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BILT: Paper drives growth!

Jun 5, 2007

Performance summary
BILT announced strong results for the third quarter and nine months ended March 2007 (June-ending fiscal). Growth in topline has been driven by a strong performance of both its paper 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 and depreciation charges.

Financial performance: A snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 5,223 6,030 15.4% 15,043 17,829 18.5%
Expenditure 3,960 4,611 16.4% 11,469 13,712 19.6%
Operating profit (EBDITA) 1,264 1,419 12.3% 3,574 4,117 15.2%
EBDITA margin (%) 24.2% 23.5% 23.8% 23.1%
Other income 17 15 -15.7% 58 59 2.4%
Interest (net) 232 223 -4.2% 713 644 -9.6%
Depreciation 390 383 -1.8% 1,124 1,144 1.8%
Profit before tax 659 828 25.7% 1,795 2,388 33.1%
Tax 134 188 40.6% 353 544 53.8%
Profit after tax/(loss) 525 641 22.0% 1,441 1,845 28.0%
Net profit margin (%) 10.1% 10.6% 9.6% 10.3%
No. of shares (m) 162.5 169.0 162.5 169.0
Diluted earnings per share (Rs)* 14.8
Price to earnings ratio (x)* 7.4
(* 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 3QFY07?
Its paper again: BILTís revenues clocked a decent 15% YoY growth during 3QFY07 led by a strong performance by its paper division. Revenues from the paper business (including paper products and office supplies), which contributes around 86% to total revenues, grew by 23% YoY during the quarter. While total paper volumes were up 16% YoY, the remaining growth was contributed by improved realisations. However, while the pulp business (Kamalapuram unit), reported a poor performance during the quarter, the performance of this business for 9mFY07 was robust due to a strong results reported in 1HFY07.

Segmental snapshot
3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Paper 4,116 4,560 10.8% 12,419 13,520 8.9%
PBIT margin (%) 21.4% 21.5% 20.6% 21.2%
Paper products & office supplies 129 655 407.4% 332 1,819 448.5%
PBIT margin (%) 28.6% 16.3% 28.9% 15.6%
APR Pulp 712 707 -0.8% 1,510 2,052 35.9%
PBIT margin (%) 4.1% 3.8% 1.4% 3.4%
Others 266 108 -59.5% 783 439 -43.9%
PBIT margin (%) -2.3% -6.6% -2.3% -4.5%
Total 5,223 6,030 15.4% 15,043 17,829 18.5%
PBIT margin (%) 18.0% 18.3% 17.7% 17.9%

Margin pressure: BILTís margins contracted by 70 basis points during the quarter, largely due to pressure on the raw material front on the back of firm pulp prices. Power and fuel charges (as percentage of sales) also witnessed a considerable 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) 3QFY06 3QFY07 9mFY06 9mFY07
Raw material costs 36.2% 37.5% 36.1% 37.5%
Stores and spares consumption 15.6% 14.8% 15.7% 14.9%
Power and fuel charges 11.1% 12.9% 11.2% 13.1%
Personnel cost 6.2% 5.3% 6.4% 5.4%
Other expenditure 6.7% 5.9% 6.9% 6.0%

Healthy bottomline picture: BILTís bottomline recorded a robust 28% YoY growth during 3QFY07, 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 2006 have been relatively lower due to poor performance of the rayon grade pulp division, sales have picked up in the last three 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
(%) 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07
Net sales growth -1.4% 13.7% 10.4% 20.9% 26.4% 15.4%
Operating profit margin 26.7% 26.4% 23.9% 24.8% 25.2% 23.5%
Net profit growth 9.4% 26.8% 64.4% 31.8% 31.1% 22.0%

What to expect?
At the current price of Rs 117, the stock is trading at a price to earnings multiple of 6.4 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. 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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