Ballarpur Industries Ltd’s (Bilt’s) shares have risen by 30% from their lows in end-August. Even so, at the current market price of Rs.23, the stock trades at only about six times its estimated earnings for fiscal year 2013-14 (FY14).
Apart from the seemingly attractive valuations, the company seems to be in a sweet spot to reap the benefits of its expansion. The paper manufacturer is in the process of expanding its pulp capacities, which would increase the availability of in-house pulp and eventually lead to better profit margins.
Bilt’s operating profit margin already showed a sequential improvement last quarter. It posted a consolidated operating margin of 18.7% last quarter compared with 16.4% in the June quarter. For the year ended September, margin stood at 16.6%. Till the June quarter, Bilt faced cost pressures (especially, power and fuel) that affected margins adversely for some time.
JPMorgan analysts wrote in their September quarter results update. “Following sequential improvement in the September quarter margins, Bilt management has guided to Ebitda (Earnings before interest, taxes, depreciation and amortization) margins of 21% by the September quarter of FY13 and 24% in FY14,” they said.
While that’s encouraging, the company still has high debt on its books. As on 30 June, the consolidated debt (long-term plus short-term borrowings) stood at about Rs.3,540 crore. That’s in comparison to a market capitalization of only around Rs.1,500 crore. Finance costs as a percentage of operating profit were high at 32% in the September quarter. So while valuations seem inexpensive and prospects on the margin improvement front are bright, investors would do well to keep a tab on the impact of interest costs on the profitability in the days to come.