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S. Vaidya Nathan

Mr Gautam Thapar, Vice-Chairman and Managing Director

SHAREHOLDERS of Ballarpur Industries (BILT), especially those who had availed themselves of the rights offer at Rs 38 per share in 2002, should consider booking profits.

Investors can use any uptrend linked to the broad market trends for this purpose. The share, which had languished in the Rs 37-42 range, spurted by 50 per cent since May 2003.

A massive expansion in the equity base is underway. This exercise, when completed in about six months, could raise the equity to Rs 159-186 crore.

Given the stock price trends, which could necessitate issuance of more equity shares on conversion of the debentures, the equity base may end up closer to the higher end of this band.

This equity expansion, and profit booking by those who had invested last year through the rights offer, could cap any potential upside to limited levels.

The stock is also likely to under-perform other paper industry players such as Tamil Nadu Newsprint, Seshasayee Paper and West Coast Paper at a time when firm price trends augur well for their profitability.

But once it gets its act together — especially at the erstwhile Sinar Mas unit vested with Bilt Graphic Papers , which is now merged with BILT — the stock would have the potential to deliver gains from a long-term perspective. So investors can re-enter at lower levels and/or at a later period.

Bright, but...

Despite being the largest player in terms of capacity, BILT continues to under-perform its industry peers.

The low levels of profitability at BILT Graphic Papers, losses in its chemicals business and modest profits from its trading business, are among reasons for the rather lacklustre showing.

The outlook, over the next couple of quarters, for the paper industry appears bright.

Firm international price trends across various varieties of paper, the periodic price hikes pushed through by the domestic manufacturers and the appreciation in the value of the rupee, which could lower the cost of pulp imports, should augment profitability.

BILT too, as a major player, would benefit. But the effect on its bottomline may be considerably muted by the burden of the merger.

Earnings card

If there is one number that stands out in BILT's earnings card for the April-June quarter, it is the sharp spurt in revenues on a year-on-year as well as quarter-over-quarter basis.

This may be partly due to the higher product price levels, and year-end push of products (BILT reports yearly earnings for the July-June period), and largely due to the integration of BILT Graphics' numbers. Performance on other key parameters are not toocomforting.

Expenses outpaced revenue growth, leading to a slide in operating profit margins by about 2.5 percentage points.

Key players in every industry have made considerable progress in cutting debt levels, replacing high-cost by low-cost debt and deriving benefits from the decline in interest rates. BILT too has benefited.

But this has been nullified by the merger of Bilt Graphics. The merger burden has pushed up interest costs and depreciation charges sharply in the latest quarter, and for FY'03 as well.

This is clear from the earnings numbers for the first three quarters, where interest costs for BILT's own operations show a steady decline, and depreciation charges a marginal rise.

If the post-tax earnings growth of 55 per cent look impressive, it is largely due to lower tax provisions, possibly due to the accumulated losses of the merged unit that provide a tax shelter. This may not be sustainable.

Pre-tax earnings are up only by 13.9 per cent — which despite the upbeat industry scenario is a more realistic indicator of the likely trends over the next couple of quarters, due to the merger effect.

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