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BILT Vs TNPL: The paper behemoths! - Views on News from Equitymaster

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BILT Vs TNPL: The paper behemoths!

May 24, 2006

Ballarpur Industries (BILT) and Tamil Nadu Newsprint (TNPL) are, at present, the two largest paper companies in India, with focus on writing and printing paper and newsprint. In this article, we compare both these companies on various parameters.

About BILT
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.

About TNPL
TNPL was promoted by the Government of Tamil Nadu in 1979 and is the largest bagasse-based paper producer in the world. The company operates with a single plant in Karur, Tamil Nadu, which is the largest single-location plant in the country. The company produces both newsprint and writing & printing paper (W&P) with the flexibility to switch production between the two. In the W&P segment, the companyís main focus is on copier paper.

BILT Vs TNPL: Financials in a nutshell
Net sales (Rs m) 17,901 6,713
Net sales growth (4 yr CAGR) 5.5% 2.8%
EBIDTA (Rs m) 4,503 901
EBIDTA margin (%) 25.2% 13.4%
EBIDTA growth (4 yr CAGR) 11.1% -12.2%
Net profit (Rs m) 1,681 379
Net profit margin (%) 9.4% 5.7%
Net profit growth (4 yr CAGR) 13.8% -16.1%
Raw material cost (% of sales) 30.2% 22.4%
Power & fuel costs (% of sales) 12.6% 21.3%

Product offerings and revenue picture: BILT is an integrated paper company present across the value chain in the writing & printing paper segment. As of FY05, BILTís total paper capacity stood at 406,568 metric tonnes (MT). The company makes all forms of W&P, right from coated wood free, which is at the higher end of the value chain to creamwove, which is at the lower end. The companyís sales over the last three years have grown at a CAGR of 19%. It must be noted that BILT has been focusing more on value added segments such as coated wood free, business stationery and copier paper segments, which enjoy higher realisations. BILT does not have any presence in the newsprint segment.

In comparison, TNPL has been focusing on both newsprint and W&P and its revenues from the paper segment grew at a CAGR of 2% between FY01 and FY05. As of FY05, TNPLís total capacity (including newsprint and W&P) stood at 230,000 MT with the flexibility to switch production between the two. With the duty protection on newsprint being slashed to 5%, the newsprint segment is highly vulnerable to imports, as the domestic prices now move in tandem with the international newsprint prices. In the years FY02 and FY03, the newsprint segment witnessed a collapse, with prices falling by around 30%, prompting TNPL to shift focus to W&P, especially the copier segment. As a result, from FY01 to FY05, TNPLís production of newsprint reduced from 62,140 MT to 7,708 MT.

Meeting raw material requirements: While BILTís chief raw materials are wood and bamboo, TNPLís key raw material is bagasse. Since coated wood free is a superior quality paper, BILT uses wood and pulp and not agri-residues for the manufacture of the same. BILT has been procuring its wood and pulp requirements by entering into long-term agreements with the Orissa and Maharashtra governments, through the open market and through social farm forestry initiatives.

TNPL uses the agri-residue bagasse in manufacturing paper and has entered into long-term contracts with the sugar mills in Tamil Nadu for the procurement of bagasse. Despite this, the companyís sales were affected in FY05, due to a shortage in sugarcane production, which was on the back of a severe drought in the state. This negatively impacted the companyís revenues and profitability. BILTís raw material costs (as a percentage of sales) are higher than that of TNPL as pulp is more expensive as compared to bagasse. As far as power and fuel costs are concerned, both the companies have captive power plants to meet the power requirements. Having said that, BILT is planning to hive of its power plants into a SPV in a bid to improve its return ratios.

The margin story: If one were to look at the margin profile, BILTís margins are superior to that of TNPL due to the formerís focus on value added segments such as coated wood free and business stationery, which enjoy higher margins as compared to the other types of paper. While TNPL has been able to maintain margins between 20% and 25% till FY04, in FY05 margins sharply declined due to a rise in raw material costs. This was attributed to bagasse shortage, which in turn resulted in the company increasing its purchases of pulp.

What to expect?
At the current price of Rs 120, BILT is trading at a price to earnings multiple of 8.5 times our estimated FY06 earnings. On the other hand, at Rs 114, TNPL is trading at 9.8 times its FY06 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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