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No longer paper tigers

No longer paper tigers
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First Published: Thu, Mar 31 2011. 12 41 AM IST
Updated: Thu, Mar 31 2011. 12 41 AM IST
There is a sudden buzz in the paper industry. News about expansions, acquisitions and fund-raising is pouring in.
After Ballarpur Industries Ltd’s announcement last week to list its overseas unit, US-based International Paper Co. has said it will pay $257 million (around Rs 1,150 crore) for a 53.5% stake in the Andhra Pradesh Paper Mills Ltd (AP Paper).
After a non-compete fee and a compulsory open offer, International Paper could end up paying $423 million for a 75% stake in AP Paper.
That’s quite a lot, say analysts.
Also See Valuation Boost (PDF)
True, International Paper would get an easy entry into the world’s fastest growing paper market. According to industry lobby Assocham’s (Associated Chambers of Commerce and Industry of India) estimates, the Indian paper industry is set to touch 11.5 million tonnes next fiscal, up 25% from a couple of years ago.
AP Paper is one of the larger paper mills in the country with necessary raw material linkages and an established distribution set-up. The company’s financial numbers are middling. Revenue for the nine months ended 31 December stood at about Rs 530 crore, up 18% from a year ago. Higher operating expenses and tax outgo crimped net profit growth to 4%. It had a debt of about Rs 470 crore in the half year ended September.
But these numbers don’t quite justify the premium paid by International Paper, especially if one looks at comparable deals.
The current numbers imply International Paper is paying $2,400 per tonne of capacity, calculates Thomas Mullarkey of Morningstar Research Inc. “The market’s valuation of Domtar UFS, North America’s largest uncoated free sheet (UFS) maker, is just around $1,000 per tonne,” notes Mullarkey.
Now consider the deal on an enterprise value (EV) to Ebidta (earnings before interest, depreciation, tax and amortization) basis. Assuming a debt of Rs 500 crore, International Paper has paid 16 times the EV-to-Ebidta of estimated fiscal 2011 numbers, points out a note from Antique Stock Broking Ltd.
The brokerages noted that it was “extremely rich for a paper company, given the fact that most companies in the industry are trading in the band of five-six times of their FY11e earnings”.
On the flip side, all paper stocks shot up on Wednesday on re-rating hopes. Paper mill executives appeared on television channels and talked about expansions, fund-raising and acquisitions, sparking speculation that there would more such deals in this industry.
This has also reduced the valuation gap between Indian paper firms’ stocks and their international peers. Paper company stocks may yet prove to be more than paper tigers.
Graphic by Yogesh Kumar/Mint
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First Published: Thu, Mar 31 2011. 12 41 AM IST