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S. Vaidya Nathan

A COMBINATION of consolidation and a disciplined approach to capacity creation has placed industry majors such as Ballarpur Industries, Tamilnadu Newsprint, JK Paper, Seshasayee Paper and West Coast Paper in a vantage position to capture growth opportunities.

Even as these players battle it out in the writing, printing, speciality and industrial paper space, ITC has walked away with the market for coated paperboards.

Acquisitions over the past two years, involving some of the larger capacities in the industry, have led to a reduction in the number of major players with financial clout. But the benefits of consolidation may get fully reflected only over the next 2-3 years.

The merger of ITC Bhadrachalam Paperboards with ITC marked the first significant move in the consolidation game. But it would be difficult to benefit from this still-emerging story as ITC is also into numerous other businesses.

The other big-ticket merger involving JK Corp and Central Pulp Mills has led to the creation of JK Paper, an exercise that has infused life into a stock that had few takers since the mid-1990s.

The deal that could deliver value at an early date is West Coast Paper's acquisition of Rama Newsprint. This was sewn up two weeks backs with a debt-restructuring package. It may take West Coast Paper a couple of years to bring the debt situation under control, but it should do so comfortably.

The contemporary nature of Rama Newsprint's capacity could lead to better profitability over the long term. Its accumulated losses could also provide tax shelter to West Coast Paper, which forks out tidy sums as tax.

Ironically, it is the industry leader, Ballarpur Industries Ltd (BILT), which appears to be stuck with an acquisition that could be a drag on its profitability for a number of years.

The Sinar Mas unit, which was acquired at an attractive price from the down-in-the-dumps Asia Pulp of Indonesia, has cast a shadow on BILT's earnings. Its contribution to the bottomline is hardly of the kind that could justify the massive expansion in BILT's equity. The funds were raised last year to buy out a closely held company, BILT Graphics that held Sinar Mas.

Significantly, a couple of weeks back BILT sold its other acquired unit, the coated paperboard facility of Servall Engineering, to ITC. This is a win-win deal as BILT is left with only one major problem area to tackle.

Going forward, barring the likely disinvestment of Hindustan Paper, the consolidation process appears to have largely run its course. Most other paper capacities are too small — less than 40,000 tonnes per annum — to offer significant advantages to would-be acquirers.

With Seshasayee Paper and Tamilnadu Newsprint completing their expansion plans, capacity additions appear unlikely.

This, coupled with the likely improvement on the pricing front, is likely to further strengthen the position of these five players in a highly fragmented industry.

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