International subsidiary will boost valuations

Ballarpur Industries (Bilt) postponed plans to list its international subsidiary on the London Stock Exchange in a bid to take advantage of the recent re-rating of the sector after the Andhra Pradesh Paper Mills acquisition deal by the US-based International Paper Company.

According to the deal, Andhra Pradesh Paper Mills’ enterprise value (EV) was estimated to be about 16 times its operating profits (Ebitda). If these valuations are taken as a benchmark, Bilt, the country’s largest paper manufacturing company, is valued around six times its current price.

Analysts believe Bilt can take advantage of the current scenario and if not at 16 times, it could list its international subsidiary at about 10 times its EV to Ebidta, still beneficial from the shareholders’ perspective. Besides relative valuations, which are attractive, its expansion of capacities and improved industry prospects has lead analysts to put a buy rating on it.
 

PREMIUM PAPER
In Rs crore	FY10	FY11E	FY12E
Revenue	3,818	4,492	4,800
Ebitda	838	919.6	1,107
Interest	237	268	240
Net profit	197	221	337
PE (x)	12.4	10.9	7.3
Source: Emkay Research

SEEKING HIGHER VALUE
In 2007, the company restructured its business and hived off some of its Indian operations under the international subsidiary, Ballarpur International Holding (BIH). The objective of the exercise was to get better value in the international markets and create value for shareholders.

To realise the value for its shareholders, Bilt on March 22, announced its plans to list Ballarpur Paper on the LSE. Bilt owns 79.5 per cent in Ballarpur Paper and the rest is with private equity firms, including JP Morgan Mauritius. Though the listing plans are now on hold, but whenever it was to happen, it would have a positive impact on its share prices. At 10 times EV to Ebidta, the equity valuation of the international subsidiary works out to be Rs 3,700 crore. The per share value of Bilt’s holding in the company comes to Rs 45, as against the current ruling prices of Rs 36 per share, which includes the value of its standalone valuations.

Apart from the valuations, through the IPO proceeds, the company plans to utilise about Rs 770 crore on expansion, mainly on the development of pulp mill facilities, which will help in increased integration and better operating margins. Also, additional Rs 640 crore will be spent on retiring debt held by BIH, which will help in lowering interest cost. The company on the consolidated basis has over Rs 3,500 crore debt on the books, almost 1.5 times its 2009-10 equity capital.

FAVOURABLE ENVIRONMENT
Bilt has been the key beneficiary of the recent upturn in the industry in terms of growth in revenue and price realisation. Further, to leverage its position and growth in the industry, the company is expanding its current annual capacity from 758,710 tonnes per annum to 1,134,000 tonnes by the end of financial year 2014. Meanwhile, led by higher capacity and industry demand, analysts are expecting the decent growth in consolidated revenue and profits over the next two years.