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BILT: Another strong quarter - Views on News from Equitymaster
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BILT: Another strong quarter
Feb 5, 2007

Performance summary
BILT announced strong results for the second quarter and half year ended December 2006 (June-ending fiscal). Growth in topline has been driven by strong performances of both its paper and pulp businesses. However, operating margins have contracted on the back of pressure on the raw material front and higher power and fuel charges. Despite this, bottomline growth has outpaced topline growth during the quarter, mainly due to reduction in interest costs.

Financial performance: A snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 4,363 5,515 26.4% 8,722 10,785 23.7%
Expenditure 3,199 4,125 28.9% 6,412 8,087 26.1%
Operating profit (EBDITA) 1,164 1,390 19.4% 2,310 2,698 16.8%
EBDITA margin (%) 26.7% 25.2%   26.5% 25.0%  
Other income 20 16 -21.2% 41 45 10.1%
Interest (net) 230 218 -5.3% 481 422 -12.3%
Depreciation 368 381 3.6% 734 761 3.7%
Profit before tax 587 807 37.5% 1,136 1,560 37.3%
Tax 113 186 64.4% 220 356 61.9%
Profit after tax/(loss) 474 621 31.1% 916 1,204 31.5%
Net profit margin (%) 10.9% 11.3%   10.5% 11.2%  
No. of shares (m) 162.5 166.7   162.5 166.7  
Diluted earnings per share (Rs)*         14.6  
Price to earnings ratio (x)*         8.7  
(* on a trailing 12-months basis)            

What is the companyís business?
BILT is Indiaís largest manufacturer and exporter of paper from India, with a strong presence in segments like writing and printing paper, industrial paper and specialty paper. The company has a diversified production infrastructure with six manufacturing units spread across the country. It is the undisputed leader in the high-margin coated wood free and business stationery segments with market share of 49% and 79% respectively. Besides this, it also has a significant presence in the uncoated wood free, copier and creamwove segments.

What has driven performance in 2QFY07?
Both paper and pulp deliver: BILTís revenues clocked an impressive 26% YoY growth during 2QFY07, backed by strong performances from both its paper and pulp divisions. Revenues from the paper business (including paper products and office supplies), which contributes around 86% to total revenues, grew by 21% YoY during the quarter. While total paper volumes were up 16% YoY, the remaining growth was contributed by improved realisations. Besides this, the pulp business (Kamalapuram unit), which was under pressure in FY06 due to labour unrest and technical breakdown, also recorded a robust 92% YoY growth backed by an 87% YoY growth in volume sales.

Segmental snapshot
  2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Paper 4,155 4,546 9.4% 8,303 8,959 7.9%
PBIT margin (%) 20.4% 21.2%   20.2% 21.0%  
Paper products & office supplies 120 629 422.6% 203 1,164 474.7%
PBIT margin (%) 30.6% 15.1%   29.2% 15.2%  
APR Pulp 361 693 91.9% 797 1,345 68.8%
PBIT margin (%) -2.5% 3.2%   -1.0% 3.2%  
Others 278 157 -43.4% 517 331 -36.0%
PBIT margin (%) -2.3% -3.5%   -2.3% -3.8%  
Total 4,915 6,025 22.6% 9,819 11,800 20.2%
PBIT margin (%) 17.6% 17.9%   17.5% 17.7%  

Margin pressure: BILTís margins contracted by 150 basis points during the quarter, largely due to pressure on the raw material front. However, the management has stated that pulp prices have started witnessing a softening trend, which is likely to have a positive impact on BILTís raw material costs going forward. Power and fuel charges (as percentage of sales) also witnessed a rise. We expect BILT to maintain operating margins between 25% and 26% going forward mainly backed by contribution from value-added products and efforts to keep raw material costs under control.

Cost break-up
(% of sales) 2QFY06 2QFY07 1HFY06 1HFY07
Raw material costs 28.4% 32.1% 28.0% 31.7%
Stores and spares consumption 17.5% 16.3% 17.8% 16.3%
Power and fuel charges 12.3% 14.1% 12.6% 14.4%
Personnel cost 7.2% 5.8% 7.3% 5.9%
Other expenditure 7.2% 6.0% 7.2% 6.1%

Healthy bottomline picture: BILTís bottomline recorded a robust 31% YoY growth during 2QFY07, despite the pressure on operating margins. Apart from strong growth in topline, this net profit growth was aided by lower depreciation charges and reduction in interest costs.

Over the last few quarters: While revenues in the first half of 2006 have been subdued due to poor performance of the rayon grade pulp division, sales have picked up in the last four quarters after the company merged APR Packaging with itself. Sales are expected to increase going forward as well on the back of new capacities being added and firm paper prices. Considering the shortage of raw material availability plaguing the paper industry, BILTís ability to maintain operating margins at 24% to 26% levels is commendable.

Quarterly trend
(%) 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07
Net sales growth 2.5% -1.4% 13.7% 10.4% 20.9% 26.4%
Operating profit margin 26.3% 26.7% 26.4% 23.9% 24.8% 25.2%
Net profit growth 10.2% 9.4% 26.8% 64.4% 31.8% 31.1%

What to expect?
At the current price of Rs 127, the stock is trading at a price to earnings multiple of 7.0 times our estimated FY08 earnings. In June 2006, BILT acquired the Malaysian-based Sabah Forest Industries (SFI) for a total consideration of US$ 261 m. Since Sabah has a long term (99 years) lease of 289,000 hectares of forest land for sustainable plantation and harvesting of wood for pulp making, the same will be beneficial to BILT as it will provide availability of wood requirement for BILTís Indian operations. Also, the cost of producing pulp in Malaysia is around 50% lower than that in India, thereby enabling the company to keep its raw material costs under control. The company is currently in the process of integrating operations of Sabah with itself and the benefits from this acquisition are expected to start filtering in from FY07. Investors should note that we have not factored this acquisition in our estimates.

Having said that, given BILTís presence in all the segments of writing & printing paper, the favourable demand-supply scenario for paper in the country and the companyís plans to add capacities, thereby leading to an increase in revenues, we maintain our positive view on the stock.

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