However, in the fourth quarter the company’s performance improved at least as far as volumes and profitability were concerned. But, rising interest and depreciation costs caused its net profit to fall by 39% to Rs44.6 crore in the last quarter.

The company’s volume sales of paper rose by 4.5% during the last quarter, much better than the less than 1% growth for the full year. However, value sales grew by just 4.1% in the quarter, indicating weaker prices or the effect of product mix. Bilt sells most of its production in the domestic market and a reviving industrial growth is good news for it.

The company has been keeping a tight rein on costs. Its operating profit margin rose by 82 basis points during the fourth quarter. One basis point is one-hundredth of a percentage point.

Raw material costs and salaries were two key areas of cost reduction. Though domestic paper sales increased, pulp sales from its shut Kamalapuram plant in Andhra Pradesh fell. The company’s Malaysian subsidiary, Sabah Forest Industries Sdn Bhd, too, suffered a decline in sales. These two units were largely responsible for the 5% decline in operating profit.

The situation has improved at the Kamalapuram pulp unit, which was reopened in May. Sabah’s performance depends on a demand revival in Malaysia. Cost cutting and a revival in prices may lead to Ballarpur’s profitability and sales improving, but its high interest and depreciation costs are dampeners. In fiscal year 2008-09, depreciation increased by 21% while interest costs rose by 15.2%. At Rs403 crore, these two heads take away nearly 60% of its operating profit. Depreciation costs may go up during the current financial year as the company is expanding capacity.

Higher depreciation costs are not unusual in the paper industry, which is highly capital-intensive. But Ballarpur needs to devise ways of having a healthier balance sheet and lowering interest costs. As of June 2008, debt stood at Rs2,880 crore and debt to equity was 3.7 times.

The company’s share price has risen from its low of Rs13 in February this year to Rs24 at present, and trades at a price to earnings multiple of nine times its 2008-09 earnings per share.

For valuation multiples to improve further, the company will need to focus on restructuring its balance sheet.

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