Recently in Kota Kinabalu (Malaysia)
Ballarpur Industries Ltd, India's leading manufacturer of printing and writing paper, recently completed acquisition of Sabah Forest Industries Ltd, Malaysia's largest paper manufacturer. This $261 million acquisition, which brings with it an integrated paper mill, captive power plant and jetty, along with a licence to harvest wood from a 2.89 lakh ha forest area and plantation provides Ballarpur Industries a low cost, stable supply of raw material and an alternative source for its exports. This will strengthen its position in the Indian market to which it can feed more products. Mr Gautam Thapar, Chairman, Ballarpur Industries, shares his views.
What spurred this acquisition?If you are in the paper industry today anywhere in the world there are clear signs of the direction that you have to take. You either go up in size rapidly or you are pushed into a niche with speciality paper. There are no volumes in speciality paper and it is not a viable option for market leaders. The choice for Ballarpur Industries is to grow aggressively.
If we did not have a large market share like we do, I would probably rethink. We are where we are because of scale and size.
What advantage does the acquisition offer in the long term in India and in Malaysia?Malaysia as a market for printing and writing paper is about 3.7 lakh tonnes. Not a very large market, but Sabah Forest Industries has a big chunk of that.
If you look at the operational cost of producing pulp and paper in Malaysia, just the wood cost is significantly lower than in India. In the long-term perspective there will be a significant lowering of costs overall for BILT. They (Malaysia/SFI) have operating margins of 45 per cent in integrated operations and we are at 26 - 28 per cent. From an investment point of view, if you look in modern pulp and paper industry, no one does less than 650,000-700,000 tonnes of brand new paper machine capacity and 300,000 tonnes of pulp and this site offers us that size.
How do the raw material costs compare with the traditional players in pulp exports?The traditional sources are Indonesia and Brazil. Indonesia is a part of the same region and we do not see any issue there.
The market leader today is Brazil in eucalyptus. They are twice as productive, but that is negated by the freight cost. The productivity makes them attractive but supply chain issues make it more challenging. Distance-wise between Malaysia and India it will be competitive. Productivity here will catch up with introduction of clonal technologies and high yielding plant material.
From the BILT point of view it provides us a long-term stability in terms of market, low-cost raw material supply and long-term supply of wood pulp.
What does the acquisition mean to BILT's business? What are your plans here?SFI produces 140,000 tonnes of paper and 120,000 tonnes pulp. Last year sales were $110 million. We will invest about $80 million for de-bottlenecking of the paper machines and revamping the energy facilities to bring down the energy cost.
Paper capacity will go up to 200,000 tonnes (uncoated), which means the coated paper capacity will be 10 per cent more 220,000 tonnes and 240,000 tonnes pulp. The EBIDTA of $25 million will increase to $55-60 million with revenue going up to $215 million. Overall those are the numbers in stage one which is in the first two-and-a-half years.
When the pulp mill is expanded at that point in time, depending on the duty structure we will look at a paper machine and for export of more paper from here. That is very much at the back of my mind.
Along with this we will develop 20,000 hectares of plantations, which is about $20 million. It takes about six years for the trees to mature. So we will need to start a new pulp mill in 2012 when the harvest of raw material will be ready. A 700,000-tonne pulp mill will mean an investment of $700 million. If we add a paper machine here that will mean investments of another $200 million, a total of $900 million.
Does that mean pulp supply will start from Malaysia to India...No. We are six years away from paper and pulp supply. Whatever paper is coming out will be sold in Malaysia or the Middle East where we are currently selling paper out of India.
So how will SFI support BILT's growth?We want to grow and protect the domestic market and increase our non-India market share. So SFI gives us that strength. It will in all probability be a realignment of exporting paper from India, which is a least attractive option. Exporting paper from SFI is a more attractive option. SFI will look at Malaysia and wherever BILT was supplying in the region. When we ultimately build a bigger pulp mill and paper will be geared to Asia Pacific Market. So we will be able to move more paper into India.
Will BILT move its own brands into the markets here? How about SFI's brands?SFI has its own brands and we will continue to reinforce them. But we would also like to see BILT brands moving into Malaysia.Let me clarify... We brand offset paper and writing and printing products. Depending on the quality here those brands will also start coming here as well. In A4 office supply they have a strong brand and a good name in the market. So there is no reason to come here. We do coated papers, they do not. The coated paper will be BILT brands. For the time being the company will be called BILT-SFI. We will run it as a subsidiary.
How would you rate SFI's efficiencies with that of your own? What will you have to do for SFI to supplement BILT?We produce 460,000 tonnes of paper and 100,000 tonnes of market pulp and we employ totally about 9,000 people.SFI makes 140,000 tonnes paper and 120,000 tonnes pulp, but it is an integrated operation, with 900 people. Productivity wise they are OK. Not great.But if you look at our Bhigwan facility where we do not run a pulp mill we produce about 1.25 lakh tonnes paper and plan to increase to 3.25 lakh tonnes. The employee number would go up from 800 to 1,100. So margin expansion will come from there.SFI people know the plant well. Where they have suffered in the past is on the gap in specialised knowledge of papermaking. The Lion Group, which owned SFI, is into steel and tyre. We see hidden savings of $8-10 million just for the asking. But that will require cooperation and coordination and certainly better knowledge of papermaking. We have put in some of our more experienced people at the top more for guidance than training.