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Saturday, April 10, 2010

Mid Cap Stock Analysis - Ballarpur Industries Limited (BILT)

This is one of the 3 stocks for investment portfolio recommended by Rajen Shah, Angel stock broking.

Here are excerpts of his discussion on one of the business news channels.

At every investor camp at around Rs 24-25 levels, we have been recommending this stock very strongly. There were at least 4-5 reasons why we like this stock and one of them was two years back this company had bought back 38 crore shares at an aggregate price of Rs 25 pumping in Rs 940 crore. When a management is pumping in Rs 940 crore, which is one of the highest buybacks in the history of the Indian corporate sector, one shouldn’t have been bearish on this stock at all. The stock did underperform significantly but then there was sheer value rate and it was just a matter of holding on to the stock and the gains were sure to follow. Now the gains are sure to follow from hereon.

The other interesting thing which happened in the last two months is that promoters have subscribed to about 10 crore shares—about 5.5 crore shares and about 4.5 crore warrants. This will increase the stake from 40% presently to about 49% in about 18 months and they are subscribing to this 10 crore share at an aggregate price of about Rs 30 pumping in Rs 300 crore. So when the management is buying back shares worth Rs 940 crore, pumping in 300 crore to scale up their holdings from 40% to 49%, I think that is no reason why we should doubt that the stock is overpriced or is going to languish.

One needs to get into it and hold on and the gains are sure to follow. Other interesting thing is that at a price of Rs 25 and even at the current price of Rs 32, Ballarpur is a one million tonne paper plant, you are getting it for about Rs 1,780 crore. If you were to set up a similar plant like Ballarpur with a capacity of 1 million tonne, you would require nothing less than Rs 3,000 crore. On a replacement value also you are getting it for about Rs 1,200 crore less than what otherwise would have been required for setting up a plant like Ballarpur.
Interestingly, what has happened is, in the first five decades, ever since Ballarpur commenced operation, the total capacity of Ballarpur was about 6 lakh tonne and over the last three years, they have almost doubled it to about 1 million tonne.

Hence huge investments went into this raising of the capacity from 6 lakh tonne to one million tonne and hence the interest cost went up, in the last quarter and the quarter prior to that we have seen depreciation going up. Now that this one million tonne capacity is into the market and with the paper prices doing very well—paper prices have moved up about 12.5% over the past six-seven months—this company is sure to encash on the increased capacity which is now coming into the play.

So interesting would be June 2011 and not June 2010—2011 it can go to the extent of reporting Rs 4.5 kind of earnings. We have a target of about Rs 45 in a year’s timeframe and maybe I think it could even go higher from those levels of Rs 45 but that depends upon how the company does perform in coming three-four quarters which we are looking at very keenly.

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