Get set for rich gains on paper

US deal shows paper companies were undervalued so far; stocks re-rated, hit upper circuit.

A re-rating of paper stocks and company valuations has been triggered by the biggest domestic deal in the sector. The US-based International Paper will buy a majority stake in the 250,000-tonne capacity Andhra Pradesh Paper Mills for around $423 million. International Paper, the world’s biggest paper company, will be the first global paper major to have a direct presence in the Indian paper sector.

AP Paper share was in the 20 per cent upper circuit since morning while all other companies’ share price increased 13 to 20 per cent on Wednesday.

At the Bombay Stock Exchange, fireworks continued for most paper companies throughout the day as they hit their upper circuit. Industry experts are of the view that paper companies have remained undervalued and the deal highlights their real worth. “It is an interesting deal as it reflects the intrinsic value of the paper industry that has not got its due recognition. It will surely bring the paper industry in focus. International players are looking at the Indian market because of its growth,” said R R Vederah, managing director of BILT, the country’s biggest paper producer with a capacity of 758,000 tonnes.

The NYSE-listed company has decided to acquire 53.5 per cent from the company’s promoters, LN Bangur and his family, for about $257 million in an all-cash deal. It will also make an open offer for the remaining 21.5 per cent promoter holding in the company for $104 million, and pay $62 million as non-compete payment to the sellers.

But what has suprised the most is the 180 per cent premium that International Paper has offered to the promoters of AP Paper. It has valued the company at a little over Rs 2,100 crore equating it with the market cap of BILT, which on Tuesday was Rs 2,120 crore.

V Kumaraswamy, chief financial officer of JK Paper, believes international players are finding ample potential in the Indian paper market. “It is time the industry got the recognition it deserves. Andhra Paper reflects what is true of all paper companies in the organised sector,” he said. Analysts also see valuations of paper companies going up from here. “The industry was already doing well with increasing literacy levels and higher corporate ad spends. The deal will enhance valuations and brighten scope for more such acquisitions in future,” said Saurav Chatterjee, senior manager, Credit Analysis and Research Ltd.

India is one of the fastest growing paper markets, with the government’s thrust on education and a sizeable budgetary allocation. The domestic paper industry is estimated at around 10 million tonnes. Of this, the writing and paper segment accounts for 3.8 million tonnes, packaging grade paper segment around 4.5 million tonnes and the newsprint industry about 1.7 million tonnes. All segments of the industry are growing at 8-9 per cent or above. Paper companies have been able to pass on the price increases at regular intervals. The market has also been able to absorb new capacity additions faster than expected.