Bilt shares rise on subsidiary listing plan

Bilt shares rise on subsidiary listing plan

Ballarpur Industries Ltd’s (Bilt) plan to list its overseas subsidiary would not only help the company reduce debt and spruce up its balance sheet, but also fund planned expansion.

Bilt has been furiously expanding. In the past five years, its paper production capacity has grown two-and-a-half times to nearly a million tonnes a year.

Not without a reason. India’s paper market is the fastest growing in the world; it is projected to grow at nearly 6% a year, a company statement said quoting an independent consultancy named Pöyry.

The company has a significant market share in the paper used for posters, calendars and magazines, as well as copier paper. These are high-margin segments that are growing at 12% a year.

However, even as it captured market share, Bilt left a flank unguarded. It fell back on increasing pulp capacity; its dependence on imported pulp increased to 40% of its needs, according to estimates from Emkay Global Financial Services Ltd.

This told on its profits, especially during the December quarter. During those three months, operating margin fell to 19.2%, not only down 2.6 percentage points from a year ago, but also the lowest in three years.

Bilt has since moved to redress this problem and is planning to increase its pulp capacity by 63% to 752,000 tonnes by the end of fiscal 2012, according to JPMorgan Chase and Co.’s local unit.

The broker also estimates Bilt to spend some Rs2,170 crore over the next two years on capital expansion. While the debt-to-equity ratio at 1.49 (fiscal 2010 numbers) isn’t too bad, the money from the share sale should help.

Bilt plans to raise $330 million (Rs1,485 crore) by listing its unit Bilt Paper Plc, which has economic interest in four of the group’s seven paper factories, in London. Of this, it wants to spend $170 million on expansion. Another $140 million will be used to redeem profit-sharing certificates held by a fully owned subsidiary of Bilt.

In effect, it will show on Bilt’s profits through reduced debt and interest payments. In a November note, JPMorgan calculated that if Bilt raises $250 million, its fiscal 2012 earnings could go up by as much as 10%.

The stock, despite a 4% spurt over the past two days, is trading at 6.5 times its estimated earnings for fiscal 2012.

The listing, along with better results expected in the March quarter due to softening pulp prices, are key drivers for the stock.