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BILT: Conference call excerpts

Feb 10, 2006

We recently had a conference call with the management of BILT post its 3QFY06 results. The call was intended towards getting an insight into the Indian paper industry in general and the company’s growth prospects in particular. Here are the key takeaways from the call. Global paper industry: In volume terms, the global paper and paperboard products industry is about 350 m tonnes per annum (MTPA). The US is the world’s leading manufacturer (90 MTPA) and consumer (100 MTPA). Together US and Canada, which is the world’s largest exporter of paper account for nearly one-third of the global production and consumption. At the same time, while India is the fastest growing paper market in the world, Latin America is establishing its position as a low-cost pulp producer.

Factors driving paper demand in India: Currently, India is the fastest growing paper market in the world with demand growing at 6% per annum. This is higher than the Asian average of 4.5% per annum and the global average of 2.2% per annum. The US, which is the largest market, is growing at a rate of just 1% per annum.

Demand growth for paper in India is almost directly correlated with GDP growth. With GDP growth pegged at 6% over the coming years, demand for paper is expected to grow at 6.3%. There are essentially three types of paper viz., industrial paper (used mainly for packaging), writing and printing paper and newsprint. While the GDP growth and manufacturing activity influence the demand for industrial paper, the demand drivers for writing and printing paper include apart from GDP growth, literacy rates, aspirations of people and demand for high quality paper and growth of the media and IT industry.

Trend of paper and pulp prices: Paper prices are expected to remain firm over the next three years. It must be noted that, at present, most of the large paper companies are operating at 100% capacity utilisation. Also, with a stable growth in demand, paper prices are expected to improve further, which is expected to be a favourable scenario for the industry as well as BILT. Global pulp prices are also expected to soften in the long-term as capacities are coming up in South America and Indonesia.

BILT is focusing on writing and printing paper, which includes coated and uncoated paper, copier paper, business stationery and creamwove. The prices of both the coated and uncoated paper follow the international prices. However, it must be noted that while the Indian coated paper prices are closely linked with that of international coated paper prices, in case of uncoated paper, there is a price differential. In fact, the imported landed cost of uncoated paper is higher than the domestic prices by 20%. Hence, while BILT has been able to undertake price increases in the uncoated paper business, they have not been able to do so in the coated paper business.

Meeting key raw material requirements: BILT’s key raw material is wood and bamboo, which is required for making pulp. The company has three sources from which it procures its raw material – government sources, open market and BILT’s social farm forestry programme. It must be noted that the Indian government does not allow paper companies to have captive plantations. While the units of Ballarpur, Sewa and Shree Gopal have their own pulping facilities, the Bhigwan unit imports pulp mainly from Indonesia. The Kamalapuram unit makes rayon grade pulp, which it supplies to Grasim amongst others. The company also enjoys an arbitrage opportunity by importing paper pulp at around US$ 500 per tonne and selling rayon grade pulp at US$ 600 per tonne.

Capex initiatives: BILT has chalked out plans to double its capacity to 1 MT by 2009. The company currently has 39% stake in APR Packaging Ltd, which used to make industrial paper. BILT has converted the same for making writing and printing paper (primarily copier paper) and has upgraded the facility to 55,000 tonnes. BILT has also acquired the remaining 61% stake of the company. Besides this, BILT is planning to add 10,000 tonnes through de-bottlenecking activities, a 20,000 tonne speciality mill and add 300,000 tonnes at its Bhigwan unit. The company is planning to fund these expansions through internal accruals and the balance through long-term suppliers’ credit. It must be noted that the pulp requirement for these capacity expansions will be imported as the global pulp prices are expected to come down in the long term as mentioned earlier.

What to expect?
At the current price of Rs 123, the stock is trading at a price to earnings multiple of 11.4 times its trailing twelve months earnings. BILT’s presence in all the segments of paper, chiefly in the value added segments (coated wood free, stationery) should stand the company in good stead going forward. With stable growth in demand for paper and with most of the players operating at nearly 100% of their capacity, paper prices are expected to improve further (Source: Cris Infac). This is likely to be favourable for the industry and consequently the company. The company is in the process of further augmenting its capacities and is also looking to foray into the tissue segment in a bid to be present in all the segments of paper and improve margins.

About the company
BILT is India’s largest manufacturer and exporter of paper, with a strong presence in the all the segments of writing and printing 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 shares of 49% and 79% respectively. Besides this, it also has a significant presence in the uncoated wood free, copier and creamwove segments.

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