Accumulate Ballarpur Industries; target Rs 35: Emkay

“Ballarpur Industries (BILT)’s Q2FY12 consol revenues increased by 7% yoy to Rs 12 bn above our est of Rs 11.1bn. Paper segment revenues increased by 6% yoy to Rs 9.3 bn marginally ahead of our est of Rs 8.9bn driven by higher paper volumes. BILT reported paper sales volumes of 209,000mt, -2% yoy higher than est supported by inventory clearance of last quarter. Paper realizations increased by 8% yoy/ flat qoq to Rs 44,800/mt and supported revenue growth for the quarter. RGP (Rayon Grade Pulp) revenues increased by 11% yoy to Rs 1.35 bn higher than est of Rs 1.04bn.”

“Consol EBITDA margins of 15.7% (-360 bps yoy / -270bps qoq) were below estimates of 19.5%. Margins have dropped to their all time low due to increase in input cost like power, pulp and fuel despite increase in paper prices. Paper segment witnessed margin pressure (7.2% vs 11.4% previous year) due to increase in input costs while RGP margins at 22.9% (-270bps yoy/-660bps qoq) declined sharply. BILT reported consol APAT of Rs 136mn, -72% yoy was lower than est of Rs 367mn due to lower margins. AEPS for the quarter stood at Rs 0.21. Current EBITDA margins at 15.7% are ruling at their all-time low. BILT’s high dependency on imported pulp (approx 38% of pulp is imported) combined with increased input costs have created significant cost pressures. However, BILT is increasing pulp capacity by 120,000 mt (at Sabah, Malaysia) in FY12 and by 170,000 mt in FY13. The new pulp mill at Sabah has already commenced operations and margins are likely to improve in subsequent quarters.”

“We have reduced our FY12 est by 31% to Rs 2.1 due to weak Q2FY12 results and challenging scenario in paper industry. However we expect margins to improve from Q3FY12 onwards due to commissioning of pulp plant. We maintain Accumulate rating on the stock with target price of Rs 35. Presently stock trades at 40% discount to FY12 book value,” says Emkay Global Financial Services research report.

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