BILT Operations in sweet spot, but debt burden still weighs
Ballarpur Industries Ltdas (Biltas) shares have risen by 30% from their lows in end-August. Even so, at the current market price ofRs.23, the stock trades at only about six times its estimated earnings for fiscal year 2013-14 (FY14).
Apart from the seemingly attractive valuations, the company seems to be in a sweet spot to reap the benefits of its expansion. The paper manufacturer is in the process of expanding its pulp capacities, which would increase the availability of in-house pulp and eventually lead to better profit margins.
Biltas operating profit margin already showed a sequential improvement last quarter. It posted a consolidated operating margin of 18.7% last quarter compared with 16.4% in the June quarter. For the year ended September, margin stood at 16.6%. Till the June quarter, Bilt faced cost pressures (especially, power and fuel) that affected margins adversely for some time.
In the September quarter, some of the expansion benefits kicked in, as Bilt got some pulp from its Sabah mill in Malaysia. The pulp contribution from the Sabah mill is expected to increase in the current quarter, which should help margins further. The company is also expanding pulp capacity at Ballarpur in Maharashtra and post the completion of both expansions, Bilt is expected to become a fully integrated operation. Both the mills should contribute 150,000 tonnes of pulp in FY14,JPMorgananalysts wrote in their September quarter results update. aFollowing sequential improvement in the September quarter margins, Bilt management has guided to Ebitda (Earnings before interest, taxes, depreciation and amortization) margins of 21% by the September quarter of FY13 and 24% in FY14,a they said.
While thatas encouraging, the company still has high debt on its books. As on 30 June, the consolidated debt (long-term plus short-term borrowings) stood at aboutRs.3,540 crore. Thatas in comparison to a market capitalization of only aroundRs.1,500 crore. Finance costs as a percentage of operating profit were high at 32% in the September quarter. So while valuations seem inexpensive and prospects on the margin improvement front are bright, investors would do well to keep a tab on the impact of interest costs on the profitability in the days to come.