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S. Vaidya Nathan

SHAREHOLDERS can stay invested in the Ballarpur Industries' stock This may enable them to take advantage of any upside in the valuation of the stock if the recovery in the paper industry takes firm hold.

Capped upside: But the upside may be limited by the large expansion in the equity base — more than two-fold — courtesy, a rights offer. The equity has moved up from Rs 71.5 crore to Rs 128.5 crore, following rights shares. The FCDs would push the equity to between Rs 159.6 crore and Rs 185.7 crore, depending on the conversion price and affect per share earnings over the next three years at least.

These factors may lead to the stock underperforming other paper industry stocks even in the event of a bullish phase for the industry. Difficult period, but... ' BILT has managed to turn in a fairly satisfactory earnings performance in fiscal 2001-02 (July 2001-June 2002). Despite weak price trends, BILT has managed to keep the downtrend in sales (Rs 1,537.8 crore) to 1.9 per cent. Strong volumes and the less-than-proportionate decline in domestic prices have helped weather the steep decline in international prices.

What has helped the company in a difficult year is the check on costs, which have helped pushed the operating profit margin from 19.07 per cent to 19.38 per cent. This coupled with a 3.5 per cent decline in interest costs has helped BILT close the year with a 4 per cent decline in pre-tax profits.

The deferred tax liability has affected reported net profits (Rs 71.4 crore) in a pronounced manner with a 34 per cent decline as compared to 2000-01. But this profit level is important as this would be the benchmark for comparison going forward.

Cause for concern: What is, however, a cause for concern is the rather indifferent showing in April-June quarter. This quarter saw paper prices move up in two rounds in varying degrees across paper varieties. But this has not been reflected in the performance of the company with Sustainable earnings showing a decline of 5.8 per cent even after significantly lower depreciation charges (down by 16 per cent) and interest costs. Quite a few other paper majors such as Tamil Nadu Newsprint and Seshasayee Paper have reported a much sharper improvement in performance in this quarter.

Outlook: The outlook for the paper industry appears to be improving. Barring newsprint, other segments have recorded price increases at the domestic and international levels. The worst also appears to be over in the latest downward cycle.

Even if the prices prevail at the current levels, it should add to the bottomline in the quarters ahead.

But, for the BILT stock, the overhang of equity is likely to be a dominant factor. The diluted earnings per share works out to around Rs 4 after the rights and taking into account the impending conversion into equity. Investors could hold the stock and evaluate profit-booking opportunities at around the Rs 55 level.

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