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BILT: Stellar start to the year - Views on News from Equitymaster
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BILT: Stellar start to the year
Oct 18, 2006

Performance summary
BILT announced strong results for the first quarter ended September 2006 (June-ending fiscal). Growth in topline has been driven by strong performances of both its paper and pulp businesses. However, operating margins contracted on the back of pressure on the raw material front and higher power and fuel charges. Despite this, bottomline growth outpaced topline growth during the quarter due to higher other income and reduction in interest costs.

Financial performance: A snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 4,359 5,270 20.9%
Expenditure 3,213 3,962 23.3%
Operating profit (EBDITA) 1,146 1,308 14.2%
EBDITA margin (%) 26.3% 24.8%
Other income 20 29 41.2%
Interest (net) 251 204 -18.7%
Depreciation 367 380 3.7%
Profit before tax 549 753 37.2%
Tax 107 170 59.3%
Profit after tax/(loss) 442 583 31.8%
Net profit margin (%) 10.1% 11.1%
No. of shares (m) 162.5 163.2
Diluted earnings per share (Rs)* 14.0
Price to earnings ratio (x)* 8.7
(* 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 1QFY07?
Both paper and pulp deliver: BILTís revenues during the quarter clocked an impressive 21% YoY growth backed by a strong performance by both its paper and paper products and office supplies division and its pulp division. Revenues from the paper business (including paper products and office supplies), which contributes around 87% to total revenues, grew by 17% YoY during the quarter. While total paper volumes were up 15.5% YoY, the remaining growth was contributed by improved realisations. The icing on the cake was the strong performance by the pulp business (Kamalapuram unit), which was under pressure in FY06 due to labour unrest and technical breakdown. Revenues from this business recorded a robust 49.7% YoY growth backed by a 49.5% YoY growth in volume sales.

Segmental snapshot
1QFY06 1QFY07 Change
Paper 4,147 4,414 6.4%
PBIT margin (%) 20.1% 20.8%
Paper products & office supplies 82 535 551.0%
PBIT margin (%) 27.1% 15.2%
APR Pulp 436 653 49.7%
PBIT margin (%) 0.3% 3.2%
Others 239 174 -27.4%
PBIT margin (%) -2.4% -4.1%
Total 4,905 5,775 17.7%

Margin pressure: BILTís margins contracted by 150 basis points during the quarter largely due to pressure on the raw material front. Power and fuel charges (as a percentage of sales) also witnessed a rise. The management opines that the pulp prices seem to have peaked and are expected to soften by the next quarter. 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) 1QFY06 1QFY07
Raw material costs 27.5% 31.3%
Stores and spares consumption 18.0% 16.4%
Power and fuel charges 12.8% 14.7%
Personnel cost 7.4% 6.0%
Other expenditure 7.3% 6.2%

Healthy bottomline picture: BILTís bottomline recorded a robust 32% YoY growth during the quarter, despite pressure on operating margins. Apart from due to strong growth in topline, this net profit growth was aided by higher other income and reduction in interest costs.

Over the last few quarters: While revenues in the first half of 2006 have been subdued due to the 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 operating margins at 23% to 25% levels is commendable.

Quarterly trend
(%) 4QFY05 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Net sales growth 0.9% 2.5% -1.4% 13.7% 10.4% 20.9%
Operating profit margin 24.2% 26.3% 26.7% 26.4% 23.9% 24.8%
Net profit growth 8.4% 10.2% 9.4% 26.8% 64.4% 31.8%

What to expect?
At the current price of Rs 122, the stock is trading at a price to earnings multiple of 6.7 times our estimated FY08 earnings. Recently, 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. The company is currently in the process of integrating operations of Sabah with itself and the benefits from this acquisition are expected to start filtering in from FY07.

BILTís presence in all the segments of paper, chiefly in the value added segments (coated wood free paper, stationary), shall 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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