Ballarpur Industries (BILT) reported net profit of R17.2 crore (+37% q-o-q and -55% y-o-y). The poor earnings were on account of the Malaysian plant shutdown and weak performance of the rayon grade pulp unit.
Ballarpur pulp mill, which was initially expected to commission a year back, keeps on getting delayed which is pressuring profitability. Its debt to Ebitda is more than 6x and in the event of an inability to refinance debt, the company could face difficulty in repayment based on the current level of cash flow. Commissioning would allow the company to improve Ebitda margin by 4% and lead to 25% growth in FY13e Ebitda. We believe this financial turnaround is just around the corner.
We cut our FY14/15 earnings forecasts to account for a delay in pulp mill commissioning and increases in wood cost. We also cut our Gordon Growthbased PE based multiple from 7x to 5x to account for increased risk of debt default but roll forward our valuation to FY15e from FY14e which results in our target price falling to R15 from R25, implying a 50% potential return. We reiterate our overweight rating as we believe the stock has overcorrected and financial turnaround is just around the corner. Key risks: inability to refinance debt, further delays in Ballarpur pulp mill.