 million tonne through de-bottlenecking and other efficiencies. Currently BILT holds 39% in APR packaging and it plans to buy remaining 61% from BILT paper holdings by paying Rs 600-700 million. 38,000 million tonne from APR Packaging will add to BILT’s volume growth.