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Ballarpur Industries Ltd. Overweight
BILT.BO, BILT IN
2Q earnings on track; expect margin improvement
ahead
• On course for margin improvement: We believe 2QFY11E marks
the bottom for margins over the next few years. Paper price hikes and
decline in pulp prices will drive margin expansion over the next few
quarters till new captive pulp capacity comes on stream. We expect
BILT's paper capacities to be fully integrated by FY12E, driving a
structural decline in costs.
• Pulp capacity expansion on track: Management expects new pulp
capacity in Sabah (Malaysia) to be operational by Jul'11 and Indian
capacity to be operational by Dec'11. Management expects blended
cost of pulp to reduce to USD400/ton once new pulp capacities are on
stream vs. current cost of imported pulp at USD680/ton and captive
pulp at about USD450/.
• 2Q results highlights: 1) Sales growth of 27% driven by price hike of
5% for paper and 44% for rayon grade pulp. Paper volumes on a yoy
basis are up 9%. 2) EBITDA margin of 21% down 280bps over last
year mainly on account of sharp increase in pulp prices partly
mitigated through paper price hikes. 3) Net profit growth of 3% yoy to
Rs503MM.
• Reiterate Overweight: We believe that valuations at 8x FY12E P/E
are attractive in the context of a 10% volume growth opportunity and
the ensuing full backward integration. We also estimate that BILT's EV
is at a 50% discount to FY11E asset replacement cost. Our Mar-11 PT
of Rs50 is based on 10x FY12E P/E. Key risks include a decline in
paper prices, a decline in paper demand in India, a delay in expansion
plans and any adverse changes in regulations.
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