Restructuring aims to bring paper biz under 1 roof: BILT

Avanta Group held Ballarpur Industries is currently undergoing some restructuring to bring all of its paper businesses under one roof, which is its Netherlands subsidiary. “The plan is to keep the structure ready so that as and when the market improves we will be ready to do a listing,” said B Hariharan, Group Director-Finance at Avantha Group.

The company considers listing its Netherlands subsidiary, which owns the paper business, Hariharan told CNBC-TV18. The company’s Netherlands subsidiary Ballarpur International Graphic Paper Holdings consists of two paper units and the Sabah Forest Industries. The rayon grade pulp unit would be put back into business with BILT.

Using the funds of the initial public offer, the Avanta Group looks to bring down its debt by Rs 300 crore by FY13. “The only reason why we will do an IPO would be if we get valuation which is significantly higher than the current valuation for BILT,” he said,

Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: Can you take us through the restructuring that you have within the Ballarpur Group. What is the purpose, the intent behind this and can you simplify the structure for us?

A: We have created a Netherland subsidiary for Ballarpur Industries (BILT) under which we have put in three units - two paper units and one rayon grade pulp unit. We had aslo acquired the Sabah Forest Industries under this structure. The current restructuring is to bring all the paper business under one structure, which is the Netherland structure, and take out the rayon grade pulp business back into BILT.

This is because the last time we were looking at an international listing for Ballarpur International Graphic Paper Holdings (BIGPH) there were some investors who had told us that it’s better to bring all the paper business under same structure. So that’s what we are trying to do now.

Q: In 2010-2011 there were reports with regards to listing possibly on the London Stock Exchange and then possible listing of Sabah etc. Where do all of those IPO plans stand at this point in time and was this restructuring a precursor to that?

A: The restructuring is being done with a view to look at an IPO, but we are not sure whether the market is conducive for doing an IPO internationally. We are going to keep the structure ready, and as and when the market improves we will be ready to do a listing. So that’s the plan going forward.

Q: Which is the possible company or subsidiary at this point in time that you would be most comfortable with listing? Also, what sort of valuations would you possibly be looking at and which stock exchange would you be focused on?

A: Our preference is to list the Nederland subsidiary BIGPH. We have filed intention to float at the London Stock Exchange because that is now going to own the entire paper business and also Sabah Forest Industries. So that is our preference.

In terms of stock exchange, we looked at London, we looked at other stock exchanges also, but we will take a call closer to the issue. We have not closed in on any stock exchange as of now. At the right time we will look at the stock exchange.

As far as valuation is concerned, the only reason why we will do an IPO would be if we get valuation which is significantly higher than the current valuation for BILT.

Q: What are you looking at in terms of valuations in the follow-up to the listing, and when you list, will it be an issue of fresh shares or will the promoter divest?

A: When we decided the intention to float at the London Stock Exchange, we were looking at a valuation which is 30-40% higher than the current marketcap of BILT. That was completely primary issues, there is not secondary sale at that point of time.

But now that we have raised 200 million perpetual bond last year, which is a way can be treated as equity, this time around we will have probably a portion of primary and secondary issuance.

Q: What are the numbers on primary and secondary issuance – any ballpark numbers you have?

A: I think you can say that if 300 million is issue size, about 200 million will be primary, about 100 million can be secondary.

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Q: How exactly would you utilise these fund and what is the reason for the IPO?

A: As far as our capital expenditure is concerned, we can say that we are coming to an end of our capex cycle, at least for the rest of the two years. So primarily this issuance which comes in will go towards deleveraging the balance sheet, which means reduction of debt.

Q: Where does your current debt stand at and what would you be more comfortable with in terms of debt to equity going forward?

A: Currently our debt is around Rs 3,900 crore, which will come down by another Rs 300 to Rs 350 crore during this financial year. Debt equity we are okay we are still less than 1:1. On debt to EBITDA we are currently around 4, so our intention would be to bring it to 3.

Q: Are your shareholders who raised the issue of simplification of corporate structure happy with the structure you have now hit upon?

A: I think so because when we go to them, we can very clearly explain to them that there is a structure which houses now the entire paper business without leaving anything except the specialty paper business, which is not writing and printing paper in BILT. So they should feel happy about it.

Q: Give us a sense in terms of the margin picture for the company at this point in time because we do understand that it has pretty much been on a declining trend. What sort of paper prices are you dealing with and could we expect a price hike in the near future?

A: The current margins are around 17% EBITDA margin, which has come down from our peak of 22-23%, which we used to have 2-3 years back. The main reason for that is non-integration to pulp, which means that we are importing pulp requirements.

What we have done recently is that we have expanded our pulp capacity in SFI that was commissioned and we started getting pulp from the SFI new capacity. So this year, which is financial year ’12-’13, we would be getting about 120,000 tonne of capacity in SFI. Out of that, about 90,000 tonne utilisation will come in. So that will significantly improve our EBITDA margins.

We are also expanding our pulp mill in India by about 180,000 tonne, which will get commissioned in September-October, so that is also going to give us additional pulp. So with the commissioning of both these capacities, we will be fully integrated on pulp, which will take our EBITDA margin atleast by 4%, which means that we will get to a level of 21% EBITDA margin once these two pulp mills are in full operations.

As far as paper prices are concerned, we increase the coated paper prices by Rs 2,000 in June and we increased the uncoated paper prices by about Rs 1,000 in June. So as far as the demand/supply situation is concerned, I think the demand for the paper is quite good.

Q: Would you expect prices to come down because there has been a general softening of commodity prices?

A: No, I don’t think the paper prices are going to come down because the coated paper prices generally tend to move with international paper prices, which are firm at this point of time. The rupee-dollar parity is also helping us in increasing the domestic prices.

Q: So in your listed entity, what will be the revenue growth in the current year considering that some pulp units are coming online?

A: The pulp units are consumed by us, so it is not a sale. The pulp units are only going to improve the margins by 4%; there will be no increase in the revenue on account of the pulp units coming in.

Q: So revenue this year maybe at what levels?

A: We would be close to Rs 4,900 crore consolidated revenue this year, which you can expect that to grow by about 6-7% next year.

Q: Wanted your sense in terms of the M&A action, which we have seen in the pulp and the paper space. We understand that Grasim made a recent acquisition of a pulp based company in Canada. We also had the AP paper deal last year. Are M&A opportunities looking more lucrative in the global market at this point in time?

A: I think Grasim – if I am right - they have looked at pulp mill to convert that into dissolving grade pulp which is a rayon grade pulp. As far as we are concerned, we did an acquisition in 2006, we have expanded the capacity so we want to fully utilize that capacity. As of now, we are not looking at any M&A space except that if in India there is anything available on the paper side, we will be open to look at.