ITC Bhadrachalam: The turnaround path

S. Vaidya Nathan

Recommendation: An investment in the stock of ITC Bhadrachalam Paperboards can be contemplated with a view to capitalising on the possibility of an improved performance in fiscal 2000-01. The company, which had been in the red for a couple of years, appears set to emerge in the black in the current fiscal (2000-2001). It has reported shareholder earnings in the April-June 2000 quarter of Rs 9.90 crore.

A cleansed balance sheet, improved price levels in the domestic and international markets, a reduction in high-cost debt and a good competitive position in its business could be factors that could enable the company to consolidate on the emerging turnaround in its fortunes.

If the company continues to report an improvement in revenues (as it has done for some time now) and shareholder earnings (as it has done in the recent April-June 2000 quarter), there may a re-rating of the stock. In the recent decline in the broad markets, the stock has emerged unscathed indicating some market confidence in the improving fundamentals.

Suitability: The stock is appropriate only for investors with an appetite for risk and who can time their exits based on an uptrend in the stock price linked to a further improvement in the fundamentals. A target of an appreciation of around 40 to 50 per cent from the present levels of Rs 40 can be set to critically take re-look at positions and book profits, if necessary. Beyond this level, any improvement may come about only if there is emergence of some institutional buying in the stock.

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Performance: ITC Bhadrachalam Paperboards has a contemporary unit with a capacity of 1,82,000 tonnes for coated paperboards and high-quality paper. The paperboards project was commissioned two-and-a-half years ago at a time when the overall industry scenario was adverse.

In the coated paperboards segment, capacity creation by another player, Servall Engineering, also came about at the same time. With demand levels yet to pick up, the sudden creation of new capacities put pressure on prices. This affected the profitability.

The problems of the finance subsidiary, ITC Bhadrachalam Finance, which required cash infusion and one-time write-offs to the earnings of ITC Bhadrachalam Paperboards also weakened its position. Following the infusion of cash by ITC taking up its stake to 51 per cent, the financial position of the company took a turn for the better.

But in the last two-and-a-half years, the company has managed to develop markets for its products and also improve export levels. This has helped in achieving good volumes and capacity utilisation levels. The growth in turnover in the last three years amidst sluggish prices is evidence to this effect.

The company has recently replaced close to 64 per cent of its high-cost debt with fresh debt funds sourced at a lower cost. This aspect may be reflected in the performance in the second quarter and beyond. The depreciation in the value of the rupee may also prove beneficial as the company has sizable exports with its import requirements toning down the degree of benefits. Overall, the stock could be potential for upside on the back of a strengthening business position and its reflection in the earnings stream.