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BILT Vs International Paper: At par?

Mar 8, 2006

Both BILT (India) and International Paper (US) enjoy the distinction of being the largest paper company in their respective countries. In this article, we will compare the two companies on various parameters.

About BILT
BILT is Indiaís 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.

About International Paper
International Paper Company (IPC) is a global forest products, paper and packaging company having an extensive North American merchant distribution system with primary markets and manufacturing operations in the US, Europe, Pacific Rim and South America. As of December 31, 2004, the company operated 27 pulp, paper, and packaging mills, 103 converting and packaging plants, 25 wood products facilities and 7 specialty chemicals plants. It also owned or managed approximately 6.8 m acres of forestlands in the US.

Financial comparison
(Rs bn) (CY04/FY05) BILT International Paper
Net sales 18 1,150
Sales growth (5 year CAGR) 5.5% -2.0%
Operating profit 5 137
Operating profit margin (%) 25.2% 12.0%
Net profit 2 (2)
Net profit margin (%) 9.4% -0.1%
Return on equity (%) 11.5% -0.4%
Return on assets (%) 5.3% -0.1%

Revenue story: International Paper chiefly derives its revenues from the sale of printing papers, industrial & consumer packaging, forest products, distribution and speciality businesses. The company has witnessed a mixed fortune over the years. International Paper had a tough 2003 on the back of a slack in demand for paper and lower price realisations. This situation improved in 2004 backed by improving US economic conditions, leading to a rise in demand for paper. Higher price realisations also played a part in reviving sales. It must be noted that though the US is the largest producer and consumer of paper. However, demand in the US is growing at a marginal rate of 1%, which is lower than the world average of 2.2% and Asian average of 4.5%.

As compared to International Paper, BILT is present only in the writing and printing paper segment. The wide gap in revenues between the two can be further highlighted by the fact that while International Paper is the largest paper company in the world, BILT is ranked 99. It must be noted that in India, demand for paper is expected to grow at 6% per annum over the next few years, with capacities growing at only 3%. While the demand-supply mismatch is expected to result in a favorable price realisations, the increase in capacities is expected to propel volumes. BILT does not have a presence in the industrial paper and newsprint segment.

Meeting raw material requirements: The principal raw material used by International Paper is wood. As of CY04, the company owned or managed approximately 6.8 m acres of forestlands in the US, 1.2 m acres in Brazil and had harvesting rights on government-owned forestlands in Russia. An additional 785,000 acres of forestlands in New Zealand were held through Carter Holt Harvey, a consolidated subsidiary of International Paper. All these catered to about 23% of the companyís wood fiber requirements. The rest was acquired from other private industrial and non-industrial forestland owners, with only an insignificant amount coming from public lands of the US government. Despite this, the company continues to face high raw material costs chiefly those of wood, energy and resin.

In comparison, the Indian government does not allow domestic paper companies to own wood plantations. As a result, BILT sources its wood requirements from the government (about 20% in FY05), open market (70%) and social farm forestry programme (10%). As far as the latter is concerned, the company provides saplings and clones to farmers for the purpose of growing them on their marginal and barren lands and buys back pulp requirements from these plants.

Cost break-up
(% of sales) BILT International Paper
Raw material & manufacturing 64.0% 74.4%
Selling & administrative 3.3% 12.9%
Others 7.5% 6.1%

Wide gap in margins: High raw material and energy costs have plagued margins of International Paper. This is despite the fact that the company has its own captive plantations. At the same time, high marketing and distribution expenses have also played spoilsport as far as margins are concerned. While BILT continues to face challenges on the raw material front, the social farm forestry programme is expected to contribute significantly going forward. It must be noted that Indian players enjoy higher margins as compared to foreign players irrespective of high input costs due to lower selling, administration and other expenses (Source: Cris Infac). BILT has the best margins in the domestic paper industry and is way ahead of International Paper on this front.

Return ratios: International Paperís return ratios (i.e. ROA and ROCE) have been hampered over the years, backed by net losses in two of the last three years. A much larger asset base has also contributed to a low ROA. However, a number of companies including International Paper are looking to dispose off their non-core holdings. International Paper, in particular, has sold of 440,000 acres of its timberlands. Though BILTís return ratios are much higher than that of International Paper, the company is also looking to further improve the same by hiving off its power plants into a special purpose vehicle (SPV). This move is expected to improve its ROA to 6.9% by FY06 (5.3% currently) and its ROCE to 12.1% (10.5% now).

What to expect?
At the current price of Rs 134, the stock is trading at a price to earnings multiple of 7.3 times our estimated FY08 earnings. BILTís 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. Given the stable demand prospects and with most of the players operating at nearly 100% of their capacity, paper prices are expected to improve further. 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 this coupled with a firm trend in paper prices is expected to drive revenue growth.

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