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BILT: The expansion effect! - Views on News from Equitymaster

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BILT: The expansion effect!

May 3, 2006

Performance summary
BILT announced strong results for the third quarter and nine months ending March 2006 (June ending company). Revenues grew at a healthy double digit pace driven by its paper business and contribution from APR packaging, which the company merged with itself during the quarter. Despite a higher tax outgo, improvement in operating margins coupled with lower interest charges contributed to the bottomline growth.

Financial performance: A snapshot
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 4,504 5,122 13.7% 13,184 13,873 5.2%
Expenditure 3,353 3,770 12.4% 9,788 10,211 4.3%
Operating profit (EBDITA) 1,151 1,351 17.4% 3,396 3,662 7.9%
EBDITA margin (%) 25.5% 26.4%   25.8% 26.4%  
Other income 15 22 44.4% 51 63 21.8%
Interest (net) 272 250 -8.1% 834 730 -12.5%
Depreciation 357 416 16.3% 1,081 1,150 6.4%
Profit before tax 537 708 31.9% 1,532 1,844 20.4%
Tax 95 147 55.4% 255 367 43.8%
Profit after tax/(loss) 442 561 26.8% 1,276 1,477 15.7%
Net profit margin (%) 9.8% 10.9%   9.7% 10.6%  
No. of shares (m) 162.5 162.5   162.5 162.5  
Diluted earnings per share (Rs)*         11.6  
Price to earnings ratio (x)*         11.5  
(* on a trailing 12-months basis)            

What is the companyís business?
BILT is Indiaís largest manufacturer and exporter of paper, with a strong presence in the all the segments that includes 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 shares 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 3QFY06?
ĎAPR Packagingí contributes: BILTís revenues during the quarter clocked an impressive 14% YoY growth backed by a strong performance by its paper division. Revenues from the paper business (including paper products and office supplies), which contributes around 81% to total revenues, grew by 19% YoY. While total paper volumes were up 15% YoY, total paper revenues increased by 19% YoY. It must be noted that this quarter includes the sales from APR Packaging, an associate company, which BILT merged with itself. This has also played a part in contributing to the volume growth in paper (especially the copier paper). The rayon grade pulp business staged a recovery during the quarter and reported a 4% YoY growth. It must be noted that in 2QFY06, revenues from this business declined due to labour unrest and technical breakdown at the Kamalapuram unit.

Segmental snapshot
  3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Paper 3,872 4,192 8.3% 11,791 12,495 6.0%
PBIT margin (%) 21.0% 21.4%   20.5% 20.6%  
Paper products & office supplies 58 492 747.6% 167 694 316.4%
PBIT margin (%) 29.5% 17.7%   27.2% 21.0%  
Pulp 685 712 4.1% 1,909 1,510 -20.9%
PBIT margin (%) 5.3% 4.1%   3.9% 1.4%  
Others 377 281 -25.6% 855 827 -3.3%
PBIT margin (%) -0.7% -2.2%   -1.2% -2.2%  
Total 4,992 5,677 13.7% 14,721 15,526 5.5%

Margin expansion: BILTís margins expanded by 90 basis points during the quarter owing to a fall in expenses, mainly personnel and power and fuel costs. Raw material costs as a percentage of sales, witnessed a slight increase. It must be noted that the company has been laying greater emphasis on the social forestry programme, which is expected to be a key source for procurement of raw material in the long-term.

Cost break-up
(% of sales) 3QFY05 3QFY06 9mFY05 9mFY06
Raw material costs 29.9% 31.0% 29.3% 29.2%
Stores and spares consumption 17.6% 16.9% 17.8% 17.4%
Power and fuel charges 12.8% 12.0% 12.6% 12.3%
Personnel cost 7.0% 6.6% 6.9% 7.0%
Other expenditure 7.2% 7.2% 7.6% 7.7%

Healthy bottomline picture: Bottomline recorded a robust 27% YoY growth mainly led by a strong growth in topline. Besides this, a rise in other income and reduction in interest costs also contributed to bottomline growth despite a higher tax outgo.

Over the last few quarters: Revenues over the past quarters have been subdued due to the poor performance of the rayon grade pulp division. However, as can be evinced in this quarter, sales are expected to pick up on the back of new capacities being added and firm paper prices. Considering the shortage of raw material availability plaguing the paper industry, BILTís operating margins at 25% is commendable.

Quarterly trend
(%) 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06
Net sales growth -0.1% -0.2% 0.9% 2.5% -1.4% 13.7%
Operating profit margin 25.7% 25.5% 24.2% 26.3% 26.7% 26.4%
Net profit growth 31.7% 36.1% 8.4% 10.2% 9.4% 26.8%

What to expect?
At the current price of Rs 134, the stock is trading at a price to earnings multiple of 7.4 times our estimated FY08 earnings. BILTís presence in all the segments of paper, chiefly in the value added segments (coated wood free, stationary) shall the 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. This is likely to be a favourable scenario 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.

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