>Ballarpur Industries (EMKAY)

Results below estimates

BILT reported poor Q3FY09 results. Revenues remained flat at 6.9 bn while EBITDA margins dropped by 650 bps to 19.8% as a result APAT fell by 76% to Rs 179mn. Results were affected mainly on account of – 1) Poor show at Sabah, Malaysia plant due to sale of high cost inventory and maintenance shut down which have resulted in EBITDA loss of ~Rs 240 mn 2) Lower demand for rayon grade pulp (RGP), Kamalapuram plant resulting in plant shut down, leading to EBIT loss of ~Rs 110 mn. We expect that the current quarter poor performance was mainly driven by extra ordinary circumstances. However global prices still remain weak hence putting pressure on margins at Sabah plant and Kamalapuram plant is likely to resume operation from May’09 and company is expected to start consuming pulp for its captive purpose. Its capex plan at Bhigwan is completed and expansion plan at Ballarpur is on schedule (completing June’09) which will increase its capacity by ~45%. We expect full benefit of this expansion to flow from Q1FY10 and Kamalapuram and Sabah plant should also stabilise by that time. To factor poor ongoing problem at Sabah and its Kamalapuram plant, we are reducing our FY09 revenue estimates by 10.6% to Rs 28 bn and APAT by 37.3% to Rs 1.8 bn. However our FY10 estimates remain unchanged. We maintain our BUY recommendation on the stock with a price target of Rs 24.

Poor show at Sabah plant and pulp plant affected results
Disappointing Q3FY09 results is mainly attributed to poor results from Sabah plant and rayon grade pulp at Kamalapuram plant. Company’s Sabah operation reported losses of approx Rs 413 mn due to sale of high cost inventory during the quarter and also due to maintenance shutdown for a month which affected its production. Sabah plant had an inventory of ~17,000 mt in Q2FY09 which was sold during current quarter at lower prices. Unit Kamalapuram, which produces rayon grade pulp, continued to remain shut due to sluggish pulp demand. Pulp division also contributed a loss of Rs 107 mn for the quarter.

Stand alone results remain stable
BILT standalone performance remained stable. BILT on stand alone reported net sales of Rs 2.5 bn with EBITDA margins of 24.2% and APAT of Rs 321 mn. Paper demand and realisations in domestic market remained stable.

Revising FY09 estimates keeping FY10 unchanged, maintain BUY
We have reduced our FY09 revenue, PAT and EPS by 10.6%, 21.7% and 37.3% to Rs 28.5
bn, 1.8 bn and Rs 2.8, respectively. We keep our FY10 estimates unchanged. We believe
that FY10 growth will be driven by 45% growth in paper capacity. We expect that pulp
operation at Kamalapuram will resume from Q1FY10 and company will start consuming pulp for its captive consumption. We maintain our BUY recommendation on the stock with a price target of Rs 24.

To see full report: BALLARPUR INDUSTRIES