For some time now, the weak operating environment has taken a toll on the earnings of Ballarpur Industries Ltd (Bilt). Higher input costs (mainly power and fuel) and slower pace of revenue growth have eaten into the profit margins of the largest paper manufacturing company in India.

photoOn a consolidated basis, power and fuel costs as a percentage of total operating revenue increased by 380 basis points (bps) to 18.7% for the fiscal year ended June.

A basis point is one-hundredth of a percentage point.

Total revenue growth was tepid at just about 7% to 4,821 crore for the full fiscal. Since operating costs increased at a relatively faster pace, operating profit margins declined by 280 bps to 16.6%. Along with higher depreciation costs and tax outgo, it led to a 42% decline in reported net profit to 123 crore.

Unfortunately, Bilt’s latest quarter also mirrors the same trend. Revenue growth for the June quarter stood at 4.8% to 1,249 crore, while reported profit after tax nearly halved to 38 crore. The June quarter operating margin came in slightly lower than that of fiscal 2012.

While costs are one part of the problem, another reason that has adversely affected the industry is excess supply due to capacity additions. Emkay Global Financial Services Ltd has also pointed out in its results review note that excess supply has reduced the pricing power of paper firms.

The silver lining, though, is that perhaps the worst is over and this year will be better for Bilt. “We believe the scenario is likely to change, given that no new capacity additions are likely to come up in the near term, while paper demand continues to grow at about 8%," Emkay analysts said in the note.

The Bilt stock has sharply underperformed the benchmark Sensex in the last one year on these concerns. At 18.7, the stock trades at about seven times its estimated earnings for this fiscal year. While valuations appear attractive, an improvement in profit margin would be one of the key triggers for the stock.

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