ballarpur ind+jp

Asia Pacific Equity Research 20 October 2010

Ballarpur Industries Ltd. Initiation

Overweight BILT.BO, BILT IN

More than paper value Price: Rs35.20

Price Target: Rs50.00

India Paper

Princy SinghAC

(91-22) 6157 3587 [email protected]

Dinesh S. Harchandani, CFA (91-22) 6157-3583 [email protected]

J.P. Morgan India Private Limited

32

38

44

Rs

Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Price Performance

BILT.BO share price (Rs)BSE30 (rebased)

YTD 1m 3m 12mAbs -2.2% -2.2% -2.2% -2.2%Rel -16.6% -4.2% -13.7% -18.2%

Ballarpur Industries Ltd. (Reuters: BILT.BO, Bloomberg: BILT IN) Rs in mn, year-end Jun FY09A FY10A FY11E FY12E FY13EAdjusted EPS (Rs) 2.72 3.10 3.81 4.98 5.67EPS growth (%) -43.0% 14.1% 23.1% 30.4% 13.9%Revenue 29,436 38,964 43,643 47,794 49,854Net Profit 1,682.9 1,970.2 2,500.8 3,262.1 3,716.2DPS (Rs) 0.52 0.60 0.74 0.96 1.10Revenue growth (%) -2.7% 32.4% 12.0% 9.5% 4.3%EBITDA 6,426 7,945 9,250 10,607 11,563EBITDA margin 21.8% 20.4% 21.2% 22.2% 23.2%P/E (x) 13.0 11.4 9.2 7.1 6.2P/BV (x) 1.2 1.0 0.9 0.9 0.8EV/EBITDA (x) 9.3 7.2 6.5 5.7 5.3Dividend Yield 1.5% 1.7% 2.1% 2.7% 3.1%

Shares O/S (mn) 657Market cap (Rs mn) 23,131Market cap ($ mn) 521Price (Rs) 35.20Date Of Price 19 Oct 10Free float (%) 41.1%3-mth trading value (Rs mn) 140.83-mth trading value ($ mn) 3.23-mth trading volume (mn) 4.2BSE30 19,983Exchange Rate 44.37Fiscal Year End Jun

Source: Company data, Bloomberg, J.P. Morgan estimates. See page 23 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

• Initiate with Overweight, and Mar-11 PT of Rs50: Our PT implies 43% upside. BILT is trading at a 35%-40% discount to its global peers, which we expect to narrow on account of 1) its market leadership in India, the world’s fastest growing paper market, 2) ensuing vertical integration which will de-link the business from volatility in pulp prices and enhance its long-term margin profile, and 3) steady improvement in ROE over FY10-FY13E to global benchmark levels. We add the stock to our Asia Analyst Focus List.

• Dominant player in the Indian market: BILT has a 40% share of the market for wood-free coated paper and a 25% share for copier paper – high-end segments that are growing at 12%-15% per annum. BILT’s paper capacity expansion will allow it increase paper output from 0.78MM tons in FY10 to 1MM tons by FY13E to cater to the growing demand requirement. BILT’s leadership position, strong brand and wide distribution reach allow it to command a pricing premium of 5%-7% over imported paper.

• Backward integration to reduce cost structure: BILT is raising its pulp capacity from 462,000 tons to 752,000 tons by FY12E which will make it self-sufficient for its pulp requirements. Its pulp capacity expansion is backed by long-term concession rights for plantations in its Malaysian subsidiary. We estimate BILT’s blended cost of pulp production at US$400/ton vs the current global price of US$600/ton. We forecast an EPS CAGR of 24% over FY10-13, driven by higher volumes and cost savings.

• Value-unlocking from potential listing of subsidiary: BILT could list its Netherlands subsidiary on the LSE over the next few months. Private equity players had acquired a 20.5% stake in this subsidiary in 2008, valuing it at US$855MM. A potential listing would unlock value and allow BILT to reduce gearing, boding well for valuations and earnings, in our view.

• Price target, valuation, key risks: Our Mar-11 PT of Rs50 is based on 10x FY12E P/E, at a 15% discount to the global peer group. Key risks include a decline in paper prices, demand slowdown in India, delay in capacity expansion plans, and any adverse changes to regulations.

This document is being provided for the exclusive use of SHASHANK SARAF at L&T FINANCE LIMITED

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Princy Singh (91-22) 6157 3587 [email protected]

Company Description P&L sensitivity metrics EBITDA EPS FY11E impact (%) impact (%) Paper price realisation (Rs) 45,030.4 Impact of each +1% increase 5% 11% Paper price volumes ('000 tons) 870.2 Impact of each +1% increase 1% 3% Source: J.P. Morgan estimates.

PT and valuation analysis

Ballarpur Industries Limited (BILT), part of the US$3B Avantha Group, is the largest manufacturer of writing and printing (W&P) paper in India and Malaysia. Its products include writing and printing paper, industrial paper, and specialty paper. BILT has a paper capacity of 1.0mtpa, with a market share of over 25% by volume in the Indian WPP market and 30% by volume in the Malaysian WPP market. BILT holds an 85% share of the bond paper market and a nearly 45% share of the hi-bright Maplitho market in India. BILT has the largest paper distribution network in India with over 135 distributors (including 54 exclusive distributors) spread across 52 locations in the country.

Our Mar-11 price target of Rs50 is based on P/E of 10x on FY12E EPS, at a 15% discount to the global peer group.

FY11E EBITDA by segment

Relative to the Asian peer group, BILT trades at a discount of 37% and 34% to FY11E and FY12E P/Es respectively.

Compared to developed market peer group, BILT is trading at a discount of 58% and 41% to FY11E and FY12E P/Es respectively.

Key risks to our rating and price target include a delay in expansion of pulp capacity, decline in paper prices, demand slowdown in Indian market and policy-related risks.

Source: J.P. Morgan estimates. EPS: J.P. Morgan vs consensus Rs J. P. Morgan Consensus vs. Cons FY11E 3.8 5.5 -31% FY12E 5.0 NA FY13E 5.7 NA Source: Bloomberg and J.P. Morgan.

Table 1: Ballarpur Industries vs. Asian paper peer group (consensus estimates) EBITDA Margin EV/EBITDA (x) P/E (x) P/BV (x) ROE (%) Curr. 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013EBALLARPUR IND. (JPM est) Rs 22% 23% 24% 6.5 5.6 5.2 9.2 7.1 6.2 0.9 0.9 0.8 13.0 15.4 15.9BALLARPUR IND (BB est) Rs 24% NA NA 5.3 NA NA 6.4 NA NA 1.0 NA NA 15.5 NA NATN NEWSPRINT & PAPER Rs 31% 31% NA 5.9 4.5 NA 7.5 6.1 NA 1.1 1.0 NA 15.7 17.2 NANINE DRAGONS PAPER HKD 22% 22% 22% 14.5 11.5 9.9 20.2 15.2 13.0 2.9 2.5 2.2 15.4 17.8 18.8SHANDONG CHENMING PAPER HKD 22% 24% 23% 2.9 2.1 1.8 11.5 9.2 7.1 1.1 1.0 0.9 9.1 11.7 14.7LEE & MAN PAPER HKD 22% 22% 22% 12.9 10.5 9.0 15.1 12.4 10.5 2.6 2.3 2.0 19.1 20.6 21.7YOUYUAN INTERNATIONAL HKD 26% 24% 24% 11.6 8.8 6.7 15.0 11.6 8.8 2.8 2.4 2.0 25.5 22.1 24.1CHINA SUNSHINE PAPER HKD 15% 14% 15% 10.6 7.0 5.9 18.2 9.9 7.6 1.6 1.2 1.0 7.3 13.3 15.3Average 9.7 7.4 6.7 14.6 10.7 9.4 2.0 1.7 1.6 15.3 17.1 18.9 Source: Bloomberg consensus estimates, J.P. Morgan estimates for Ballarpur Industries. Valuations as on COB 19/10/2010.


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Investment thesis We initiate coverage on Ballarpur Industries (BILT) with an OW rating and a Mar-11 price target of R50, based on 10x FY12E P/E, at 15% discount to the global peer group. BILT is largest manufacturer of writing and printing (W&P) paper in India and Malaysia. BILT has a paper capacity of 1.0mtpa, with a market share of over 25% by volume in the Indian W&P market and 30% by volume in the Malaysian W&P market.

India is the fasted growing paper market in the world. Paper demand in India is expected to grow at a CAGR of 6.7% over FY08-FY20 driven by low per-capita consumption, rising literacy levels and focus on education, growth of print media, and favorable lifestyle changes. BILT is well positioned to benefit from this trend, given its strong market leadership, pan-India distribution network, and strong relationships with its customers. BILT’s dominant positioning in the market allows it to charge premium pricing for its products. In addition, its significantly larger scale relative to competition allows for higher bargaining power, as well as more efficient production through operating leverage benefits. BILT is enhancing its paper capacity, which will allow it increase paper output from 0.78MM tons in FY10 to 1MM tons by FY13E to cater to the growing demand requirement for the Indian market. BILT is in the process of enhancing its pulp capacity from the current 462000 tons to 752,000 tons by FY12E, which should take care of about 95% of BILT’s pulp requirement for its enhanced paper capacity base. BILT’s pulp capacity expansion is backed by a 99-year concession for plantations held by its Malaysian subsidiary SFI. The expansion in pulp capacity should de-risk BILT’s operations from volatility of global pulp prices and enhance margins. We estimate that post its capacity enhancement, its blended cost of pulp would average about US$400/ton, which compares favorably with the current landed price of US$700/ton. We forecast earnings CAGR of 24% over FY10-FY13E, driven by higher paper volumes and improvement in margins on account of vertical integration. BILT stated that is looking to list its Netherlands incorporated subsidiary Ballarpur International Holdings BV (BIL) over the next few months. BILT has a 79.5% stake in this subsidiary and the remainder is with private equity players. Private equity players had acquired a 20.5% stake in 2008, valuing the subsidiary at US$855MM. According to press reports (e.g. Bloomberg), BILT is looking to list the subsidiary on the London Stock Exchange and is looking raise about US$250MM. We believe that a potential listing would unlock value and bodes well for a stock re-rating. In addition, BILT could potentially use funds raised from the listing to de-leverage its balance sheet. We have not incorporated this scenario into our earnings estimates for BILT. Any potential de-leveraging could provide upside to our earnings estimates.

BILT is currently trading at a 7.2x FY12E P/E, at about a 40% discount to its Asian and global peer group. We believe this discount to the peer group is set to narrow on account of 1) its dominant positioning in the fastest growing paper market in the world, 2) ensuing vertical integration which will provide raw material security and enhanced margins, and 3) expansion in ROE to global benchmarks.

Initiate with Overweight with a price target of Rs50

BILT is the leader in the W&P market in India, which is the fastest growing paper market globally. It is expanding its paper capacity to cater to rising demand

Enhancement of pulp capacity will make BILT self-sufficient for its raw material requirements and lower the cost of production

Listing of Netherlands incorporated subsidiary could potentially unlock value and drive stock re-rating

Valuations are at a 40% discount to peers, which is unjustified, in our view. We expect BILT’s valuations multiples to expand going forward


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Positive drivers Dominant positioning in the fastest growing paper market BILT is the market leader in the writing and printing (W&P) paper segment in India, the fastest growing paper market globally. Paper demand in India is expected to grow at a CAGR of 6.7% over FY08-FY20E, compare to 4.5% in China, 0.2% in Western Europe, and a decline of 0.3% in North America over the same period. India’s per capita consumption of paper is currently amongst the lowest in the world (9kg per annum vs 56kg per annum global average). Rising literacy levels and a focus on education, growth of print media, and favorable lifestyle changes are key drivers of growth for paper demand in India.

Figure 1: Paper per-capita consumption (kg) Figure 2: Expected paper market growth 2008-20E (% CAGR) 312

285253 247 236 223

170

42 36 25 22 9

56

0

50

100

150

200

250

300

350

USFinland

SwedenJapan

GermanyFrance

South KoreaChin

aTaiwan

Malaysia

Indonesia Ind

ia

World Average

6.1

4.5 4.33.7 3.6 3.5

2.4 2.3

0.2

-0.3 -0.3-1

0

1

2

3

4

5

6

7

India China Russia Middle East Africa E Europe LatinAmerica

Rest ofAsia

W Europe NorthAmerica

Japan

Source: Pulp and Paper International Source: Company presentation

BILT operates in the high-end and fast-growing sub-segments of the W&P paper industry in India, which include coated and uncoated wood-free and branded copier paper. BILT has a strong market leadership in each of these segments, which allows it to charge premium pricing for its products. Figure 3: Historical and projected growth rates for various segments of Indian paper market

9.0%

6.0%

9.0%

7.0%8.0%

6.5%7.0% 7.0%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

Industrial Paper Printing & w riting paper New sprint Specialty paper & Others

Historical Projected

4,150 3851,8403,318Size '000 tons

Source: Company

Typically, it manages a premium of 5%-7% over the landed price of imported paper. In addition, its significantly larger scale relative to the competition gives it higher bargaining power, as well as more efficient production through operating leverage benefits.

Paper demand in India is growing at 7% per annum. BILT is the market leader in the W&P segment, which is growing at over 10% per annum

BILT’s leadership position and widespread distribution reach enables it to charge a premium for its products


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Table 2: BILT: Market position in key paper categories FY09-2010 Market Size Market Share Growth (‘000 tons) (%) (%) BILT's Products Wood-free coated 411 40% 12.0% Wood-free uncoated (Hi Bright) 549 37% 8.0% Branded Copier 370 25% 15.0% Business Stationery 14 81% 2.0% Creamwove 1,490 2% 4.0% Others 456 9% 0.0% Overall 3,290 16% 6.7% Source: Company.

BILT has a strong distribution network spread across the country. It has 135 distributors across India, of which 54 are exclusive to BILT. In addition, BILT has now started to approach end consumers directly in order to capture higher margins. The company has started to roll out an office supply retail store chain under the brand name P3 – Paper Print Pens. It has already opened 10 stores and is looking to roll out the store chain in all major cities across India. Figure 4: BILT: Sales contribution from various distribution channels

Ex clusiv e distributors,

68%

Multibrand distributors,

28%

Consumer Printers, 2%

End Consumers,

2%

Source: Company

Over the past few years, BILT has invested in enhancing its paper capacity in India to cater to the rising demand requirement. BILT has enhanced its paper capacity to almost 1MM tons from about 0.4MM tons over the past five years. At 1MM tons of capacity, BILT’s capacity will be almost 3x the size of the second-largest player in the Indian market. While large scale provides BILT with better operating leverage than the competition, BILT maintains production flexibility, allowing it to manufacture small quantities of a large variety of papers specially suited to individual client requirements. This, coupled with a strong distribution network, helps it command a price premium in the Indian market.

With its enhanced capacity, BILT’s size would be almost 3x that of the next largest player in India


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Figure 5: Paper capacities for Indian companies (‘000 tons)

922

340240 240 240 165 155 135 100

0200

400600

8001000

BILTKhan

na JKTNPL

Century

West Coas

tAPPM

Trident/A

bhishe

kSPB

Source: Company

Backward integration to drive structural improvement in margins BILT is in the process of enhancing its pulp capacity from current 462,000 tons to 752,000 tons, which should make BILT self-sufficient for its pulp requirements. The expansion in pulp capacity will help de-risk its operations from volatility of global pulp prices and enhance BILT’s margin profile. We estimate that after its capacity enhancement, its blended cost of pulp will average about US$400/ton, which compares favorably with the current landed price of US$700/ton.

Table 3: BILT: Current capacity by plant and expansion plans Unit Ballarpur Bhigwan Kamlapuram SFI Sewa Ashti Shreegopal Total

Location Maharashtra Maharashtra Andhra

Pradesh Sabah,

Malaysia Orissa Maharashtra Haryana

Paper Capacity (TPA) 299,500 315,000 Nil 144,000 72,000 55,000 106,000 991,500

Pulp Capacity (TPA) 120,000 Nil 98,550 120,000 45,000 Nil 78,000 461,550 Captive Power

Capacity 67.25 MW 60.0 MW 12MW Power: 47MW,

Diesel 13.30 MW Nil 24.50 MW 240.05MW

Product Mix

Hi bright wood-free uncoated

paper

High quality wood-free

coated paper Rayon grade

pulp Wood-free uncoated

Copier Paper, Maplitho Copier Paper

Royal exec Bond BCB, Water Mark

Paper, Maplitho

Raw Material Mix

Bamboo, wood, pulp

sourced from 3rd party

Pulp sourced from 3rd party Wood

Wood from own

plantations Bamboo,

wood Purchased

pulp

Bamboo, wood, timber

waste

Capacity Expansion Plan

170,000 tpa pulp capacity expansion in

Dec. 2011. 40,000 paper

capacity increase in Dec 2011

35,000 tpa and 300,000

tpa paper capacity

expansion in Dec 2011 and Jun 2014 resp

120,000 tpa and 400,000

tpa pulp capacity

expansion in Jun 2011 and Jun 2014 resp

Paper capacity will increase by

1,00,000 tpa and Integrated Pulp capacity by 70,000 tpa by Jun 2014.

Source: Company

BILT acquired Sabah forest Industries (SFI) in Malaysia in 2007, which will help it secure feedstock for its enhanced pulp capacities and will allow it to vertically integrate its operations. SFI is the largest integrated pulp and paper manufacturing company in Malaysia and has a 99-year concession from the Malaysian government to procure wood from 289,00 hectares of land, of which about 186,000 hectares is

Expansion of pulp capacity should make BILT self-sufficient in pulp and enhance its margin profile

Land concessions for plantations in Malaysia secure raw material supply to meet longer-term growth requirements


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amenable to plantations. Currently, SFI has plantations of 45,000 hectares and the company is looking at increasing the land area under plantations by planting on an additional 15,000 hectares per annum. According to management, once fully planted, SFI will have the potential to provide feedstock for about 1MM tons of pulp capacity. This should take care of BILTs pulp requirement for any potential paper capacity expansion over the long term. According to BILT’s management, the cost of pulp production at SFI is currently US$400/ton, which will decline to US$300/ton post the capacity expansion. These savings would accrue on account of change in wood mix used in the plant, replacement of diesel and MFO fuel with hog (captive wood bark) as well as scale benefits. For its pulp capacity expansion in Ballarapur, BILT has acquired an old pulp mill in Sweden, which will be dismantled and reassembled in India. The total cost entailed for this would be about Rs5B, which is almost 60%-65% cheaper than setting up a similar green-field capacity. In addition, BILT has secured feedstock for its domestic pulp plants through long term government contracts to extract wood from waste land, through farmers in the vicinity of its plants who are provided extension services by BILT and through traded wood purchased from depots. According to the management, the cost of pulp produced in the Ballarpur mill will be about US$350/ton. We estimate that BILT’s blended cost of pulp production will be about US$400/ton. This compares favorably with its current landed cost of US$700/ton and also with the long-term average price of pulp forecast by J.P. Morgan’s global pulp analyst Debbie Bobovnikova. In addition, based on our discussion with the company, we estimate that the blended cost of paper production for BILT would be about US$600/ton, which also favors comparably to its current realizations of about US$1000/ton. In addition, BILT’s cost structure post pulp capacity addition also compares favorably to other markets such as Indonesia, China, Europe and North America as well as to historic averages over the last 10 years.

Table 4: Wood-free coated paper cost structure Table 5: Wood-free uncoated paper cost structure

US$/MT India Indonesia China Europe North

America Fiber 281 311 298 244 156 Chemical 132 124 163 181 181 Energy 80 34 51 111 86 Labour 21 9 18 73 106 Other Expenses 37 40 37 56 73 Total 551 518 567 665 602

US$/MT India Indonesia China Europe North

America Fiber 230 278 309 290 198 Chemical 87 75 84 105 122 Energy 78 32 71 103 76 Labour 36 8 43 77 103 Other Expenses 44 43 45 55 61 Total 475 436 552 630 560

Source: BILT Corporate Presentation Source: BILT Corporate Presentation

Cost entailed for domestic pulp capacity expansion is 65% cheaper on account of reassembling of old mill acquired in Sweden

Blended cost of pulp production will be below LT historic average and J.P. Morgan pulp price forecasts


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Table 6: Pulp list prices by grade and region Figure 6: Pulp price trends Sep.10 NBSK BEK US$/Ton US EU China US EU China List Price 990 980 890 900 870 800 MoM 0% 0% 0% 0% 0% 0%

YoY 29% 34% 39% 38% 45% 48%

Last Trough 635 580 490 545 475 395

% vs Trough 56% 69% 82% 65% 83% 103%

Last Peak 885 910 765 860 840 810 % vs Peak 12% 8% 16% 5% 4% -1% 5 Yr avg 754 721 698 657 614

% vs. 5Yr 31% 36% 29% 32% 30%

10 Yr avg 669 644 591

% vs. 10 Yr 48% 52% 47%

642

455

660 615 603 596

0100200300400500600700

2008 2009 2010E 2011E 2012E 2013E

US$/T

Source: RISI, J.P. Morgan Source: J.P. Morgan estimates

Potential value unlocking from listing of overseas subsidiary BILT is looking to list its Netherlands incorporated subsidiary Ballarpur International Holdings BV (BIL) over the next few months. BILT has a 79.5% stake in this subsidiary and the remainder is with private equity players. The private equity players had taken the stake in 2008, valuing the subsidiary at US$855MM. This subsidiary has a 98% interest in SFI and a 100% interest in Ballarpur, Bhigwan and Kamalapuram mills. According to press reports (e.g. Bloomberg), BILT is looking to list the subsidiary on the London Stock Exchange and raise about US$250MM over the next few months. We believe that a potential listing at a valuation over the private equity stake valuation bodes well for a stock re-rating. In addition, BILT could potentially use funds raised from the listing to de-leverage its balance sheet. We have not incorporated this scenario into our earnings estimates for BILT. However, we estimate that if BILT were to raise US$250MM through a potential listing, and use this to retire debt, its FY12E EPS would be higher by about 10% than our current estimate.

Listing of Netherlands subsidiary should unlock value; BILT could potentially use funds raised to reduce debt


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Figure 7: BILT: Corporate structure

100%

BIPH BV

Ballarpur Industries Limited (BILT)

BIGPH

Ballarpur Paper Holdings BV (BPH)

Sabah Forest Industries (SFI)

BILT Graphic Paper Products Limited (BGPPL)

JP Morgan/GIC

INDIA

NETHERLANDS

MALAYSIA

20.47%

79.53%

100%

97.8%

100%100%

Ballarpur

Maharashtra

Bhigwan

Maharashtra

Kamalapuram

Andhra Pradesh

Ballarpur

Maharashtra

Bhigwan

Maharashtra

Kamalapuram

Andhra Pradesh

Shreegopal

Haryana

Sewa

Orissa

Ashti

Maharashtra

Shreegopal

Haryana

Sewa

Orissa

Ashti

Maharashtra

100%100% 100%100%100%

Govt. of Sabah2.2%

Ballarpur International Holdings BV (BIH)

100%

Promoters MF, FIs and Banks Insurance Cos. FIIs Foreign FIs Body

CorporatesPublic and

Others

49.40% 9.33% 10.14% 8.4% 6.70% 4.39% 11.64%

RetailRetail

100%

Source: Company reports, Exchange filings as of Mar 31, 2010

Exploring new segments to capture longer-term growth opportunities BILT is exploring expansion into new emerging segments to secure longer-term growth. It recently acquired Premier Tissues, which has provided it with a foothold in one of the fastest growing paper segments in India. The tissue paper market in India is expected to grow at a CAGR of 20% over the next few years. The current size of the market in volume terms is about 68,000 tons, implying a low per-capita usage of only about 59 grams. BILT is targeting high-end customers who have a per-capita consumption of 0.5kg and is looking to ramp up the business in phases over the next five years.

Exploring new emerging paper segments with large untapped potential and significant scope for long-term growth


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Key risks to our rating and price target Delay in expansion plans for pulp BILT has announced plans to increase its paper capacity by 75,000 tons and pulp capacity by 290,000 tons over the next three years. Our estimates are based on these additional capacities kicking in in-line with company guidance. Any delay in expansion of these capacities could adversely affect our estimates.

Decline in paper prices BILT’s earnings are highly sensitive to paper prices. We have assumed constant paper price realization for BILT going forward. However, a decline in paper prices could have an adverse impact on BILT’s earnings.

Demand slowdown in Indian market BILT’s expansion plans are predicated on continued strong demand growth for paper in the Indian market. However, a slowdown in the economy could potentially result in slowing demand for paper and adversely impact BILT’s volume growth.

Policy-related risks Any changes to policy related to environmental norms for paper mills in India could potentially result in plant closures or increase cost of production.

Delay in expansion plans for pulp, decline in paper prices, demand slowdown in Indian market, and policy-related risks constitute key risks to our rating and price target


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Valuations and share price analysis BILT currently trades at 7.2x FY12E P/E, at a discount of 9% to its historical trading average of 7.9x. For most of the past five years, the stock has traded at a one-year forward P/E band of 6.0x-9.0x and at a discount of 30%-50% to India MSCI forward P/E.

We benchmark our target valuation to global peer group of paper manufacturers. Our price target of Rs50 is based on 10x FY12E P/E, at a discount of about 15% to the Asian and global peer group. We attribute the 15% discount to BILT despite its leadership position in the Indian market and its ensuing expansion in scale. However, despite its scale expansion, BILT’s capacity would be relatively small compared to large global players. In addition, while vertical integration would lower BILT’s costs of production, it would still be higher than the marginal cost producers. We therefore believe that a 15% discount to BILT’s valuations is appropriate.

Figure 8: BILT: P/E bands (x) Figure 9: BILT: EV/EBITDA bands (x)

3.0

6.0

9.0

12.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

P/E Bands

4.0

5.0

6.0

7.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

EV/EBITDA Bands

Source: company reports, Bloomberg, J.P. Morgan estimates Source: company reports, Bloomberg, J.P. Morgan estimates

Figure 10: BILT: P/E relative to MSCI India one-year forward P/E

0.010.020.030.040.050.060.070.080.090.0

100.0

Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10

PE Relative to MSCI India 1 yr. forward PE

Source: Bloomberg, Company reports, J.P. Morgan estimates

BILT currently trades at 7.2x FY12E P/E. We base our price target at 10.0x FY12E P/E, at a discount of 15% to global peers


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Peer comparables Relative to Asian peer group, BILT trades at a discount of 37% and 34% to FY11E and FY12E P/Es respectively. We believe that BILT’s valuations should pick up as its margin profile improves with additional pulp capacity and entry into higher-margin paper products. Our 10x target P/E multiple for BILT is at about a 15% discount to that of its peer group.

Table 7: Ballarpur Industries vs. Asian paper peer group EBITDA Margin EV/EBITDA (x) P/E (x) P/BV (x) ROE (%) Curr. 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013EBALLARPUR IND. (JPM est) INR 22% 23% 24% 6.5 5.6 5.2 9.2 7.1 6.2 0.9 0.9 0.8 13.0 15.4 15.9BALLARPUR IND (BB est) INR 24% NA NA 5.3 NA NA 6.4 NA NA 1.0 NA NA 15.5 NA NATN NEWSPRINT & PAPER INR 31% 31% NA 5.9 4.5 NA 7.5 6.1 NA 1.1 1.0 NA 15.7 17.2 NANINE DRAGONS PAPER HKD 22% 22% 22% 14.5 11.5 9.9 20.2 15.2 13.0 2.9 2.5 2.2 15.4 17.8 18.8SHANDONG CHENMING PAPER HKD 22% 24% 23% 2.9 2.1 1.8 11.5 9.2 7.1 1.1 1.0 0.9 9.1 11.7 14.7LEE & MAN PAPER HKD 22% 22% 22% 12.9 10.5 9.0 15.1 12.4 10.5 2.6 2.3 2.0 19.1 20.6 21.7YOUYUAN INTERNATIONAL HKD 26% 24% 24% 11.6 8.8 6.7 15.0 11.6 8.8 2.8 2.4 2.0 25.5 22.1 24.1CHINA SUNSHINE PAPER HKD 15% 14% 15% 10.6 7.0 5.9 18.2 9.9 7.6 1.6 1.2 1.0 7.3 13.3 15.3Average 9.7 7.4 6.7 14.6 10.7 9.4 2.0 1.7 1.6 15.3 17.1 18.9 Source: Bloomberg consensus estimates, J.P. Morgan estimates for Ballarpur Industries. Valuations as on COB 19/10/2010.

Compared to developed countries’ paper manufacturers, BILT is trading at a discount of 58% and 41% to FY11E and FY12E P/Es respectively.

Table 8: Ballarpur Industries vs. Developed country peer group EBITDA Margin EV/EBITDA (x) P/E (x) P/BV (x) ROE (%) Curr. 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013EDOMTAR CORP USD 17% 16% 16% 3.6 4.0 4.6 7.7 10.7 10.1 1.0 1.0 1.0 13.9 8.4 4.7INTERNATIONAL PAPER CO USD 13% 14% 15% 5.4 4.8 4.6 12.8 9.3 7.5 1.6 1.4 1.4 12.2 16.6 12.2SAPPI LTD -SPONSORED ADR USD 12% 14% 17% 6.5 5.3 4.4 70.1 14.7 10.0 NA NA NA 2.0 7.0 NAPACKAGING CORP OF AMERICA USD 18% 20% 22% 6.8 5.7 5.2 15.2 11.6 10.1 2.5 2.2 1.7 17.2 20.9 13.2STORA ENSO OYJ-R SHS EUR 11% 12% 12% 6.5 5.8 5.7 11.5 10.6 10.1 1.1 1.0 0.9 8.4 8.6 9.5UPM-KYMMENE OYJ EUR 16% 17% 17% 7.6 6.7 6.4 14.3 11.9 10.7 1.0 0.9 0.9 6.4 7.5 8.0FIBRIA CELULOSE SA BRL 38% 41% 43% 7.7 6.5 6.0 22.5 15.5 11.2 0.9 0.8 NA 4.8 0.9 1.7Average 6.3 5.6 5.3 22.0 12.1 9.9 1.3 1.2 1.2 9.3 10.0 8.2 Source: Bloomberg consensus estimates. Valuations as on COB 19/10/2010.

Figure 11: Paper producers’ FY12E P/E vs. FY10-12E EPS CAGR Figure 12: Paper producers’ FY12E EV/EBITDA vs. FY10-12E EBITDA CAGR

Nine Dragons paper

Ballarpur IndustriesTamilnadu New sprint

Shandong Chenming paper

Lee & man PaperYouy uan International

Domtar Corp International Paper

Sappi Ltd

Packaging Corp of AmericaStora Enso

0.0

5.0

10.0

15.0

20.0

25.0

30.0

-20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0

FY10-FY12E EPS CAGR (%)

FY12E PE (x)

Shandong Chenming paper

Tamilnadu New sprint

Nine Dragons paper Lee & man Paper

Youy uan InternationalChina Sunshine paper

Domtar Corp

International PaperSappi Ltd

Packaging Corp of America UPM-Ky mmeneBallarpur Industries

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

-20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

FY10-FY12E EBITDA CAGR (%)

FY12E EV/EBITDA (x)

Source: Bloomberg, Company reports, J.P. Morgan estimates Source: Bloomberg, Company reports, J.P. Morgan estimates


13



Figure 13: Paper producers’ FY12E P/BV vs. FY12E ROE

Tamilnadu New sprint

Nine Dragons paper

Shandong Chenming

Lee & man Paper

Youy uan International

China Sunshine paper

Domtar Corp

International Paper

Sappi Ltd

Packaging Corp of America

Stora Enso

UPM-Ky mmene

Ballarpur Industries

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 5.0 10.0 15.0 20.0 25.0

FY12E ROE (%)

FY12E P/B (x)

Source: Bloomberg, Company reports, J.P. Morgan estimates


14



Company description BILT, part of the US$3B Avantha Group, is the largest manufacturer of W&P paper in India and Malaysia. Its products include W&P paper, industrial paper, and specialty paper. The company’s product portfolio ranges from basic to high-end specialty paper. BILT also provides customized, value-added products to suit specific applications of its customers. BILT has a paper capacity of 1.0mtpa, with a market share of over 25% by volume in Indian WPP market and 30% by volume in Malaysia WPP market. BILT holds an 85% share of the bond paper market and nearly 45% share of the hi-bright Maplitho market in India. They have the largest paper distribution network in India with over 135 distributors (including 54 exclusive distributors) spread across 52 locations in the country.

BILT’s W&P paper business can broadly be divided into following six segments:

Coated wood-free: This paper is used in commercial printing applications, such as company brochures, annual reports, magazines, books and high-quality advertising materials. According to BILT, this segment is one of the fastest growing segments in India, with an estimated growth of 9% to 381,000 MTPA in 2008-09. BILT is the market leader in India, with a share of 39%.

Uncoated wood-free: These high-quality uncoated papers are used in copiers, for fine writing and printing, for archival copying and offset printing. Uncoated wood-free papers are found in the office environment and in books and direct mail pieces. Indian uncoated market comprises Low Bright and Hi Bright segments. The market for uncoated wood-free in India is highly fragmented, with a multitude of products and manufacturers. The segment is largely restricted to domestic players, and price trends are set by domestic competition. According to BILT, this segment grew by 6% to 965,000 MTPA in 2008-09. BILT has a market share of 35% in the Hi-Bright sub-segment of uncoated wood-free paper.

Copier Paper: Copier is a forward integration of the uncoated wood-free paper. This includes maplitho paper cut in sizes and characteristics best suited for desktop printing and copying. The mill packed copier market in India grew by 15% during 2008-09 to 310,000 MTPA. BILT has three brands in the market - Copy Power, Image Copier and BILT Matrix. BILT is 2nd largest player in the Indian copier market with a 25% market share.

Business stationery: This segment includes bond paper, parchment and BILT Matrix. Besides, BILT has also built a significant presence in the non-paper office supplies through outsourced products like pencils, glue sticks, tapes and files. BILT builds market share in these businesses through its strong distribution network. According to BILT, paper based office supplies segment in India has grown by 8% in FY09. To further leverage its strength, BILT has entered the office supply retailing business and has over seven stores, mostly in Delhi-NCR and Bangalore. These stores retail a complete suite of office supplies through B2B and B2C platform.

Creamwove: This is the largest segment of paper products, in India characterized by high volume and low value. This segment is dominated by a large number of small producers with sub-optimal capacities, making the market highly price-sensitive.

Figure 14: BILT: FY10 paper sales by category (in’000 tons)

Coated w ood-free29%Branded

Copier17%

Business Stationery

2%

Others7%

Creamw ov e5%

Uncoated w ood-free (Hi-

Bright)40%

Source: Company reports Figure 15: BILT FY10 sales by segment

Paper79%

Paper products &

Office supplies

10%

Pulp9%

Others2%

Source: company reports Figure 16: BILT: FY10 EBIT by segment

Paper84%

Paper products &

Office supplies

5%

Pulp10%

Others-1%

Source: Company reports


15



According to BILT, this segment is growing around 3-4% to 1.5 MM MTPA in 2008-09. As BILT focuses on paper products higher in the value chain, it is reducing its focus on this segment.

Tissue and Hygiene: The tissue paper market is still in the nascent stage in India. With greater awareness of hygiene among the urban middle class, demand for this paper is moving up significantly, and is expected to grow at a CAGR of 20% for the next few years. BILT is well positioned to take advantage of this growing demand and has recently made an acquisition (Premier Tissues) to scale up operations in this segment. Besides Tissue and Hygiene, BILT expanded its product portfolio to aluminum foil and wet wipes in the Indian market from last year.

BILT also operates in farm forestry through its subsidiary, BILT Tree Tech Limited.

Management background Ballarpur Industries (BILT), a subsidiary of Avantha Group was incorporated as Ballarpur Paper and Straw Board Mills in 1945. The company is promoted by Mr Gautam Thapar, who is also the chairman of the Avantha Group. Day-to-day operations are managed by Mr. R.R. Vederah, MD, Mr. B. Hariharan, Group Director (Finance) and Mr. Y Agarwal, COO. BILT has 7 independent directors out of total board of 10 members.

Shareholding trend As of June 30, 2010, promoter shareholding in the company was 49.4%, and has steadily increased over the last three years. The shareholding trend for BILT over the past three years is enumerated below.

Table 9: BILT’s shareholding trend % Jun-07Sep-07Dec-07Mar-08Jun-08Sep-08Dec-08Mar-09Jun-09Sep-09 Dec-09 Mar-10 Jun-10Promoter holding 38.9 38.9 38.9 38.9 39.0 39.0 39.0 40.3 40.3 40.3 40.3 44.8 49.4 Public shareholding Institutions 48.7 48.4 49.6 49.5 49.3 49.6 48.8 46.3 41.2 40.8 42.1 40.7 34.6Mutual Funds 4.6 5.9 4.9 6.3 8.3 9.4 10.2 9.0 8.5 7.7 8.7 10.3 9.2Fin. Insti./Govt. 0.4 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.1Insurance Co 17.7 16.7 14.5 14.4 14.3 14.0 14.0 14.0 13.9 13.9 13.5 11.3 10.1FIIs 17.5 17.3 21.8 20.4 18.3 17.8 16.2 14.9 10.5 10.8 11.5 11.3 8.4Foreign individual investors 8.5 8.3 8.3 8.3 8.4 8.4 8.4 8.4 8.4 8.4 8.4 7.7 6.7 Non-Institutions 10.6 11.1 9.9 9.9 9.9 10.0 10.8 11.8 16.3 16.8 15.6 12.8 14.3Corporates 3.6 3.8 3.2 2.9 3.0 3.2 3.9 4.0 6.3 6.9 5.6 2.7 4.4Individuals 7.1 7.3 6.7 7.0 6.8 6.8 6.9 7.8 10.0 9.9 10.0 10.1 9.9 Others 1.4 1.6 1.7 1.7 1.9 1.4 1.4 1.6 2.2 2.2 2.0 1.7 1.7 Total 100 100 100 100 100 100 100 100 100 100 100 100 100 Source: BSE website


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Financial analysis Earnings CAGR of 24% over FY10-FY13E We forecast an earnings CAGR of 24% over FY10-FY13. We expect earnings growth to be driven by a 9% CAGR in revenues and a 290bp expansion in EBITDA margins over the same period.

Figure 17: BILT revenues, FY05-FY13E Figure 18: BILT PAT (bef. Minorities), FY05-FY13E

17,903 19,12723,178

28,311 28,247

37,94642,508

46,551 48,557

0

10,000

20,000

30,000

40,000

50,000

60,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

1,6812,016

2,5513,036

1,8792,404

3,050

3,9784,532

0

1,000

2,000

3,000

4,000

5,000


Source: company reports, J.P. Morgan estimates Source: company reports, J.P. Morgan estimates

We expect revenue growth to be driven by increasing volumes as new capacities ramp up. Enhancement in pulp capacities will result in raw material cost savings as captive pulp will be cheaper to produce than current market prices. In addition, the ramp-up of new capacities will drive operating leverage benefits and will drive margin expansion. Our key revenue assumptions are enumerated below: Table 10: BILT: Key revenue assumptions Rs MM, YE Jun. FY08 FY09 FY10 FY11E FY12E FY13ETOTAL REVENUES (Consolidated) 30,259.5 29,436.5 38,964.1 43,643.2 47,793.6 49,853.6 Net Paper Sales 26,112.7 27,676.8 34,898.5 39,185.7 43,264.3 45,284.8 % YoY 18.7 6.0 26.1 12.3 10.4 4.7 Sales Volumes ('000 Tons) 607.0 606.0 775.0 870.2 960.8 1,005.7 Realization (Rs/ton) 43,019.3 45,671.2 45,030.4 45,030.4 45,030.4 45,030.4 % YoY (3.8) 6.2 (1.4) 0.0 0.0 0.0 APR Pulp 3,580.7 1,153.7 3,424.9 3,740.0 3,740.0 3,740.0 % YoY 29.0 (67.8) 196.9 9.2 0.0 0.0 Sales Volumes ('000 tons) 88.0 88.0 88.0 88.0 Realization (Rs/ton) 38,918.8 42,500.0 42,500.0 42,500.0 % YoY Others (including traded goods) 519.1 565.7 583.8 653.8 719.2 755.2 % YoY 17.2 9.0 3.2 12.0 10.0 5.0 Caustic Soda, Chlorine etc. 47.0 40.3 56.9 63.7 70.1 73.6 % YoY 47.4 (14.3) 41.2 12.0 10.0 5.0 Source: company data, J.P. Morgan estimates

BILT’s earnings are highly sensitive to paper realizations and volumes. We show on the next page the earnings sensitivity to paper prices and volumes for BILT.

Earnings CAGR 24% of over FY10-FY13E driven by 9% CAGR in revenues and 290bps expansion in EBITDA margins


17



Table 11: FY11E and FY12E EPS sensitivity to paper prices* Table 12: FY11E and FY12E EPS sensitivity to paper volumes

Rs, YE Jun. FY11E EPS % Change

FY12E EPS % Change

-5% 1.7 -55.3 2.7 -46.0 -4% 2.1 -44.7 3.1 -38.0 -3% 2.6 -31.6 3.6 -28.0 -2% 3.0 -21.1 4.1 -18.0 -1% 3.4 -10.5 4.5 -10.0

Base Case 3.8 0.0 5.0 0.0 1% 4.2 10.5 5.4 8.0 2% 4.6 21.1 5.9 18.0 3% 5.1 34.2 6.4 28.0 4% 5.5 44.7 6.8 36.0 5% 5.9 55.3 7.3 46.0

Rs, YE Jun. FY11E EPS % Change FY12E EPS % Change -5% 3.4 -11.3 4.5 -10.6 -4% 3.5 -8.9 4.6 -8.6 -3% 3.6 -6.6 4.7 -6.6 -2% 3.6 -4.2 4.8 -4.6 -1% 3.7 -1.8 4.9 -2.6

Base Case 3.8 0.0 5.0 0.0 1% 3.9 2.6 5.1 1.6 2% 4.0 5.0 5.2 3.6 3% 4.1 7.4 5.3 5.6 4% 4.2 9.7 5.4 7.6 5% 4.3 12.1 5.5 9.8

Source: J.P. Morgan estimates Source: J.P. Morgan estimates * Not assuming any commensurate decline in pulp and wood prices

Capacity expansion to be funded through internal accruals and debt We estimate that BILT will incur cumulative capital expenditure of about Rs21.7B over FY11E-FY13E to fund its capacity expansion plans. We expect this capital expenditure to be funded through a combination of internal accruals and debt. BILT’s operating cash flow profile has been significantly enhanced following the ramping up of new paper capacities at Bhigwan and Ballarpur that were commissioned in FY09. We expect the cash flow profile to be further enhanced on account of savings from replacement of bought pulp with captive pulp. We estimate BILT to generate cumulative operating cash flow of Rs27.1B over FY11-FY13, which will help fund major part of its capital expenditure.

Figure 19: BILT: Operating cash flow, capex and free cash flow trends (Rs MM)

5,781.77,471.8 7,366.8

9,046.810,654.1

(13,295.0)

(4,471.2)(7,563.1) (6,424.3) (7,743.2)

3,000.6(196.3)

2,622.5 2,910.8

(7,513.3)

(15,000.0)

(10,000.0)

(5,000.0)

0.0

5,000.0

10,000.0

15,000.0

FY09 FY10 FY11E FY12E FY13E

Operating CF Capex FCF

Source: company reports, J.P. Morgan estimates

While we expect absolute debt levels to increase over the next two years, we expect net gearing to decline from current levels of 1.5x to 1.3x by FY13E. We are not assuming potential listing of BILT’s subsidiary into our earnings assumptions – if the listing were to happen, gearing levels would potentially be lower than our current estimates.

Capacity expansion plans to be funded through combination on internal cash flow and debt

Marginal decline in gearing by FY13E


18



Figure 20: BILT: Net debt to equity trend, FY05-FY13E Figure 21: BILT: Operating cash flow trend, FY08-FY13E (Rs MM)

0.7 0.60.9

1.3

2.0

1.5 1.5 1.4 1.3

0.0

0.5

1.0

1.5

2.0

2.5


4,193 4,009 4,156

7,6015,782

7,472 7,3679,047

10,654

0

2,000

4,000

6,000

8,000

10,000

12,000


Source: company reports, J.P. Morgan estimates Source: company reports, J.P. Morgan estimates

Working capital intensity to decline on lower raw material inventories We expect some improvement in BILT’s operating cycle going forward as we expect raw material inventory to reduce on account of lower pulp purchases as BILT ramps up captive pulp capacity. We expect receivable days to remain at current levels.

Figure 22: BILT: Inventory and receivable days

62.874.0 66.7 66.7 66.7

42.1 44.3 41.1 41.1 41.1

0.0

20.0

40.0

60.0

80.0

FY09 FY10 FY11E FY12E FY13E

Inv entory day s Receiv able day s

Source: Company reports, J.P. Morgan estimates

Capital efficiency to improve going forward We expect ROCE and ROE for BILT to improve going forward on account of improving profitability and ramp-up of capacity utilization. We expect ROCE to improve from 7.8% in FY10 to 10.0% by FY13 and ROE to improve from 11.8% in FY10 to 15.9% by FY13. At 15.9%, BILT’s ROE will be on par with most of the large global paper manufacturers.

Working capital to decline on lower pulp inventories

ROE to increase to about 16% by FY13E, in line with global peers


19



Figure 23: BILT: ROE and ROCE trends (%)

9.6 9.6 9.2 9.6

6.27.8 8.6 9.6 10.0

11.212.9

14.116.1

10.411.8

13.015.4 15.9

0.0

5.0

10.0

15.0

20.0


ROCEROE

Source: Company data, J.P. Morgan estimates

Table 13: BILT: Consolidated Income Statement FY08-FY13E Rs MM, YE Jun. FY08 FY09 FY10 FY11E FY12E FY13EGross Revenues 30,259.5 29,436.5 38,964.1 43,643.2 47,793.6 49,853.6 Less: Excise & Sales Tax (1,948.7) (1,189.6) (1,018.1) (1,134.7) (1,242.6) (1,296.2)Net Revenues 28,310.8 28,246.9 37,946.0 42,508.5 46,551.0 48,557.4 Manufacturing Expenses (18,382.1) (18,639.7) (25,900.8) (28,666.3) (30,914.4) (31,748.4)Gross Margin 9,928.7 9,607.2 12,045.1 13,842.2 15,636.5 16,809.0 Other Operating Expenses (2,943.2) (3,181.4) (4,100.0) (4,592.4) (5,029.1) (5,245.9)EBITDA 6,985.5 6,425.8 7,945.1 9,249.8 10,607.4 11,563.1 EBITDA Margin 24.7 22.7 20.9 21.8 22.8 23.8 Depreciation (1,923.8) (2,325.5) (3,018.9) (3,376.0) (3,653.8) (3,971.2)EBIT 5,061.8 4,100.2 4,926.2 5,873.8 6,953.6 7,591.9 Interest (1,482.4) (1,708.2) (2,371.3) (2,536.3) (2,536.3) (2,536.3)Other Income 161.2 131.8 238.6 250.5 263.0 276.2 PBT 3,740.5 2,523.8 2,793.5 3,587.9 4,680.3 5,331.7 Tax (704.3) (645.1) (389.1) (538.2) (702.0) (799.8)PAT Before minorities/ exceptionals 3,036.3 1,878.8 2,404.4 3,049.8 3,978.2 4,531.9 Minority Interest (64.8) (211.6) (434.1) (549.0) (716.1) (815.7)Share of associate 27.7 15.8 0.0 0.0 0.0 0.0 PAT 2,999.2 1,682.9 1,970.2 2,500.8 3,262.1 3,716.2 FD EPS (Rs) 4.8 2.7 3.1 3.8 5.0 5.7 Source: Company reports, J.P. Morgan estimates


20



Table 14: BILT: Consolidated balance sheet FY08-FY13E Rs MM, YE Jun. FY08 FY09 FY10 FY11E FY12E FY13EShareholders Funds 17,754.1 18,303.4 22,433.9 24,449.9 27,079.7 30,075.5 Share Capital 1,111.2 1,111.2 1,311.2 1,311.2 1,311.2 1,311.2 Convertible share warrants 0.0 0.0 0.0 0.0 0.0 0.0 Reserves and Surplus 16,642.8 17,192.2 21,122.7 23,138.7 25,768.4 28,764.2 Minority Interest 4,561.8 3,676.1 4,110.2 4,659.2 5,375.2 6,191.0 Loan Funds 28,802.0 37,138.6 35,916.2 38,416.2 38,416.2 38,416.2 Secured Loans 20,743.6 28,257.1 20,633.4 23,133.4 23,133.4 23,133.4 Unsecured Loans 8,058.4 8,881.6 15,282.8 15,282.8 15,282.8 15,282.8 Deferred Tax Liability 1,264.7 1,778.1 1,914.3 1,722.8 1,550.5 1,395.5 TOTAL 52,382.5 60,896.3 64,374.6 69,248.1 72,421.7 76,078.1 Fixed Assets 42,618.6 52,435.1 54,300.0 58,487.2 61,257.7 65,029.7 Gross Block 49,760.7 65,260.5 76,075.6 85,075.6 92,075.6 100,075.6 Less: Depreciation 18,498.0 21,399.7 25,015.2 28,391.2 32,044.9 36,016.2 Net Block 31,262.7 43,860.8 51,060.4 56,684.4 60,030.6 64,059.4 CWIP 9,283.7 8,022.4 2,835.9 1,500.0 1,000.0 800.0 Advance against Capital assets 2,072.1 551.9 403.7 302.8 227.1 170.3 Goodwill Investments 231.1 381.5 405.6 405.6 405.6 405.6 Current Assets, Loans and Advances 20,175.4 16,952.0 24,910.1 25,673.9 27,407.6 28,193.3 Inventories 5,006.0 4,861.3 7,692.7 7,772.1 8,511.2 8,878.0 Sundry Debtors 3,126.6 3,260.1 4,605.3 4,782.8 5,237.7 5,463.4 Cash and Bank Balance 4,882.8 1,043.2 2,416.8 1,699.3 1,153.1 807.2 Other current assets 0.2 0.9 6.3 7.1 7.8 8.1 Loans & Advances 7,159.7 7,786.5 10,189.0 11,412.6 12,497.9 13,036.6 Less: Current Liabilties & Provisions 10,722.3 9,080.2 15,251.2 15,318.7 16,649.3 17,550.5 Current Liabilties 7,919.3 6,067.6 11,625.3 11,330.2 12,262.0 12,724.5 Provisions 2,803.0 3,012.5 3,625.9 3,988.4 4,387.3 4,826.0 Net Current Assets 9,453.2 7,871.9 9,658.9 10,355.3 10,758.3 10,642.8 Miscellaneous Expenditure 79.6 207.8 10.0 0.0 0.0 0.0 Total 52,382.5 60,896.3 64,374.6 69,248.1 72,421.7 76,078.1 Source: company reports, J.P. Morgan estimates


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Table 15: BILT Consolidated Cash flow Statement FY08-FY13E Rs MM, YE Jun. FY08 FY09 FY10 FY11E FY12E FY13EPBT 3,740.5 2,523.8 2,793.5 3,587.9 4,680.3 5,331.7 Direct Taxes paid/ Refund (651.9) (535.5) (599.1) (538.2) (702.0) (799.8)Depreciation 1,923.8 2,325.5 3,018.9 3,376.0 3,653.8 3,971.2 Change in Working Capital 1,071.5 (77.7) (302.5) (1,413.8) (949.3) (230.4)Other Non Cash Items 1,517.0 1,545.5 2,561.1 2,354.9 2,364.1 2,381.3 Operating Cash Flows 7,600.9 5,781.7 7,471.8 7,366.8 9,046.8 10,654.1 Capex (9,312.7) (13,295.0) (4,471.2) (7,563.1) (6,424.3) (7,743.2)Change in Investments 0.0 (199.0) (24.2) 0.0 0.0 0.0 Other Investing Activities 0.0 0.0 0.0 0.0 0.0 0.0 Cash flow from Investing (9,312.7) (13,494.0) (4,495.3) (7,563.1) (6,424.3) (7,743.2) Change in Debt 6,910.8 8,336.7 (1,222.4) 2,500.0 0.0 0.0 Equity Issued (2,200.1) 0.0 3,000.0 0.0 0.0 0.0 Dividends Paid (327.4) (455.6) (326.0) (484.8) (632.4) (720.4)Interest Paid (1,020.4) (1,712.6) (2,327.3) (2,536.3) (2,536.3) (2,536.3)Other Cash Flow from Financing 3,362.9 6,168.4 (875.7) (521.1) (3,168.7) (3,256.7) Change in Cash 1,651.1 (1,544.0) 2,100.7 (717.4) (546.2) (345.9)FX Translation reserve (486.4) (2,295.6) (727.2) 0.0 0.0 0.0 Cash at Beginng of the Year 3,718.2 4,882.8 1,043.2 2,416.8 1,699.3 1,153.1 Add: Upon addition of new subsidiary Cash at End of Year 4,882.8 1,043.2 2,416.8 1,699.3 1,153.1 807.2 Source: Company reports, J.P. Morgan estimates.


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Ballarpur Industries Ltd.: Summary of Financials Income Statement Cash flow statement Rs in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Rs in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Revenues 29,436 38,964 43,643 47,794 49,854 PBT 2,524 2,793 3,588 4,680 5,332

% change Y/Y (2.7%) 32.4% 12.0% 9.5% 4.3% Depr. & amortization 2,326 3,019 3,376 3,654 3,971Gross Profit 9,607 12,045 13,842 15,637 16,809 Change in working capital -78 -303 -1,414 -949 -230

% change Y/Y -3.2% 25.4% 14.9% 13.0% 7.5% Other 1,546 2,561 2,355 2,364 2,381EBITDA 6,426 7,945 9,250 10,607 11,563 Cash flow from operations 5,782 7,472 7,367 9,047 10,654

% change Y/Y -8.0% 23.6% 16.4% 14.7% 9.0% EBIT 4,100 4,926 5,874 6,954 7,592 Capex -13,295 -4,471 -7,563 -6,424 -7,743

% change Y/Y NM 20.1% 19.2% 18.4% 9.2% Net Interest - - - - -EBIT Margin 13.9% 12.6% 13.5% 14.5% 15.2% Other 0 0 0 0 0Net Interest - - - - - Free cash flow -7,513 3,001 -196 2,622 2,911Earnings before tax 2,524 2,793 3,588 4,680 5,332

% change Y/Y -32.5% 10.7% 28.4% 30.4% 13.9% Equity raised/(repaid) 0 3,000 0 0 0Tax -645 -389 -538 -702 -800 Debt raised/(repaid) 8,337 -1,222 2,500 0 0

as % of EBT 25.6% 13.9% 15.0% 15.0% 15.0% Other -1,713 -2,327 -2,536 -2,536 -2,536Net income (reported) 1,683 1,970 2,501 3,262 3,716 Dividends paid -456 -326 -485 -632 -720

% change Y/Y -43.9% 17.1% 26.9% 30.4% 13.9% Beginning cash 4,883 1,043 2,417 1,699 1,153Shares outstanding - - - - - Ending cash 1,043 2,417 1,699 1,153 807EPS (reported) 2.72 3.10 3.81 4.98 5.67 DPS 0.52 0.60 0.74 0.96 1.10

% change Y/Y (43.0%) 14.1% 23.1% 30.4% 13.9% Balance sheet Ratio Analysis Rs in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Rs in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Cash and cash equivalents 1,043 2,417 1,699 1,153 807 Gross margin 32.6% 30.9% 31.7% 32.7% 33.7%Accounts receivable 3,260 4,605 4,783 5,238 5,463 EBITDA margin 21.8% 20.4% 21.2% 22.2% 23.2%Inventories 4,861 7,693 7,772 8,511 8,878 Operating margin 13.9% 12.6% 13.5% 14.5% 15.2%Others 7,787 10,195 11,420 12,506 13,045 Net margin 5.7% 5.1% 5.7% 6.8% 7.5%Current assets 16,952 24,910 25,674 27,408 28,193 Sales per share growth (1.2%) 29.0% 8.7% 9.5% 4.3%LT investments 381 406 406 406 406 Sales growth (2.7%) 32.4% 12.0% 9.5% 4.3%Net fixed assets 52,435 54,300 58,487 61,258 65,030 Net profit growth -43.9% 17.1% 26.9% 30.4% 13.9%Total Assets 69,976 79,626 84,567 89,071 93,629 EPS growth (43.0%) 14.1% 23.1% 30.4% 13.9% Liabilities Interest coverage (x) - - - - -Short-term loans 0 0 0 0 0 Payables 4,684 6,613 7,407 8,111 8,461 Net debt to equity 197.2% 149.3% 150.2% 137.6% 125.0%Others 4,397 8,638 7,912 8,538 9,089 Working Capital to Sales 11.7% 14.6% 11.8% 11.8% 11.8%Total current liabilities 9,080 15,251 15,319 16,649 17,551 Sales/assets 0.44 0.52 0.53 0.55 0.55Long-term debt 37,139 35,916 38,416 38,416 38,416 Assets/equity 3.82 3.55 3.46 3.29 3.11Other liabilities 1,778 1,914 1,723 1,551 1,395 ROE 9.3% 9.7% 10.7% 12.7% 13.0%Total Liabilities 47,997 53,082 55,458 56,616 57,362 ROCE 8.0% 8.7% 9.7% 10.8% 11.3%Shareholders' equity 18,303 22,434 24,450 27,080 30,075 BVPS 29.53 35.28 37.30 41.31 45.88 Source: Company reports and J.P. Morgan estimates.


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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• Client of the Firm: Ballarpur Industries Ltd. is or was in the past 12 months a client of JPM.

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Price(Rs)

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Jul07

Apr08

Jan09

Oct09

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Ballarpur Industries Ltd. (BILT.BO) Price Chart

OW Rs47 OW

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Aug 03, 2005 - Oct 23, 2007, and Oct 15, 2008 - Oct 19, 2010. This chart shows J.P. Morgan'scontinuing coverage of this stock; the current analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (Rs)

Price Target (Rs)

24-Oct-07 OW 30.06 47.00 15-Oct-08 OW 23.00 --

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Princy Singh: Apollo Hospitals Enterprise Ltd. (APLH.BO), Deepak Fertilisers & Petrochemicals Corp (DPFE.BO), Dish TV (DSTV.BO), Fortis Healthcare Ltd (FOHE.BO), Jain Irrigation Systems Ltd (JAIR.BO), Opto Circuits (India) Ltd (OPTO.BO), S.Kumars Nationwide Limited (SKMK.BO), Sintex Industries Limited (SNTX.BO), Sterlite Technologies Ltd (STTE.BO)


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