BackSabah scarred Ballarpur, and it has done well to exit
A sharp depreciation in the rupee since the time of its investment has meant that in rupee terms, Ballarpur has earned a marginal profit of `200 crore
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At first look, it seems Ballarpur Industries Ltd (Bilt) has emerged unscathed from its troubled investment in Sabah Forest Industries Sdn Bhd Malaysia. According to Mint’s calculations, it ended up losing about $110 million on its Sabah investments, although a sharp depreciation in the rupee since the time of its investment has meant that in rupee terms, it has earned a marginal profit of ₹ 200 crore (see chart).
Investors, of course, are mighty relieved the company has managed to find a buyer for the debt-laden and loss-making Malaysian operations. Ballarpur shares have risen 16% in the past two trading sessions. As an aside, the fact they rose by over 8% on Wednesday should provide the Securities and Exchange Board of India clear leads on some insider trading.
Coming back to the Sabah sale, while it has improved Ballarpur’s prospects, it’s wrong to conclude that the company has come away unscathed. The proceeds from the sale will help the company cut its debt, but it will still be left with a monumental debt of ₹ 3,600 crore. In hindsight, the company’s ambitious plans to vertically integrate, and gain access to pulp and fibre through Sabah, clearly backfired.
Ballarpur’s plans to restructure operations, and have a Dutch subsidiary listed, to unlock value, haven’t materialized yet either.
Of course, all of these problems had become evident some time ago. As things stand, the Sabah sale is good riddance and will help the company reduce its financial costs. In fact, Sabah’s exit will not only lead to a reduction in debt, but will also help overall profit margins inch up, as the Malaysian operations were running losses.
As far as interest costs go, they accounted for as much as 55% of the operating profit. Eventually, after accounting for depreciation costs, Ballarpur made a meagre pre-tax profit of ₹ 63 lakh. Sumant Kumar of Elara Capital said net profit for 2015-16 is likely to be revised to ₹ 240 crore from ₹ 120 crore, largely because of interest cost savings. Further, the debt-operating profit ratio will improve from 6.7 times to 3.5 times. The muted performance of Sabah was one of the reasons that impacted the company’s margins last quarter, Elara said in a note in August.
Meanwhile, the outlook for the paper industry has brightened marginally of late. Wood prices have softened and that should help margins, although it remains to be seen if improved demand results in better operating leverage as well.
The writer does not have positions in the companies discussed here.
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