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    Ballarpur IndustriesShekhar Phadnis India Initiation

    Paper & Pulp Industries 03 September 2008

    I N I T I A T I N G C O V E R G A E R E P O R T

    India Paper Industry poisedfor better growth on back of increased paper pricerealization and higher

    capacity utilizationValue unlocking throughbusiness and financialrestructuring

    BILTs industry leadershipattributable to successfulproduct mix in PWPsegment

    Target Price ...... INR 38.75 Current Price ..... INR 33.30 (03 rd September 2008)Upside ................................... 16%

    BUY

    Business Restructuring, Acquisition of Sabah and Successful products mix

    makes long term outlook attractive on BILT

    Market Leader in PWP

    Value unlocking through business and financial restructuringRecently, the company bought 40% of its equity and reduced its face valueto INR2 per share. Now the companys equity stands at INR 1110.6 millionwith 555.3 million basic outstanding shares and INR 1260.0 million with630.0 diluted outstanding shares. BILT created a 100% subsidiary calledBILT Graphic Paper Products (BGPPL) and transferred three of its plantsoperating in a commodity business and finally sold 25% stake in its stepdown subsidiary BPH, Netherlands.

    Successful product mix in Printing & Writing Paper (PWP )segment makes BILT a industry leader In 2007 BILT gained an overall market share of 38% by volume in theCoated Wood Free category and ranked first in the Uncoated Wood Freecategory with 30% of total market share. In branded Copier BILT ismarginally behind the industry leader and expects to become a leader in thefast growing Copier segment with its newly launched brands.

    India Paper Industry poised for better growth on back of increased realization and higher capacity utilizationTill now Indian Paper Industry observed 1:1 correlation with Countrys GDPgrowth but more recently threat of 2 Is (rising Inflation & Interest rates) hasput the brakes on the countrys GDP growth. We believe that at near 100%utilization levels coupled with possible delays in upcoming capacities woulddrive Indian Paper Industrys volume and price growth. Further we believethat with buoyancy in demand it will surpass the GDP growth estimates infuture.

    Base case ValuationWe initiate coverage on BILT with a BUY rating and a target price of INR38.75 implying a 16% upside from the current price. Our assumption isbased on revenue growth of 6.8% CAGR for the period 2008a to 20013e. We

    have arrived at the fair value of INR38.75 in our DCF based valuation withWACC of 12.05% and terminal year being 2013e using very conservativeterminal perpetual growth rate of 2%. At CMP stock is trading at 12.86 xs &10.72 xs of 2009e and 2010e basic adjusted earnings of INR3.02 & INR3.59per share respectively.

    Shekhar PhadnisSenior Analyst

    Earnings Estimates And Valuation Ratios YE june (INR million) 2008a 2009e 2010e 2011e

    Revenue 28,311 30,847 36,027 38,828Net Income Basic 2,999 1,438 1725 1970Basic EPS 5.40 2.59 3.11 3.55Diluted EPS 4.76 2.28 2.74 3.13P/E ( x) 6.17 12.86 10.72 9.39 Basic EPS growth (%) 76.7% -52.0% 20% 14.2%Diluted EPS growth(%) 69.3% -52% 20% 14.2%Dividend yield (%) 2.1% 1.2% 1.4% 1.6%EV/EBITDA (x) 6.7x 6.0x 5.6x 5.2xPrice/book (x) 0.37 0.36 0.36 0.36 ROE (%) 23% 10% 11% 11% Net debt/equity 2.13 1.83 1.53 1.21

    Sources: Adventity research

    Share Price Daily vs. Sensex

    05

    1015202530354045

    J a n - 0

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    M a y - 0

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    S e p - 0

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    N o v - 0

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    J a n - 0

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    M a y - 0

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    10000

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    BILT SENSEX (RHS) Next results/event n/aMarket cap (INR m) INR 18492/ USD 4152 weeks avg traded quantity 99563Free float (%) 61.01%Major shareholder Promoters 38.99%

    12m high/low (TWD) INR 38 /I NR24.90(Discount) /premium (%) 16%Source: BSE/NSE

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    Contents

    ValuationValuation ......................................................................................................... 3

    Investment Thesis ........................................................................................... 4

    Comparable Company Analysis ................................................................... 4

    Risk to our Investment Thesis ......................................................................... 8

    Financial statements .. .................................................................................. 9

    Financial Ratio Analysis . .. ..................................................................... 10

    Fundamental AnalysisCompany Background .................................................................................... 11

    Business Segments ....................................................................................... 11

    Manufacturing Locations ............................................................................... 13Capacity Expansion Factored in ROIC ........................................................ 14

    Pricing Factored in DCF .............................................................................. 14

    Margins .. ........................................................................................................ 15

    Buyback & Split .............................................................................................. 17

    Share Holding Pattern .................................................................................... 17

    Indian Paper IndustryIndustry Overview ........................................................................................... 18

    Capacity Expansion ....................................................................................... 19

    Brownfield Economical over Greenfield.. .................................................... 20

    Industry Capex Possess No Threat of Oversupply.. ................................... 20

    Fragmented Structure of Indian Paper Industry.. ........................................ 20

    Structure of Indian Paper Industry with growth rates .................................... 21

    Operations of Industry are increasingly becoming global .............................. 21

    Raw Material Scenario.. .............................................................................. 21

    Demand Shift towards Higher Quality Paper.. ............................................ 22

    Demand Drivers.. ........................................................................................ 22Low Per Capita Consumption A Tremendous Growth Opportunity.. ....... 23

    Consolidation Unlikely in Domestic Paper Space.. ..................................... 23

    Stringent Environmental Norms .. ............................................................... 24

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    VA L U AT I O N

    We initiate coverage on BILT with a BUY rating and a target price of INR38.75

    implying a 16% upside from the current price. Our DCF based fair value of

    INR38.75 is mainly a function of CAGR 9% volume growth between 2008a and

    2013e at all of its paper plants and marginal average paper price increase across

    coated and uncoated segments. In our DCF valuation we have assumed a WACC

    of 12.05% and a terminal growth rate of 2.0%.

    Valuation Summary -in INR million except per share data

    Particulars INRPresent value of FCFF 2009-13 17,185 Terminal Value @ 2% growth rate 25,655 Total EV 42,841 Less: Corporate adjustmentsDebt 21,891

    Minority Interest 257 Preferred stock - Capitalized Leases - Contingent Liability - Cash & cash equivalents (3,718) Total corporate adjustments 18,430 Equity Value 24,411 Shares outstanding 630Equity value per share INR 38.75

    Discounted cash flow (INR) mn 2008a 2009e 2010e 2011e 2012e 2013e

    Revenues 28,311 30,847 36,027 38,828 39,021 39,411

    % growth 22.15% 8.96% 16.79% 7.78% 0.50% 1.00%EBITDA 6,985 7,510 7,662 7,777 7,035 7,106 % margin 24.67% 24.34% 21.27% 20.03% 18.03% 18.03%Less: D&A 1,924 2,383 2,422 2,561 2,621 2,661 As a % of sales 6.80% 7.73% 6.72% 6.60% 6.72% 6.75%EBIT 5,061 5,126 5,240 5,216 4,414 4,445 % margins 17.88% 16.62% 14.54% 13.43% 11.31% 11.28%Less:Taxes -704 -727 -872 -996 -866 -1029Tax-effected EBIT 4,357 4,399 4,368 4,220 3,548 3,416 Plus: D&A 1,924 2,383 2,422 2,561 2,621 2,661 Gross cash flows 6,281 6,782 6,789 6,781 6,169 6,076 Plus/Less Other - - - - - -Less: Capex -6130 -1900 -1000 -1000 -1500 -1000

    As % of sales -21.65% -6.16% -2.78% -2.58% -3.84% -2.54%Less: Changes in WC 672 -502 -1028 -556 -40 -77Free Cash Flows (Pre-interest/Dividends/etc) 823 4,381 4,762 5,225 4,629 4,999

    Key Assumptions Sensitivity Analysis-per share

    Particulars

    WACC 12.05%

    Ke 12.67%Kd 11.42%

    Beta 0.67

    Risk Free Rate 9.09%Expected Market Return 14.43%

    Percentage equity 50.10%Percentage debt 49.90%

    Per Share Perpetual Growth Rate

    Discount Rate 1.50% 2.00% 2.50%

    11.05% 43.7 46.5 49.5

    11.55% 40.0 42.4 45.1

    12.05% 36.6 38.7 41.1

    12.55% 33.6 35.5 37.5

    13.05% 30.8 32.5 34.3

    S o u r c e : b l o o m b e r g

    We initiate coverageon BILT with a BUY rating and a target

    price of INR38.75 implying a 16% upsidefrom the current price.

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    Ballarpur Industries Limited(BILT)

    BILT Tree Tech (BTT)91.67%

    Ballarpur International Holdings(BIH), Netherlands

    100%

    Sabah Forest Industries (SFI),Malaysia97.78%

    Ballarpur Paper Holdings(BPH), Netherlands

    75%

    BILT Graphic Paper ProductLtd (BGPPL)

    100%

    I N V E S T M E N T T H E S I S

    We Recommend Buy rating on BILT based on following investment thesis

    Company Restructuring

    Currently, management has segregated the companys business operations into

    two broad divisions i.e. Commodity Business and Specialty & Consumer Facing

    Product Business. Over time management wants to hive off the Commodity

    Business to a Special Purpose Vehicle (SPV) and integrate the same with Sabah

    Forest Industries (SFI) under a common structure. On March 2007 BILT acquired

    97.8% of the paid up capital of SFI, Malaysia for the total consideration of

    US$253.70 million and rest is with Government of Sabah. For this acquisition

    BILT floated first SPV, named Ballarpur International Holdings (BIH) as a 100%subsidiary of BILT and capitalized it by US$130mn. Of this initial US130mn,

    $US60 million equity contribution was made from BILT, US$15mn convertible

    bonds were placed with JP Morgan Securities (Asia Pacific) Ltd, a joint venture

    partner and a 20% owner in Sabah Forest acquisition and rest US$55mn were

    placed as a Mezzanine debt. The second SPV, named Ballarpur Paper Holdings

    (BPH) was formed with as a 100% subsidiary of BIH and monetized it by non-

    recourse loan of US$200mn to finance the remaining part of SFI acquisition

    (US$253.70-130=US$123.70) and to incur the capex for expansion at SFI at later

    stage. In order to integrate commodity business under one umbrella BILT Graphic

    Paper Products Ltd (BGPPL) as a 100% subsidiary of BIH was formed and

    transferred three of its total 6 plants (Ballarpur, Bhigwan & Kamalapuram) to

    BGPPL at consideration of INR 19500 million. Finally, BILT has diluted its 15.75%

    stake in BPH (Step down subsidiary) to a private equity investor Government of

    Singapore (GIC) and 9.25% to JP Morgan (JP already had 5% stake in SFI). We

    expect that this strategic step of segregating the commodity business would create

    value in the long run.

    Organizational Structure after completion of Business

    Restructuring

    Rationale of restructuring..Hiving off CommodityBusiness under oneumbrella andsegregatingSpeciality andConsumer Productbusiness

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    Reduction in Finance Cost due to financial restructuring

    An important financial arrangement in whole Business Restructuring suggest that

    BPH would gain 100% control over BGPPL at total estimated costs of INR19500

    million. BPH will take up equity and debt financing from international banks at

    much lower rate than the prevailing interest rates in the domestic market. This

    move would help BILT to retire existing secured and non-secured loan. We expect

    this entire financing arrangement would bring down average cost of debt to just

    below 10% by 2013e from current level of 11.42%. The Companys capital

    expenditure plan of INR9000 million is restricting ROCE in 2009e-2010e.

    ROCE VS Average Cost of Debt- in %

    11.71%

    12.03% 12.24%

    10.67% 10.98%

    11.42%11.00% 10.50%

    10.00%9.00%

    4%

    6%

    8%

    10%

    12%

    14%

    16%

    2009e 2010e 2011e 2012e 2013e

    ROCE (%) Average Cost of Debt

    We expect that ROE to remain constantly remain above the companys average

    cost of borrowing, mainly due to depleting cost of borrowing caused by the

    financial restructuring. BIH a direct subsidiary of parent has already diluted 25% of

    its stake in BPH and planning to integrate a commodity business consisting of

    three plants situated at Bhigwan, Ballarpur and Kamalapuram with Sabah Forest

    industries (SFI). We believe that this process of restructuring would help to

    improve BILTs Return on Net Worth (RONW/ROE).

    ROE vs. Average Cost of Debt

    11.42% 11.00%10.50% 10.00%

    9.00%

    9.94% 10.71%10.95%

    8.73%9.43%

    4%

    5%6%

    7%8%

    9%

    10%11%

    12%13%

    14%

    2009e 2010e 2011e 2012e 2013e

    Average Cost of Debt ROE

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    Market Leader in PWP Segment

    BILT is the market leader in PWP segment and PWP segment is contributing 86%

    of the total revenue as on FY-2008.BILT is maintaining leadership positing in

    almost all the sub segment as can be seen below.

    BILTs Market share in PWP MarketPWP Volume Growth-2006-07

    PWPMarket Size

    in 2007('000 tons)

    IndustryGrowth Rate

    for 06-07

    BILT'sMarket

    Share in %

    BILT'sPosition

    i) Coated Wood Free 320 9.20% 38% 1

    Two Side Coated 155 13.00% 46%

    Two Side Board 62 9.00% 54%

    ii) Uncoated Wood Free 860 6% 28%-30% 1

    iii) Branded Copier 215 13% 28% 2iv) Business Stationery 15 NA 70%-80% 1v) Writing Paper/Creamwove 1420 4% 3% 6

    Total (i+ii+iii+iv+v) 2830 8%-9% 17%-20% 1

    9%

    15%

    Industry BILT

    Capacity Expansion

    This robust volume growth is attributable towards INR9000 million expansion plans

    at two of its plants situated in the state of Maharashtra. At its Ballarpur plant

    110,000 mtpa of Uncoated variety of paper will be added and at Bhigwan 140,000

    mtpa of Coated paper capacity will be added. We are also expecting some part of

    this additional capacity expansion would reflect in the later half of 2009e.

    Secondly, we are expecting 7% CAGR growth in Rayon Grade Pulp prices which

    is used by Grasim as a main raw material to produce Viscose Staple Fibre (VSF).

    We expect Rayon Grade Pulps contribution to total revenues in value terms would

    remain in the range of 10%-12% for next five years.

    Sabah Forest Industries (SFI) Acquisition A Strategic Step

    The company has acquired 97.8% stake in Sabah Forest Industries (SFI),

    Malaysia through leveraged buy-out route by forming a joint venture with JP

    Morgan. Buy out cost works out to be USD$253.70 million and it will provide

    sustainable and scalable raw material linkage to support the domestic expansionplans. In the initial years SFI will not supply pulp but BILT will source 30000-40000

    MT of paper from SFI. SFI current capacity of 144,000 mtpa of paper and 120,000

    mtpa of pulp and it is easily scalable. It has 99 years lease of forest land spread

    across 289,000 hectares for plantation. This gives an enormous opportunity to set

    up a pulp mill of 500,000 mtpa which will give BILT a much needed access to

    cheap pulp. In future, announcement of expansion activity at SFIs pulping facility

    and its arrangements with BILT is an event to be gauged very closely. We believe

    that such an arrangement would have a direct and drastic impact on BILTs

    EBIDTA. In the wake of such an even we will revise our estimates and valuation.

    Sabah acquisition is astrategic step to haveaccess to fibrous raw material

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    C O M PA R A B L E C O M PA N Y A N A LY S I S

    ( I N T E R N AT I O N A L P E E R S )

    BILT trades at PE of 6.2 xs in 2008a (For BILT 2008 income statement numbers

    are actual) which is low compared to international industry peers average of 16.1

    xs. This is primarily due to the 10 th March 2008 buyback of a 371.4 million equity

    shares of INR2.0 each at a price of INR25 per share. Had this buy back not

    happened, BILTs PE would have been fallen in line with Industry PER. The

    Company trades at a 2008 EV/EBITDA of 6.7 xs which is in line with its peers.

    BILTs current and forward EV/EBIT multiple is much lower to its average of

    international peers mainly because of the low Depreciation & Amortization costs

    compared to peers.

    Currency Sales EBITDA EBIT Net Income EPSCOMPANY 2007 FY2008E FY2009E 2007 FY2008E FY2009E 2007 FY2008E FY2009E 2007 FY2008E FY2Pulp & PaperBILT INR 23,177.828,310.830,846.7 5,717.8 6,984.9 7,509.5 4,152.5 5,061.1 5,126.2 2,559.7 2,998.8 1,438.0 3.1 5.4 2.6 Norske Skogindustrier ASA NOK 27,118.026,063.426,630.2 8,395.0 2,634.8 3,308.2 5,517.0 NM 654.6 NM NM NM NM NM NPortucel Empresa Produtor . .EUR 1,147.41,150.1 1,180.6 328.0 324.5 320.0 257.5 231.3 218.6 154.0 145.4 135.3 0.2 0.2 0.2 Stora Enso Oyj EUR 13,373.611,726.011,768.9 1,727.8 1,348.4 1,465.5 NM 604.8 713.1 NM 339.7 419.0 NM 0.4 0.5 Holmen AB SEK 19,159.019,096.519,488.1 5,321.0 3,104.1 3,224.0 3,984.0 1,788.5 1,880.4 1,505.0 1,022.0 1,110.5 17.8 12.2 12.7 PaperInternational Paper Compa USD 21,890.023,556.125,053.9 2,796.0 2,781.5 3,047.0 1,710.0 1,475.3 1,754.8 1,168.0 824.7 1,028.6 2.7 2.0 2.5 Meadwestvaco Corporation USD 6,906.06,803.0 7,085.6 834.0 905.1 970.1 314.0 413.7 532.5 285.0 178.6 237.6 1.6 1.0 1.4 Pulp Aracruz Celuose S.A. BRL 3,846.93,830.9 3,835.4 1,673.1 1,712.5 1,769.0 1,011.4 1,013.2 1,176.1 1,042.2 893.5 802.2 1.9 0.8 0.8

    Grupo Empresarial Ence S. .EUR 637.2 686.8 800.8 130.8 133.8 176.7 84.6 81.6 109.9 58.2 41.0 42.5 0.3 0.2 0.2

    Sales margin EBITDA Margin EBIT Margin Net Income MarginCOMPANY 2007 FY2008E FY2009E 2007 FY2008E FY2009E 2007 FY2008E FY2009E 2007 FY2008E

    Pulp & PaperBILT 100% 100% 100% 25% 25% 24% 18% 18% 17% 11% 11% 5Norske Skogindustrier ASA 100% 100% 100% 31% 10% 12% 20% NM 2% NM NMPortucel Empresa Produtora de P . .100% 100% 100% 29% 28% 27% 22% 20% 19% 13% 13% 11%Stora Enso Oyj 100% 100% 100% 13% 11% 12% NM 5% 6% NM 3% Holmen AB 100% 100% 100% 28% 16% 17% 21% 9% 10% 8% 5% PaperInternational Paper Company 100% 100% 100% 13% 12% 12% 8% 6% 7% 5% 4% Meadwestvaco Corporation 100% 100% 100% 12% 13% 14% 5% 6% 8% 4% 3% Pulp Aracruz Celuose S.A. 100% 100% 100% 43% 45% 46% 26% 26% 31% 27% 23%Grupo Empresarial Ence S.A. 100% 100% 100% 21% 19% 22% 13% 12% 14% 9% 6%

    Currency Share Market Net Enterprise EV / Revenue EV / EBITDA EV / EBIT PECOMPANY No(m) Cap(m) Debt (m) Value(m) LTM FY2008E FY2009E LTM FY2008E FY2009E LTM FY2008E FY2009E LTM FYPulp & PaperBILT INR 816 18,49328,077.2 42,840.6 1.6x 1.6x 1.5x 6.4x 6.7x 6.0x 8.8x 9.2x 8.8x 10.9x 6.2x12.9xNorske Skogindustrier ASA NOK 189.9 5,641.4 16,643.0 22,649.4 0.8x 0.9x 0.9x 2.7x 8.6x 6.8x 4.1x NM 34.6x NM NMPortucel Empresa Produtor . .EUR 767.5 1,711.5 367.7 2,079.5 1.8x 1.8x 1.8x 6.3x 6.4x 6.5x 8.1x 9.0x 9.5x 11.4x 13.0x11.0xStora Enso Oyj EUR 612.2 4,469.3 3,380.1 7,921.3 0.6x 0.7x 0.7x 4.6x 5.9x 5.4x NM 13.1x 11.1x 17.0x 112.2xHolmen AB SEK 62.1 13,731.4 5,838.0 19,569.4 1.0x 1.0x 1.0x 3.7x 6.3x 6.1x 4.9x 10.9x 10.4x 18.1x 116.8xPaperInternational Paper Compa USD 427.6 11,687.0 5,715.0 17,630.0 0.8x 0.7x 0.7x 6.3x 6.3x 5.8x 10.3x 12.0x 10.0x 13.9x 11.2xMeadwestvaco Corporatio USD 173.7 4,685.4 2,198.0 6,883.4 1.0x 1.0x 1.0x 8.3x 7.6x 7.1x 21.9x 16.6x 12.9x 26.3x 13.8xPulp Aracruz Celuose S.A. BRL 549.2 6,557.5 2,215.8 8,777.1 2.3x 2.3x 2.3x 5.2x 5.1x 5.0x 8.7x 8.7x 7.5x 14.3x 20.1xGrupo Empresarial Ence S. . EUR 174.9 996.9 223.6 1,220.5 1.9x 1.8x 1.5x 9.3x 9.1x 6.9x 14.4x 14.9x 11.1x 24.2x 10.6x

    Mean 1.3x 1.3x 1.2x 5.8x 6.9x 6.2x 10.3x 12.2x 13.4x 17.9x 16.1x13.7xMedian 1.0x 1.0x 1.0x 5.8x 6.4x 6.3x 8.7x 12.0x 10.8x 17.0x 15.5x12.2x

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    R I S K T O O U R I N V E S T M E N T T H E S I S

    Industry Risk Viability of sustained growth and profitability in long run is

    questionable for paper industry, albeit we expect a supply shortfall in domestic

    industry which leaves a scope for promising industry returns for at least five years.

    Realization Risk Industry is operating at near capacity and new capacity

    addition in the pipeline would be operational only in late FY2009 or early FY2010,

    till then there is very limited scope for volume growth. Any sudden decline in paper

    prices which looks a rare possibility at this stage could affect the profitability and

    might hamper the industry growth.

    Input Risk Raw material mainly pulp and other utilities like water & power

    constitutes more than 60% of the total production costs for all the paper

    manufacturers. Non availability of affordable pulp and high cost of utilities could

    put pressure on margins.

    Coated products faced stiff competition from imports mainly from China and South

    East Asia. The Coated segment is increasingly becoming commoditized and

    facing a pricing pressure on segment with imports of good quality Coated paper.

    We believe that this competition emanated from strong INR against US$ in 2007-

    08. Any further depreciation can wane the threat of cheap imports of Coated Paper from China but again depreciation of INR would be a cause of concern as raw

    material imports will become expensive.

    BILTs plan to combat competition from import of good quality coated paper.

    Emphasis on reducing costs through better efficiencies while production

    Focus on increased customer contact through organized retail network

    Problems faced by Uncoated Paper Segment

    With significant improvements in quality and growth in domestic demand, sales

    realizations have improved of Uncoated Segment (Narrowing the gap between

    Coated and Uncoated variety of Paper). As this segment is highly commoditized,

    price competition is the key challenge. To counter this, the Company relies on

    superior delivery processes to differentiate itself from competitors, while keeping

    its costs aligned to the best in the industry.

    Pricing Risk covered indetail later under Pricing Factored inDCF heading

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    F I N A N C I A L S TAT E M E N T S

    2007a 2008a 2009e 2010e 2011e 2012e 2013eNet Revnues 23,178 28,311 30,847 36,027 38,828 39,021 39,411 Y-o-Y Change 21% 22% 9% 17% 8% 0% 1%Total Expenditure 17,460 21,326 23,337 28,365 31,051 31,985 32,306 % of Sales 75% 75% 76% 79% 80% 82% 82%EBIDTA 5,718 6,985 7,510 7,662 7,777 7,035 7,106 EBIDTA Margins(%) 25% 25% 24% 21% 20% 18% 18%Other Income 137 161 185 216 233 234 236 Interest & Financial Charges 1,003 1,482 3,105 2,810 2,430 2,024 1,561 Non-Recurring Income - - 3 3 0 (0) 2 Depreciation 1,565 1,924 2,383 2,422 2,561 2,621 2,661 PBT 3,286 3,740 2,203 2,643 3,019 2,624 3,119 Provision for Tax 735 704 727 872 996 866 1,029 Tax Rate (%) 22% 19% 33% 33% 33% 33% 33%PAT (Basic) 2,560 2,999 1,438 1,725 1,970 1,713 2,035 Y-o-Y Change 17% 77% (52%) 20% 14% (13%) 19%

    % to sales (Net Profit Margin) 11% 11% 5% 5% 5% 4% 5%PAT (Diluted) 2,560 2,999 1,438 1,725 1,970 1,713 2,035 Y-o-Y Change 25% 69% (52%) 20% 14% (13%) 19%% to sales (Net Profit Margin) 11% 11% 5% 5% 5% 4% 5%EPS (Basic-Adjusted) INR 3.1 INR 5.4 INR 2.6 INR 3.1 INR 3.5 INR 3.1 INR 3.7EPS (Diluted-Adjusted) INR 2.8 INR 4.8 INR 2.3 INR 2.7 INR 3.1 INR 2.7 INR 3.2Market Price as on 10th April 2007 INR 33.3 INR 33.3 INR 33.3 INR 33.3 INR 33.3 INR 33.3 INR 33.3P/E 10.9x 06.2x 12.9x 10.7x 09.4x 10.8x 09.1x

    Profit and Loss Statement (year Ending June) INR million (except per share data)

    2007a 2008e 2009e 2010e 2011e 2012e 2013eAccount Payable 4,001 4,259 4,665 5,685 6,255 6,414 6,479 Other Current Liabilty 1,387 2,053 2,237 2,613 2,816 2,830 2,858

    Current Liabilities 5,388 6,312 6,902 8,298 9,071 9,244 9,337 Debt 21,891 27,891 26,491 24,591 21,691 18,791 15,891 Other Liabilty 2,524 2,524 2,524 2,524 2,524 2,524 2,524 Minority Interest 257 257 295 341 393 438 493 Shareholder Equity 19,873 13,117 14,472 16,114 18,001 19,630 21,582

    Total Liabilities 49,933 50,101 50,684 51,867 51,680 50,628 49,827 Cash 3,718 (186) (212) (30) 14 (130) 560 Sundry Debtors 3,891 4,752 5,178 6,047 6,518 6,550 6,615 Inventory 3,943 4,325 4,738 5,774 6,352 6,514 6,579 Other Current Assets 3,822 2,831 3,085 3,603 3,883 3,902 3,941

    Current Assets 15,374 11,722 12,789 15,394 16,767 16,836 17,696 Long term Investments 203 203 203 203 203 203 203 Other assets 4,313 4,313 4,313 4,313 4,313 4,313 4,313 Net Fixed Assets 30,043 33,862 33,379 31,957 30,396 29,276 27,615

    Total Assets 49,933 50,101 50,684 51,867 51,680 50,628 49,827

    Balance Sheet (INR million)

    Note: (BILTs 2008 Income Statement numbers are actual whereas Balance Sheetand Cash Flow are projected)

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    2007a 2008e 2009e 2010e 2011e 2012e 2013eNI 3,286 2,999 1,438 1,725 1,970 1,713 2,035 D&A 1,565 2,310 2,383 2,422 2,561 2,621 2,661 Non-cash 637 - - - - - - W/C (1,333) 672 (502) (1,028) (556) (40) (77)

    CF Ops 4,156 5,981 3,320 3,119 3,975 4,294 4,619

    Capex/Cap SW (3,095) (6,130) (1,900) (1,000) (1,000) (1,500) (1,000) FCF 1,062 (149) 1,420 2,119 2,975 2,794 3,619 Acquisition (10,334) - - - - - - Cash/Investments 91 - - - - - - Debt 8,342 6,000 (1,400) (1,900) (2,900) (2,900) (2,900) Equity (575) (9,755) (83) (83) (83) (83) (83) Other - - 38 46 52 45 54

    Change (1,415) (3,904) (25) 182 44 (144) 690

    FCF/Share INR 1.27 (INR 0.27) INR 2.56 INR 3.82 INR 5.36 INR 5.03 INR 6.52EPS/Share INR 3.06 INR 5.40 INR 2.59 INR 3.11 INR 3.55 INR 3.08 INR 3.67FCF/EPS INR 0.41 (INR 0.05) INR 0.99 INR 1.23 INR 1.51 INR 1.63 INR 1.78

    Cash Flow (INR million except per share data)

    2007a 2008e 2009e 2010e 2011e 2012e 2013ealuation Ratios

    Market Cap /Sales 0.80 0.65 0.60 0.51 0.48 0.47 0.47Gearing (%) 110% 213% 183% 153% 121% 96% 74%Dividend Yield (%) 9.3% 2.1% 1.2% 1.4% 1.6% 1.4% 1.7%P/E (x) 10.9x 06.2x 12.9x 10.7x 09.4x 10.8x 09.1xROCE (%) 9.3% 11.6% 11.7% 12.0% 12.2% 10.7% 11.0%ROE (%) 12.9% 22.9% 9.9% 10.7% 10.9% 8.7% 9.4%ROIC 7.9% 9.4% 7.8% 8.1% 8.2% 7.2% 7.5%P/BV (x) 0.56 0.37 0.36 0.36 0.36 0.37 0.37EV/EBIDTA (x) 6.4x 6.7x 6.0x 5.6x 5.2x 5.3x 4.8xEV/Sales (x) 1.6x 1.6x 1.5x 1.2x 1.0x 1.0x 0.9xEV/EBIT (x) 8.8x 9.2x 8.8x 8.2x 7.7x 8.5x 7.6x

    Per Share RatiosDPS INR 3.1 INR 0.7 INR 0.4 INR 0.5 INR 0.5 INR 0.5 INR 0.5EPS Basic (adjusted) INR 3.1 INR 5.4 INR 2.6 INR 3.1 INR 3.5 INR 3.1 INR 3.7

    Adj Basic EPS Growth (%) 17% 77% -52% 20% 14% (13%) 19%EPS Diluted(adjusted) INR 2.8 INR 4.8 INR 2.3 INR 2.7 INR 3.1 INR 2.7 INR 3.2Adj Diluted EPS Growth (%) 25% 69% -52% 20% 14% (13%) 19%Cash EPS (Diluted No Shares) INR 4.6 INR 9.5 INR 5.3 INR 5.0 INR 6.3 INR 6.8 INR 7.3Book Value INR 59.6 INR 90.2 INR 91.3 INR 93.4 INR 93.1 INR 91.2 INR 89.7Profitability RatiosEBITDA margin (%) 24.7% 24.7% 24.3% 21.3% 20.0% 18.0% 18.0%EBIT Margins (%) 17.9% 17.9% 16.6% 14.5% 13.4% 11.3% 11.3%PBT margin (%) 14.2% 13.2% 7.1% 7.3% 7.8% 6.7% 7.9%PAT margin (%) 11.0% 10.6% 4.7% 4.8% 5.1% 4.4% 5.2%Growth Ratios

    Revenue (%) 21.2% 22.1% 9.0% 16.8% 7.8% 0.5% 1.0%Operating Profit (%) 22.8% 21.9% 1.3% 2.2% (0.5%) (15.4%) 0.7%PAT (%) 19.7% 17.2% (52%) 20.0% 14.2% (13.1%) 18.8%Other RatiosStock Turnover (days) 121.86 121.86 121.86 121.86 121.86 121.86 121.86Current Ratio 2.85 1.86 1.85 1.86 1.85 1.82 1.90Debt-Equity Ratio 1.10 2.13 1.83 1.53 1.21 0.96 0.74Avg Collection Period (days) 61.27 61.27 61.27 61.27 61.27 61.27 61.27Avg Payment Period (days) 123.65 120.00 120.00 120.00 120.00 120.00 120.00

    Ratio Analysis

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    F U N D A M E N TA L A N A LY S I S

    Company Background

    BILT (Ballarpur Industries Ltd) is the largest paper producer in India having

    combined paper capacity 625,568 mtpa (BILT 481,568 and Sabah Forest 144000;

    SFI also has a 120,000 pulping capacity which is highly scalable). BILT is a part of

    the large conglomerate owned by the Thaper Group originally promoted by Lalit

    Mohan Thaper. After his death in January 2007 Mr. Gautam Thaper has inherited

    a controlling stake in Thaper Group and going forward he may propose separate

    branding for his group of companies. BILT is the only Indian paper manufacture

    that is featured amongst the top 100 global paper manufacturer and has an

    aspiration to be among top 50 global paper producers by 2010-12. BILT clearly isan industry leader with highest market capitalization in domestic paper space and

    its paper capacity is more than the twice that of the nearest competitor. BILT has 6

    manufacturing facilities, 3 in Maharashtra & one each in Haryana, Orissa, Andhra

    Pradesh, respectively. BILTs Kamalapurma plant produces Rayon Grade Pulp

    that is sold to Grasim and has a capacity of 98,550 mtpa.

    Business Segments

    BILT operates predominantly in Printing & Writing Paper (PWP). It produces high

    end Coated Wood Free to low end Creamwove. Its Paper & Paper Product sales

    are broadly divided into six types of paper categories:

    i) Coated Wood Free

    ii) Uncoated Wood Free

    iii) Copier

    iv) Creamwove

    v) Office Supplies & Stationery and last

    vi) Tissue Paper.

    The Company is not compelled to report segmental information as per the

    guidelines of the Companys act as it operates only in paper production; still it

    reports on major segments like Paper, Paper Products, Pulp and Others in its

    annual report. We have clubbed Paper and Paper Products as one division since

    all the Paper and Paper Product categories falls within the purview of the major six

    lines of products mentioned above. Secondly, we are treating Rayon Grade Pulp

    produced at Kamalapurma plant as a separate division in our revenue estimates

    mainly because Rayon Grade Pulp is used in a textile value chain and has no

    relation whatsoever with paper production.

    PWPs contribution tototal sales in valueterms has grown from80% in 2005 to 86% in2007.We expect 86%- 87% in future

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    Segmental Revenue Forecast-(2009-13)in INR million 2008 2009 2010 2011 2012 2013Paper & Paper Products NA 26,092 30,970 33,446 33,836 34,043 Rayon Grade Pulp NA 3,569 4,007 4,251 4,420 4,596 Others NA 1,186 1,049 1,131 765 773

    Total 28,311 30,847 36,027 38,828 39,021 39,411 y-o-y 22.1% 9.0% 16.8% 7.8% 0.5% 1.0% Source: Adventity research, company reports

    Average selling price for writing paper as whole has increased from INR41841 in

    2005a per ton to INR44816 in 2007a. This is a 3.5% y-o-y for average selling

    prices in all categories across PWP product line and for the same period volume

    has also grown by 9.10% y-o-y. Utilization level for all paper units stood at 94% for

    FY2007 (excluding SFI) and we expect 97% utilization in FY2008 (again excluding

    SFI).

    FY 2005 Revenue Break-Up by Value FY 2007 Revenue Break-Up by Value

    Others15668%

    RayonGrade Pulp

    230312%

    PWP 16081

    80% PWP 20501

    86%

    RayonGrade Pulp2730 12%

    Others 4242%

    Historically the Printing & Writing Paper segments contribution to total sales value

    has increased from 80% in 2005a to 86% in 2007a. Going ahead we believe that

    Paper & Paper Products contribution to total revenues would grow from 84.6% in

    2009e to 86.4% in 2013e reflecting a CAGR of 5.5% in value terms for the same

    period.

    BILTs Retail Focus

    The estimated size of paper based office supply market was estimated size of INR

    16000 million in FY2007 which is very large by size but highly fragmented and

    catered by large pool of unorganized players. Increased economic activity along

    with the consumers tilted preference for high quality products is driving the growth

    of stationery products in SOHO (Small Office Home Office) and DTP (Desk Top

    Publishing) segments.

    2008 Income

    statement numbersare out. Numberson segmental break-up,Utilizations,Balance Sheet and Cash Flows areawaited.

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    BILTs Position in Retail Stationery Products Fastest GrowingSegment

    In 2007 the Business Stationery segment of BILT has grown by near 60% in terms

    of volumes taking the turnover to INR800 million. BILT has three major brands in

    this segment: BILT Matrix (premium multi purpose paper), Royal Executive Bond

    (which has 80% market share) and BILT Ten on Ten. BILT has leveraged its

    brand-equity quite well in this segment by launching contemporary and stylish

    products. By size, the contribution of this segment to the total sales is smallest but

    we are expecting around 38%-40% rise in total sales value to INR1100 million in

    FY2008 and with a growth rate of 70% to 80% it could grow up to INR2000 million

    in FY2009. The three brands have been a great success in the market and are

    seen in all retail outlets across India. This has given a leadership position for BILT

    in Business Stationery segment by achieving market share of 80%. On the pricingfront BILT clearly commands premium in this segment being the market leader for

    the last two years.

    Industry Size by Volume-FY 2007 BILT's Market Size by Volume-FY 2007

    Creamw ove 50%

    Copier 8%

    Uncoatedood Free

    30%

    BusinessStationery

    1%

    CoatedWood Free

    11%

    Coatedood Free

    25%BusinessStationery

    2%

    UncoatedWood Free

    52%

    Copier 12%

    Creamwove 9%

    Manufacturing Locations

    Manufacturing FacilitiesPlant Locations ----- Ballarpur Bhigwan Ashti (APR) Shree Gopal Sewa KamalapuramLocation (State) Maharashtra Maharashtra Maharashtra Haryana Orissa Andhra PradeshPaper Capacity (mtpa) 134,500 115,000 55,000 105,068 72,000 NilPulp Capacity (mtpa) 130,000 78,000 Nil 78,000 43,000 98,550 Product Mix Hi-birght

    Uncoatedpaper, Copier

    High qualitycoated paper

    Branded Copier Uncoated,Coated BCB,

    Speciality

    Copier, C1Spaper, maplitho

    Rayon GradePulp

    Raw Material Mix Bamboo Wood Purchased Pulp urchased Pulp Bamboo, wood,timber waste

    Bamoo Wood Wood

    Expansion plans (mtpa) 110,000 of Uncoated

    140000 Coated No Expansion No Expansion No Expansion No Expansion

    Business Stationery smallest segment interms of value to total sales is the fastest growing segment.Weexpect 10% revenuecontribution in total sales by 2009e.

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    Capacity Expansion Factored in ROIC

    Capacity Increase Vs ROIC

    563546662065

    707198

    7.8%

    8.1%

    8.2%

    0

    100000

    200000

    300000

    400000

    500000

    600000

    700000

    800000

    2009e 2010e 2011e

    7.6%

    7.7%

    7.8%

    7.9%

    8.0%

    8.1%

    8.2%

    8.3%

    Capacity ( mtpa) ROIC(%)

    BILT has announced INR9000 million capex to expand its Uncoated Paper facility

    at Ballarpur by 110,000 mtpa and 140,000 mtpa of Coated Paper facility at

    Bhigwan. Out of this total capex plan BILT has already incurred INR300 million in

    2007a and 2008a capex figures would be out shortly. Both of these capacity

    expansions would go on steam in 2H of 2009e. Factoring the incremental

    production into our DCF calculation highlights the fact that companys ROIC will

    increase from 7.8% in 2009e to 8.2% in 2011e. We are expecting rationalization of

    incremental capacity in production figures after 2011e.

    Pricing Factored in DCF

    Average Selling Price of Paper & Paper Products per ton Vs Basic EPS

    46398

    46862

    47331

    46858

    46389

    2.59

    3.11 3.08

    3.673.55

    45800

    46000

    46200

    46400

    46600

    46800

    47000

    47200

    47400

    47600

    2009e 2010e 2011e 2012e 2013e0.00

    0.50

    1.00

    1.50

    2.00

    2.503.00

    3.50

    4.00

    Average Selling Prices for Paper & Paper Products in INR Basic EPS in INR

    Recently the gap between the price per ton of Coated category of paper and the

    Uncoated variety of paper per ton has reduce therefore we have considered single

    Paper prices aresensitive to global

    paper price trends,buoyant domestic demand and cheapimports from China

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    average selling price for both the categories in our calculation. We dont expect

    any correction in the paper prices until 2011e due to sustained gap in demand and

    production. Our assumption is based on the fact that capacity addition by major

    players would come into play after 2011e and paper price would stabilize at

    around INR46300 to INR46800 per ton. Recently BILT has announced 2% hike of

    Un-Coated Paper (INR800 per ton) with effect from 1 st September 2008 to offset

    input cost push. Coated variety has also witnessed a price increase of INR1500

    per ton taking current price of Coated Paper per ton to INR49500 levels. We have

    considered average price range between INR46500 to INR47500 per ton for both

    the varieties of Paper; Coated as well as Uncoated in our DCF calculation. Paper

    prices are sensitive to global paper price trends, buoyant domestic demand and

    cheap imports from China. Under such circumstance 2%-3% variation in Paper

    Prices is not ruled out and it will have a direct impact on the BILTs topline.

    Average Selling Prices of Rayon Grade Pulp per ton Vs Basic EPS

    3773141504 43579

    45758 47588

    2.59

    3.11 3.08

    3.673.55

    05000

    100001500020000250003000035000400004500050000

    2009e 2010e 2011e 2012e 2013e0.00

    0.50

    1.00

    1.50

    2.00

    2.50

    3.00

    3.50

    4.00

    Average Selling Price of Rayon Grade Pulp in INR Basic EPS in INR

    In case of Rayon Grade Pulp (RGP) we are expecting greater demand from

    Grasim in the coming years and it would propel the price of RGP to INR47300 to

    INR47800 per ton from the current levels, which suggest the CAGR of 7% from

    2008a to 2013e.

    Margins

    In 2008a EBITDA margins have increased by 570 basis points taking it to 22.2%

    from 16.5% in 2007a. This stupendous increase is caused by strong rupee against

    dollar in 2007-2008. BILTs imports more than 60% of its total raw material

    requirements for its Bhigwan and Ashti plants. Due to the recent fall in the INR we

    are expecting rise in imported pulp prices for the next few years. This will have a

    substantial impact on EBITDA margins and EBITDA margins will stabilize in the

    range of 18% to 20% in future. (We expect that INR would remain in the range of

    42-44 against US$)

    We expect EBITDAMargins to stabilizeat around 18% inlong run

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    Raw Material & Power Costs in INR million Vs EBITDA Margins (%)

    14,190

    17,29319,026 19,510 19,706

    4,9356,125 7,024 7,0946,601

    24%

    21% 20% 18% 18%

    -

    5,000

    10,000

    15,000

    20,000

    25,000

    2009e 2010e 2011e 2012e 2013e0%

    5%

    10%

    15%

    20%

    25%

    30%

    Raw material & Stores Pow er & f uel c os ts EBITDA Margin

    Global Hardwood Pulp Prices Soft Wood Pulp Prices (Europe)

    Global Hardwood Pulp Prices

    0100200300400500600700800900

    1 6

    - J u

    l - 0 2

    6 - J a n - 0

    3

    1 6

    - J u

    l - 0 3

    6 - J a n - 0

    4

    1 6

    - J u

    l - 0 4

    6 - J a n - 0

    5

    1 6

    - J u

    l - 0 5

    6 - J a n - 0

    6

    1 6

    - J u

    l - 0 6

    6 - J a n - 0

    7

    1 6

    - J u

    l - 0 7

    6 - J a n - 0

    8

    1 6

    - J u

    l - 0 8

    U S $ p e r

    t o n

    SoftWood Pulp Prices (Europe)

    0

    10 0

    20 0

    30 0

    40 0

    50 0

    60 0

    70 0

    80 0

    90 0

    1000

    1 6 - J u l - 0 2

    1 6 - J a n - 0

    3

    1 6 - J u l - 0 3

    1 6 - J a n - 0

    4

    1 6 - J u l - 0 4

    1 6 - J a n - 0

    5

    1 6 - J u l - 0 5

    1 6 - J a n - 0

    6

    1 6 - J u l - 0 6

    1 6 - J a n - 0

    7

    1 6 - J u l - 0 7

    1 6 - J a n - 0

    8

    1 6 - J u l - 0 8

    U S $ p e r

    t o n

    Higher Depreciation and Amortization costs on account of INR9000 million capex

    in the initial years would decrease the EBIT margins to 13% in 2011e, after that

    lack of clarity on further expansion plans and moderate routine capex would help

    EBIT margins to stabilize at around 11%.

    EBIT Margin

    2,3832,422

    2,561

    2,621 2,66117%

    15%

    11% 11%

    13%

    2,2002,2502,3002,3502,4002,4502,5002,5502,6002,6502,700

    2009e 2010e 2011e 2012e 2013e0%

    2%

    4%

    6%

    8%

    10%

    12%

    14%

    16%18%

    Depreciation EBIT Margin

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    Buyback & Split

    As per the restructuring plan 18,57,07,430 equity shares of INR10 were sub-

    divided into 92,85,37,150 equity shares of INR2 each on the March 10, 2008 and

    simultaneous compulsory buy back of 37,14,14,860 equity Shares of INR2 each at

    a price of INR25 per share was completed. In addition the optional buy back of 15,98,451 equity shares of INR2 each from small shareholders was completed by the

    Company at a price of INR30 per share on May 09, 2008.

    Share Holding Pattern

    Shareholding Pattern 31-Mar-08 30-Jun-08 y-o-y(%)Promoters & Promoter Group 38.88% 38.99% 0.3%Mutual Funds/UTI 6.32% 8.33% 31.8%Financial Institutions/Banks 0.04% 0.02% -50.0%Insurance Companies 14.41% 14.26% -1.0%FII 20.36% 18.29% -10.2%FFI 8.32% 8.35% 0.4%Body Corporates 2.93% 3.04% 3.8%Individuals 8.74% 8.72% -0.2%Total 100.00% 100.00% 0.00%

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    I N D I A N PA P E R I N D U S T R Y

    Industry Overview

    Indian paper industry being one of the oldest can be traced down way back in

    1812 in eastern state of West Bengal. The Indian paper industry is largely power

    and capital intensive and alike global paper industry it always exhibited the basic

    characteristics of commodity business i.e. cyclical in nature. Historically global

    paper price cycles were very sharp with 15% to 20% change in their peaks and

    troughs. Nowadays global paper price cycles have become smooth and flat with

    just 3% to 5% change in the peaks and troughs.

    Domestic Paper Industry No Longer Cyclical in Nature

    Contrary to global scenario current domestic paper industry is moving out of the

    cyclical nature of a commodity business. Average realization on Printing & Writing

    Paper (PWP) per MT has increased with 4.65% CAGR during FY02-FY07. We

    have calculated the average utilization level for FY07 of six large players, which

    stands at 99.86%. Due to optimum utilization levels; all major integrated players

    have announced expansion plans.

    Industry Utilization Rate Average Realization of PWP

    94%107% 109%

    94%104%

    91%

    0%20%

    40%60%80%

    100%120%

    BILT TNPL JKPaper

    *WestCoast

    A PPM **Star Paper Mills

    Utiliz ation Levels 2007 Indus try Average

    11%

    1%

    5% 3% 4%

    0

    10000

    20000

    30000

    40000

    50000

    FY02 FY03 FY04 FY05 FY06 FY07

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    Average Prices y-o-y * West Coast FY2008 capacity** Star Paper Mills FY2006 capacity

    Our estimates suggest that Capacities are growing at CAGR 10.89% slightly lower

    than demand growth of CAGR 10.93%. Demand will outstrip the production which

    is growing at CAGR of 10.36%. We expect utilization levels to remain stable at

    higher levels (near 100%) for next 3 years. The gap mentioned in the chart below

    depicts the difference between demand and production of Paper. In FY06 & FY07

    we have observed the gap of -0.4 million tons (MT) and even going ahead in future

    till FY2010e we expect the demand production gap to remain in the range of -0.35

    (MT) to -0.4 (MT). This gap has instigated the increase in average realization of

    PWP prices from INR35700 in FY02 to INR44816 in FY07 at 4.65% CAGR for the

    same period (See the chart above).

    Indian Paper PriceCycle bucking International trend

    Average utilizationlevel for FY07 of six large players, whichstands at 99.86%

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    Demand & Supply Gap In Volume- CAGR 2006-09

    (2.00)

    -

    2.00

    4.00

    6.00

    8.00

    10.00

    FY07 FY08e FY09e

    Capac ities Demand Produc tion Gap

    10.89% 10.93%

    10.36%

    10.00%

    10.20%

    10.40%

    10.60%

    10.80%

    11.00%

    Capacities Demand ProductionCAGR (06-09e)

    Adventity Estimates

    Capacity Expansion

    Most of the new capacity being added will go on steam only in later part of FY09 or

    beginning of FY10. Sustained demand will keep operating levels of major playersnearing their full capacities. Few large international investors like IFC & Goldman

    Sachs have picked up equity stakes in domestic paper companies believing that

    sustained demand along with the supply constraints will give a promising view on

    Indian Paper Industry in few years to come. These investments are mainly

    directed towards funding the brown field expansion of large domestic players. IFC

    invested US$35 million in Andhra Pradesh Paper Mills to partly fund its

    INR5540million expansion plan and planning to invest further INR230 million for

    helping the company out to buy a high-end paper machine. IFC & Goldman Sachs

    had earlier made investments of INR500 million and INR760 million in JK Paper.

    Capacity Expansion in mt- Mostly Coming up in H2 -09 and in FY10

    Companies PresentCapacity

    ProposedExpansion

    NewCapacity

    %Increase

    Est Capexin INR

    *BILT 481,568 250,000 731,568 52% 9,000

    TNPL 230,000 15,000 245,000 7% 5,700 *JK Paper # 240,000 210,000 450,000 88% 8,500

    West Coast 180,000 140,000 320,000 78% 11,000

    APPM 153,500 104,000 257,500 68% 8,800 Sirpur ## 138,300 54,750 193,050 40% 2,900 * BILT & Jk Paper has June year ending# Partly incurred## fully incurred

    All major domestic paper manufacturersare operating at near and even above 100%utilization levels

    Most of the new capacity being added will go onsteam only in later

    part of FY09 or beginning of FY10.

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    Brownfield Expansion Economical Over Greenfield

    Capacity expansion is cost effective instead, adding a new capacity. For large

    players cost of expansion is less than 50% than the cost of adding a new capacity.

    (For Example West Coast Paper Mills has announced brown field expansion of

    140000 TPA at the cost of INR92000 per ton; whereas green field cost for thesame project would work out to be INR125000 per ton). In recent past seven large

    players have announced capacity expansion of over 600,000 tons p.a. together.

    The Govt of India has reduced excise duty from 12% to 8% ad valorem on paper &

    paperboards with effect from March 2008 in order to encourage the capacity

    addition. Currently, industry enjoys import duty protection (10.57% duty on paper

    imports net of credits) and 100% FDI.

    Industry Capex posses no threat of Oversupply

    This capex is to primarily fund - rightsizing captive pulp capacities (to cut cost and

    reduced dependency on imports), to meet pollution control norms, cogeneration of

    power (to lower power and fuel cost), chemical recovery plants and much less on

    increasing paper capacity. Consequently, despite of huge capex in line, we do not

    expect any threat of supply overhang and we feel that incremental supply is likely

    to be absorbed by growing demand.

    Fragmented Structure

    Fragmented Structure of Indian paper Industry

    No of Players

    TotalCapacity

    Marketshare

    Large Player-Having Capacity more than 0.1 mtpa 12 2.5 mtpa 41%Small Player-Having Capacity less than 0.1 mtpa 590 3.6 mtpa 59%

    Total 602 6.1 mtpa 100%

    Indian paper industry is 15 th largest in the world which provides employment to 1.3million and contributes over INR25 billion to the Government. Indian paper market

    is estimated to be INR220 billion (according to the latest 2008 numbers BILTs

    revenue stood at INR28311 million; which means BILT controls 13% of the total

    i.e. unorganized and organized market together) and demand growth is expected

    to be 7% to 8% approximately, in line with the GDP growth estimates.

    For large players cost of Brownfield expansion is lessthan 50% than thecost of adding a new capacity

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    Structure of Indian Paper Industry with Segment Growth Rates

    Segment Market Size & Growth over 2005-09 in million tons per annum (mtpa)

    Segement Market Size Market Size CAGR2005 2009 2005-09

    Printing & Writing Paper 2.186 2.95 8%Includes Coated & uncoated

    Industrial-Paper & Paper Board Tissues

    Includes Tisues & packaging 0.075 0.130 15%

    Packaging

    2.568 3.659 9%

    Newsprint 1.17 1.94 13%

    Paper Industr

    y

    Operations of Industry are increasingly becoming Global

    Indian industry is structured in a very similar manner to the global industry with

    most players operating either in the paper and paperboard industry or newsprint

    industry. Existing nature of an Indian paper industry is highly fragmented. It is

    estimated that there are nearly 1200 mills in the country both in organized and

    unorganized sector. Out of these 1200 mills 50% are shut mainly on account of

    technological obsolescence and due to their small size they are deprived of

    access to the much needed funding to restart shut mills. Top nine organized

    players contribute to the 1/3rd of the total domestic production. Cheap raw

    material sourcing is an important financial parameter for all paper manufacturers

    as pulping cost is the single largest component in the total operating costs. Net

    imports of pulp have gone up by 9.2% and that of recovered paper by 16%.

    Effective solution for Indian Paper Mills is to make heavy investments in

    plantations and pulp mills in Laos, Vietnam, Indonesia & Malaysia. BILTsacquisition of SFI is a classic example of Indian Paper producers making an

    attempt to control Cellulose assets outside India.

    Raw Material Scenario

    Cellulose is the main constituent of paper which is derived from wood, waste

    paper, bamboo and agro residue like bagasse, jute, straw etc. Historically wood

    was major raw material to produce pulp but recently proportion of non-wood raw

    materials and waste paper has increased to 60.8% of the total pulp production.

    India is facing a shortage of wood as well as non-wood fibrous resource rawmaterial; based on the World Bank report Indias timber supply deficit was 39

    million cubic meters in 2006.

    Ballarpur Presence in PWP segment-Market leader in most segments

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    Demand Shift towards Higher Quality Paper (BILT operates inHigher Value Segments)

    With regard to printing & writing grades, there is rapid shift to consumption of

    premium quality papers like coated and high bright maplitho. The demand for

    coated paper is fuelled by a massive increase in advertising & promotional spendand printing of brochures & high quality books. Currently Two Sided Coated paper

    is growing at 13% p.a.

    Demand Drivers

    Historically Paper industry mimicked the domestic economic growth. In

    2006 domestic paper demand grew 1.1x the GDP growth. This multiple is

    expected to be higher going ahead in future Rapidly changing demographics are causing increase in paper

    consumption. Urbanization is growing at a much faster rate of 2.5% with

    higher number of young adults. Growth in Industrial Production progressively increasing use of industrial

    paper for packaging of FMCG goods. This healthy growth in segments like

    pharmaceuticals, consumer durables and readymade garments is

    boosting the growth of industrial paper. Growth estimates for Duplex 7.2%

    and for Kraft 8% CAGR upto 2008-09 Writing and printing paper to grow at

    8% compounded upto 2008-09. Few segments with PWP are growing at

    more than 10%. Lifestyle changes, increasing aspirations & awareness are making a shift

    in the consumption pattern towards high value products. Demand for high

    quality magazines, promotional material, availability and usage of better

    paper and printing technology is suggesting an upward movement in the

    paper value chain. Increased Government spending on Educational Sector. Educational

    sector is expected to grow at 4%. Government has promised more than

    6% of GDP to increase literacy rate.

    As the international Wood Free Coated Paper Prices are marginally moving

    upward due to rising raw material and input costs; increasing global linkage and

    domestic demand-supply mismatch facilitates the domestic paper prices to follow

    international prices.

    However, in comparison with international price trends domestic prices are

    relatively insulated from the dual factors:

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    Indian paper industry has 1:1 correlation with the GDP. GDP grew 9.2% in

    2007 and growth in paper demand is likely to mirror this target or even

    slightly better than it.

    Secondly, low per capita domestic consumption of paper. Paper industry

    is likely to mimic the same growth or even stronger growth than GDP.Enormous potential for growth in paper demand caused by lowest per

    capita consumption (7kgs) in the world compared to world average of

    56kgs.

    Low per capita consumption throws a tremendous growthopportunity

    In a longer run Asia still remains as a major catalyst or a major growth

    driver in the global economy. India is the fastest growing paper market

    which is growing at the rate of 3 times that of global market and 50% more

    than the Asian average. Detailed analysis by major research houses have

    shown a possibility of additional 1 million paper demand if Indias Per

    Capital Paper Consumption increases by mere 1kg from current levels of

    7kg. Indias Per Capita is abysmally low against the Global average of

    56kg.

    Consolidation Unlikely in Domestic Paper Space

    Domestic small players are getting increasingly marginalized and most of the bigplayers are planning to strengthen their capacities and improve upon the cost

    structure as they reach near their capacities. This scenario suggests that industry

    is undergoing a churning akin to an organic growth which is unlikely in the

    immediate future as the 50% closed mills offers unattractive investment

    opportunities for a consolidation to begin in the industry.

    These sick small units were a consequence of the Government licensing system

    introduced in the year 1970; as small paper mills had been set up as SSI units.

    The smaller mills are being rendered unviable due to Removal of excise concession for small units Reduction of basic import duty and, Stricter environmental compliance standards

    Since, smaller players operate in the niche segments no immediate consolidation

    is foreseen. This again shows a lesser effort by the domestic companies to grow

    inorganically within the domestic space.

    Indias Per Capitaconsumption of

    7kg is abysmally low against theGlobal average of 56kg.

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    Stringent Environmental Norms

    Stringent environment management policy of Government is deterring fresh

    Greenfield investments. The industry consumes tons of chemicals and thousands

    of litres of fuel. This has an adverse affect on the environment. In India, the pulp

    and paper industry has been brought under the list of 17 most polluting sectors asidentified by the Central Pollution Control Board. Pollution is caused by outdated

    processes and inadequate pollution prevention & control technologies.

    (Last major Greenfield investments was done by TNPLs of 90,000 mtpa bagasse-

    based mill in 1984 and Sinar Mass (at Bhiwan and now taken over by BILT)

    115,000 mtpa coated paper in 1996.)