For Ballarpur Industries Ltd (Bilt), consolidated March quarter results show a sharp rise in revenue and operating profit compared with the year-ago period. But the increase in raw material (pulp) prices prevented profit margins from widening, as paper prices moved up with a lag only from April.

The company clocked revenue of Rs1,032 crore in the quarter, which was 50% higher than the year-ago period and 17% higher on a sequential basis. This was purely on account of higher volumes, driven by an upswing in domestic demand.

Following its capacity expansions in both the coated and uncoated paper segments during 2009, Bilt can make 1.06 million tonnes of paper every year. As the country’s largest paper manufacturer, it is the market leader in most premium grades of paper, with a near 85% share in bond paper. During the quarter, higher volumes led to a commensurate jump in operating profit. At Rs204 crore, it was about 50% higher than the year-ago period.

Bilt’s operating profit margin remained at 20% of sales during the two comparable periods. This was despite the fact that paper prices did not increase, but raw material costs nearly doubled. According to a senior company executive, “Pulp prices have shot up from $450 (Rs20,070 today) a tonne about a year ago to $800 a tonne now." Raw material costs, therefore, rose to 36% of sales from about 27% in the year-ago period. In other words, the company absorbed the rise in pulp prices during the quarter.

Graphic: Ahmed Raza Khan / Mint

But prospects for the quarter ending June seem bright. Besides demand growth, paper prices rose by Rs3,000 a tonne in April. Industry expects a similar rise in May too. Meanwhile, industry experts say that much of the rise in raw material costs has already taken place. Hence, both revenue and profit margins will continue to grow in the coming quarters.

At the peak of the paper cycle, Bilt posted an operating profit margin (OPM) of around 22%, while fully integrated players can register an OPM of 25%.

Bilt’s reported net profit of Rs55 crore for the March quarter was three times higher than the year-ago period. The firm’s shares rose marginally to close at Rs34, which discounts historic FY09 earnings of Rs3 per share by 10 times.

Given the upswing in the paper industry and Bilt’s leadership position, the shares could move up in the near term, although, being in a cyclical industry, it normally commands low price-to-earnings multiples.

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