Ballarpur Ind may touch Rs 50 by Mar '12: JPMorgan

NEW DELHI: Ballarpur Industries Ltd may move higher to Rs 50 by March 2012 on the back of better realization of margins, frequent price hikes and growing domestic demand, a JPMorgan report said today.

According to the brokerage house, near-term margins are under pressure as domestic realizations are down 4% over past 3-months. However, it expects the margins to pick up over the next 1-2 quarters as captive pulp capacities start to kick in from Oct 11. By Jun’12, BILT will be self reliant for pulp and new capacities will drive USD100-150/ton savings vs. imported pulp.

Concerns:

Apart from 4% correction in domestic paper realization, prices for rayon grade pulp have also corrected from Rs 64,000/ton to Rs 54,000/ton (BILT has a dedicated rayon grade pulp plant). The pulp prices are down from $700/ton to $600/ton.

Outlook:

The brokerage expects the Sabah pulp plant, which has a capacity of over 120,000 tons to 240,000 tons, will be commissioned by end Oct ’11 and the pulp plant in Maharashtra with a capacity of over 150,000 tons to 270,000 tons by Jun ’12.

Management noted that demand for W&P paper in India is growing at 10%-12%. For FY12, BILT expects to produce 0.9MM ton of paper v/s 0.85MM tons last year.

Valuations: JPMorgan

Shares of BILT gained over 13% to touch their day’s high of Rs 28.65 in trade today. At 01:30 p.m., shares of the company were trading 9.3% higher at Rs 27.60.

Ballarpur Industries Ltd is one of the cheapest paper stocks in the world and we expect the company’s ROE to improve from 10% in FY11 to 13% by FY14E, as captive pulp kicks in.

We maintain ‘Overweight’ rating, with Mar-12 price target of Rs 50 based on 10xFY13E P/E. However, key risks include demand slowdown, delay in capacity expansion and decline in paper prices.