When the world’s largest paper company International Paper struck a deal around two months ago with LN Bangur Group to acquire the entire promoter stake in the mid-size firm Andhra Pradesh Paper Mills Ltd (APPM) for $257 million in cash, it was seen as a game-changer for the slow moving paper industry in India. So much so that the country’s top paper firm Ballarpur Industries (Bilt) indefinitely postponed the London listing plan for its overseas arm Bilt Paper Plc.
But as the dust settled down, it seems that the sharp rise in the price of paper scrips on Indian bourses only a few weeks ago was just a flash in the pan as long-term investors are not yet ready to ‘rerate’ the companies in the sector. Share prices of top firms have slowly retreated as investors hunt for faster-growing sectors, ditching the paper scrips which offer slow but steady earnings growth.
Take Bilt for instance. The firm which has almost $1 billion in revenues with net profit of a little less than $50 million, currently commands a market cap of around Rs 2,153 crore ($478 million). This is less than four times profit from operations (before other income, interest and exceptional items) for the past four quarters and just about 10x its trailing consolidated net profit. The share price which shot up around 25 per cent within 10 days of the International Paper-Andhra Paper deal, has retreated.
Others are doing no better. International Finance Corp-backed JK Paper is trading just two times its profit from operations (before other income, interest and exceptional items) for the year ended March, 2011, and around 3x its trailing net profit. Its share price has also lost the momentary sheen it acquired two months ago. So have the scrips of other peer group firms such as Tamil Nadu Paper Ltd, West Coast Paper Mills, and Seshasayee Paper & Boards, among others.
In contrast, APPM is trading at 15.5x its profit from operations (before other income, interest and exceptional items) for the year ended March, 2011, and over 30x its net profit for the last financial year. At Rs 356, the stock is trading a third less than the price at which International Paper acquired majority stake in the firm. This has partly to do with the acceptance ratio in the open offer which is still pending. Since all the shares tendered in the open offer will not be accepted, the market price discounts it in day-to-day trading.
What does it mean for Bilt?
The immediate fallout of the paper stocks tracing back from recent highs, can be seen in the proposed London fundraising plan of Bilt’s overseas arm. Within 10 days of announcing its plans to raise $330 million or about Rs 1,500 crore through a listing on the London Stock Exchange, Bilt had postponed the London listing plan for Bilt Paper Plc.
The company had said that even as the proposed listing on London Stock Exchange had seen considerable interest and engagement from institutional investors in the UK, Europe and the USA, it believed that the International Paper-APPM deal would set a benchmark for the valuation of paper companies in India and might possibly rerate the Indian paper industry.
But this doesn’t appear to be the case and could well set the course for Bilt Paper Plc. to revive its London listing plans soon. The company spokesperson declined to comment on its next moves for this VCCircle report.
However, the London listing plan will also pave the way for part-exit for Singapore’s sovereign wealth fund GIC besides JP Morgan, who together own around 20.5 per cent stake in Bilt Paper Plc., and are looking to sell some shares during the LSE public offer.
The company has not indicated the quantum of equity dilution but Avantha Group finance chief B Hariharan said in a conference call early this year that the company would dilute a minimum of 25 per cent as required by the listing norms. The group, led by Gautam Thapar, had earlier said that it was eyeing a valuation of around $1.5 billion for its overseas arm which is 79.5 per cent owned by the Indian-listed company Bilt through a separate wholly owned entity.
If the financial investors sell 5 per cent of their holding (post-equity dilution) and the company issues fresh shares representing 20 per cent of the post-issue capital, it can be eyeing a market cap of around $1.65 billion. Assuming that Bilt would like to retain at least a little over 50 per cent holding in the Bilt Paper Plc. so that it can consolidate its earnings, the UK-listed holding company will be valued at $920 million or around Rs 4,160 crore, according to VCCircle estimates.
This will make it almost two times the market cap of its parent firm Bilt. Even at the lower end of the estimated market value of Bilt Paper Plc., Bilt’s stake in the overseas arm will be worth its own current market cap, making it grossly undervalued.
GIC and JP Morgan together picked up 20.5 per cent equity stake in the Dutch step-down subsidiary of Bilt in a deal valued at $175 million (Rs 700 crore) in January, 2008. That deal valued it at $825 million or around Rs 3,300 crore. Therefore, the two investors can be looking at anywhere between 25 per cent and 100 per cent return in their part-exit during the London float.
Bilt Paper Plc. anticipates that it will enter the FTSE 250 and FTSE All-Share Indices, and also expects to be eligible for entry to the FTSE UK index series.
For Bilt, a successful London listing will vindicate its strategy to restructure the firm around four years ago, aimed at unlocking the value in its commodity paper business which was getting low valuation from investors in the country. Commodity paper businesses listed in Europe typically trade at a higher price to earnings multiple, compared to India. And the listing in London will allow the group to generate better value for its shareholders and also raise funds cheap to bankroll future expansion.
Bilt Paper Plc. intends to use the net proceeds of the proposed London issue to finance approximately $170 million of capital expansion plans, principally the development of enlarged pulp mill facilities, as well as the capacity expansion of two existing paper production facilities, and to reduce the company’s debt through redemption of approximately $140 million of profit-sharing certificates held by Bilt International Holdings, a wholly owned entity of Bilt which, in turn, holds the majority stake in Bilt Paper Plc.