ITC Bhadrachalam: Cash counter

Anup Menon

Recommendation: An investment in the stock of ITC Bhadrachalam Paperboards (ITCBP) can be considered with a very short time period in mind. The earnings performance of the company for the quarter ended December 2000 is likely to be good. This should have a positive impact on the performance of the stock in the near term. However, the question is whether the price will be sustained? May be not.

Given that the prices have been moving up in the recent past, there may be a correction in the stock during the post earnings announcement period. Fresh and existing investors can make use of any notable uptrend than to liquidate exposures and take profits.

Rising paper prices in both the domestic and international markets have allowed the domestic paper companies to breathe easier. Coupled with an improvement in the industry per se, ITCBP has also been realigning its operations by reducing its overall cost of funds and improving earnings over the last few quarters. Consequently, the stream of events have led to an improvement in the operational and financial risk profile of the company.

Suitability: The stock is a suitable investment with a moderate to high risk profile. Trading at around Rs 65.35, investors can expected an appreciation, especially as the earnings performance for the quarter is expected to be good. Beyond this level, the stock is likely to go through a correction phase. Hence taking fresh exposures at current levels may be fraught with a high level of risk. On an equity base of Rs 87.74 crore, the current annualised earnings per share of the company works out to around Rs 2.26. This translates into a price earnings multiple of around 29 times.

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Prospects: With a capacity of around 1,82,000 tonnes, ITCBP is one of the largest paper companies in the country. In the past the performance of the company has been affected by sluggish trends in the industry and a debt laden balance sheet. In the recent past, the company has cleared its balance sheet and focused more on its operations.

It exports around 15 to 20 per cent of its total production. With the recent depreciation of the rupee and firm international paper prices, the company's realisations is likely to be on a stronger ground. Further around 20 per cent of the total production is for captive consumption for ITC. These factors tend to reduce the operational risk profile of the company. ITCBP has also diversified into value added segments.

Overall the performance of the company for the next few quarters is likely to be good. Existing investors can stay invested and cash in on any uptrends in the near future.