Sell Ballarpur Industries: Global Securities

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Global Absolute is bearish on Ballarpur Industries and has maintined sell rating on the stock.

 

Global Absolute research report on Ballarpur Industries

 

BILT had recently announced a financial restructuring plan & a stock buy back plan, as a result of which the stock has appreciated by almost 20%. Though, we are convinced with the long term growth of the company, yet we would advise the investors to sell the stock at the current price of Rs. 144 and buy the stock at the time of buy back by the company.

 

As a part of the restructuring plan, it would be mandatory for the investors to sell 40% of their holdings back to the company at a price of Rs. 125 per share. If someone buys the stock today at a price of Rs. 144, then he would have to compulsorily sell 40% of his holdings at Rs. 125 per share to the company, and therefore his average cost for the remaining 60% would be Rs. 156.7. However, we expect the stock price to come down at the time of buy back, as the investors may prefer to sell the stock in the open market rather than compulsorily selling it to the company at Rs. 125 per share. As a result, the stock will be available at a much lesser price than the present average cost of Rs. 156.7. Therefore, we recommend SELL rating on the stock now and advice buying later.

 

Restructuring Explained in Nutshell (for details refer to annexure)

 

BILT is transferring its 3 units to its subsidiary BPH for a cash consideration of Rs. 19.5billion. It will utilise Rs. 9.4billion for compulsory buy-back of shares and Rs. 10.1billion for repaying debt. Before the buy-back, share capital of BILT will be split into '5' shares of face value of Rs. 2 each from the current face value of Rs. 10. BPH (Netherland) is a 80% owned subsidiary of BILT, while balance 20% is held by JP Morgan. BPH already holds Sabah Forest Industries (SFI). BILT is transferring 3 units under BPH, which inturn will raise funds in the form of debt & private equity to pay BILT for its plants. This is expected to reduce the JP Morgan's stake from 20% to 4% and BILT's stake to 77%. The balance 19% stake will be held by the private equity.

 

Benefits of Restructuring:

 

(a) Better valuation: Internationally paper companies trade at much better valuation than in India. BILT had historically traded at EV/EBIDTA of ~5x, currently it is trading at EV/EBIDTA of 8x where as BPH is expected to raise funds at a EV/EBIDTA of ~10x. (b) Refinancing of Debt through international route will help the company to bring down its average interest cost from 8% to 7%. (c) For FY 08 we had expected an EPS of Rs. 4.3 (without restricting), but with the current restructuring initiative of the company, we expect EPS of Rs. 6.5, a growth of 51%..

 

Valuations Investment Summary Financial Performance

 

After the acquisition of Sabah Forest Industries, BILT is in possession of valuable forest inventory, which would fulfill its pulp requirement in the long term. Subsequently, BILT will be a fully integrated player, starting from wood (forest resources) to captive pulp, including captive power plant to paper, and to high-end retail stationary products. Now, with the transfer of three units to BPH and further capacity expansion, the company would have further cost saving from economies of scale & lower interest rate, which would lead to an improvement in profit margins, going forward.

 

Its aggressive expansion plan, strong demand expectation & its market leader position may help BILT grow at a faster rate than its past growth. In FY 08, due to SFI acquisition and restructuring, we expect an exceptional EPS growth of 134% to Rs. 6.5/share from Rs. 2.8/share. l The Company has recently announced a restructuring plan. It has created an SPV through which it is selling its 23% stake in the overseas market, from where the company expects to reap profits through better valuation. We believe, this restructuring would help the Company to unlock nearly 34% more value for its shareholders l BILT is India's largest manufacturer of Writing and Printing Paper with 18% of the market share by volume and 28% by value.

 

l BILT has been able to contain cost by achieving a high degree of selfsufficiency in wood pulp and electricity - the primary inputs of paper production. l BILT has an expansion plan, wherein it has expanded its product portfolio by increasing its presence in the high value added segments. It has revamped its distribution reach & network, and is undertaking extensive modernization with Rs. 12 billion, which will further increase its market share. l The company has acquired 80% stake in Sabah Forest Industries, Malaysia, which will enable it to not only increase its capacity, but also to ensure regular supply of raw materials. l The main demand drivers for the paper industry are the GDP growth & literacy rates.

 

GDP growth at 8% per annum and the increased allocation for education by the government in the Union Budget 2006-07, are expected to give a fillip to the paper industry. Thus, a positive impact on BILT is expected, as it is a dominant player in the industry. BILT has declared annual results for June 2007. The company has reported a growth of 21.4% YoY in net sales at Rs. 23.2billion in FY07 from Rs. 19.1billion in FY06, due to the increase in volumes, along with rising paper prices. The operating profits have increased by 16.5% to Rs. 5.96billion from Rs. 5.1billion last year.

 

The profits after tax have registered a 19.5% growth at Rs. 2.56billion in FY07 from Rs. 2.14billion in FY 06. During FY07, paper & paper products' sales revenue grew by 22.4%. Net sales realisation for FY07 was up by 4% at Rs. 44,745.7/tonne from Rs. 43,024.7/tonne in FY06. Sales volume grew by 7.7%. Pulp revenues grew by 24% on back of both, increase in volumes by 17% & growth in net realisation per tonne by 5.7%. Though, we are convinced with the long term growth of the company, yet we would advise the investors to sell the stock at the current price of Rs. 144 and buy the stock at the time of the buy back by the company