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BILT: Merger drives growth
Aug 25, 2006

Performance summary
BILT announced its results for the fourth quarter and year ending June 2006 this week. For both the periods, revenue growth was driven by its paper business and contribution from APR Packaging, which the company merged with itself during the third quarter. While operating margins expanded marginally, bottomline growth outpaced topline growth during both the periods due to a reduction in interest costs and an increase in other income. Besides, the extraordinary income received for hiving of its power business also boosted the bottomline growth.

Financial performance: A snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 4,724 5,214 10.4% 17,908 19,087 6.6%
Expenditure 3,615 3,967 9.7% 13,403 14,178 5.8%
Operating profit (EBDITA) 1,109 1,247 12.4% 4,505 4,909 9.0%
EBDITA margin (%) 23.5% 23.9%   25.2% 25.7%  
Other income 45 47 4.4% 97 110 13.6%
Interest (net) 270 213 -21.1% 1,104 943 -14.6%
Depreciation 351 376 7.1% 1,432 1,527 6.6%
Profit before tax 533 705 32.3% 2,065 2,549 23.4%
Tax 129 165 27.9% 384 533 38.6%
Extraordinary item - 124   - 124  
Profit after tax/(loss) 404 664 64.4% 1,681 2,140 27.3%
Net profit margin (%) 8.6% 12.7%   9.4% 11.2%  
No. of shares (m) 162.5 163.2   162.5 163.2  
Diluted earnings per share (Rs)*         13.1  
Price to earnings ratio (x)*         8.8  
(* 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 FY06?
ĎAPR Packagingí drives growth: BILTís revenues during the year grew by a decent 7% YoY growth backed by a strong performance by its paper and paper products and office supplies division. Revenues from the paper business (including paper products and office supplies), which contributes around 85% to total revenues, grew by 12% YoY during the year. While total paper volumes were up 6% YoY, the remaining growth was contributed by improved realisations. It must be noted that FY06 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, however, performed poorly during the year due to labour unrest and technical breakdown witnessed at the Kamalapuram unit in 2QFY06. That said, the fact that this business has grown by 20% YoY during 4QFY06 is an encouraging sign.

Segmental snapshot
  4QFY05 4QFY06 Change FY05 FY06 Change
Paper 4,058 4,608 13.5% 15,849 17,103 7.9%
PBIT margin (%) 20.1% 19.8%   20.4% 20.4%  
Paper products & office supplies 65 167 156.5% 232 861 271.5%
PBIT margin (%) 26.1% 18.7%   26.9% 20.6%  
Pulp 580 695 19.9% 2,489 2,205 -11.4%
PBIT margin (%) 4.8% 5.3%   4.1% 2.7%  
Others 551 208 -62.3% 1,406 1,035 -26.4%
PBIT margin (%) -0.7% -5.2%   -1.0% -2.8%  
Total 5,254 5,678 8.1% 19,975 21,204 6.1%

Margin expansion: BILTís margins expanded by 50 basis points during the year owing to a tight control over its costs namely its raw material and personnel costs (as a percentage of sales). 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. We expect BILT to maintain operating margins at these levels mainly backed by contribution from value-added products and efforts to keep raw material costs under control.

Cost break-up
(% of sales) 4QFY05 4QFY06 FY05 FY06
Raw material costs 32.6% 31.7% 30.2% 29.9%
Stores and spares consumption 17.0% 15.7% 17.6% 16.9%
Power and fuel charges 12.4% 14.5% 12.6% 12.9%
Personnel cost 6.8% 5.9% 6.9% 6.7%
Other expenditure 7.7% 8.2% 7.6% 7.8%

Healthy bottomline picture: Bottomline recorded a robust 27% YoY growth during the year mainly led by a reduction in interest cost and the extraordinary income that the company received on hiving off its power business into a special purpose vehicle (SPV). If one were to exclude this extraordinary income, then the bottomline has grown by 20% YoY.

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 the last two quarters, revenues have picked up after the company merged APR Packaging with itself. Sales are expected to pick up, 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 operating margins at 23% to 25% levels is commendable.

Quarterly trend
(%) 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06
Net sales growth -0.2% 0.9% 2.5% -1.4% 13.7% 10.4%
Operating profit margin 25.5% 24.2% 26.3% 26.7% 26.4% 23.9%
Net profit growth 36.1% 8.4% 10.2% 9.4% 26.8% 64.4%

What to expect?
At the current price of Rs 115, the stock is trading at a price to earnings multiple of 6.3 times our estimated FY08 earnings. Recently, BILT acquired Malaysian-based company 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.

BILTís presence in all the segments of paper, chiefly in the value added segments (coated wood free paper, 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. We maintain our positive view on the stock.

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