International Paper’s aggressive investment in APPM has sent the Indian paper industry soaring into the stratosphere. It is likely that long-held valuation parameters will be rewritten, but small investors will do well to tread with caution rather than take to misinformed exuberance
Memphis based International Paper Inc (IP) has made a foray into the thriving Indian paper industry with a massive $319 million deal with Andhra Pradesh Paper Mills Ltd. The announcement made Tuesday last week by L N Bangur set off a wild spate of revaluation for the leading players in the paper industry. The deal includes $257 million in cash for the promoters' 53.5% stake besides an additional payment of $62 million for a non-compete arrangement.
In a move that caught the markets by surprise, IP agreed to pay Rs544 per share, a premium of about 205% on its market price at the time. In the few days since then, APPM has shot up to Rs283.35, spurting on low volumes while breaching the circuit each trading session.
It isn't entirely new for an acquiring company to pay a premium to acquire a controlling stake, especially in an overseas market. However, the extent of the premium paid in this instance is bound to excite conversations for some time to come.
The $25 billion International Paper is a market leader with operations in over 24 countries, but no presence in India before this acquisition. APPM is a leading player in India with a production capacity of 250,000mtpa (metric tonnes per annum). The Bangur group company is also known for its green manufacturing initiatives, with sales of approximately Rs720 crore per annum.
International Paper will spend another $104 million to complete the mandatory open offer for an additional 21.5% of APPM's outstanding equity. It is expected that IP will complete the formalities by the third quarter of FY2012, by which time it will own 75% of APPM.
The acquisition allows International Paper to hedge for growth with many of its current markets stagnant or in decline. India is among the fastest growing paper markets in the world-Poyry, an independent consulting firm specialising in the paper and pulp industries-estimates that India will witness CAGR (compounded annual growth rate) of 5.5% compared to 4.8% in China, marginal decline in Europe and just 0.5% growth in North America.
The fact that per-capita consumption in India is relatively low also makes the industry believe that there is huge untapped demand. A renewed thrust by the government through policy investments in the education sector also adds fuel to these aspirations. According to Poyry's data from 2009, consumption in India was rooted at just 8kg against 63kg in China and 227kg in the USA.
John Faraci, Chairman and CEO of IP said, "APPML is an established and highly respected company in India, and is an excellent platform for International Paper to grow in the Indian paper and packaging markets."
Meanwhile, the markets have gone into a virtual frenzy sending the prices of paper stocks soaring into the sky. Besides APPM, trading in stocks like West Coast Paper, Star Paper and ABC Paper-relatively smaller players-hit the upper circuit. Fancied players such as Ballarpur Industries and JK Paper also recorded massive gains to close at a new high.
The average valuation of Indian paper companies is about 7 times earnings, while IP has paid about 32 times APPM's 2010 earnings. It is no wonder that analysts are scrambling to discover new ways to evaluate the otherwise neglected industry. Interesting enough, BILT decided to delay its plans to raise $330 million by listing on the London Stock Exchange in order to review their valuation metrics and benefit from the developments at APPM.
At the end of Friday, there were outstanding 'buy' orders for more than 4,000,000 shares of APPM against 'sell' orders of just over 10,000 shares reflecting the mad rush to benefit from the changed circumstances. A similar trend is also evident in almost all the other players in the paper industry.
It is evident that the paper industry is all set for a rerating by the markets. But it is also likely that there might be a further consolidation of the fragmented sector as it takes a long time to build up capacities in this capital intensive business.
Given the circumstances it would be better for the small investors to avoid the risks associated with the current frenzy. It will be wise to look at the sector once the changes play out to identify and invest in fundamentally sound stocks to benefit in the long term.
Crude prices were up on upbeat economic data indicating a rise in demand and on the ongoing conflict in West Asia, which threatened to disrupt supplies
The Indian stock market is likely to open higher supported by positive global cues. Markets in Asia, with the exception of the Seoul Composite, were in the green in early trade on Monday while upbeat jobs data resulted in the US markets closing with good gains on Friday. The SGX Nifty was 15 points higher at 5,880 compared to its previous close of 5,865.
The market rally, which began early in the previous week, lost a bit of steam on Friday. The gains were mainly on institutional support and optimism over the global recovery, despite there being no domestic positive signs. But concerns over rising crude prices and sustained inflation linger. We expect the market to give up some gains in the week ahead.
In the week gone by the market registered a gain of 3% with the Sensex rising 605 points to close at 19,420 on Friday and the Nifty was up 172 points at 5,826.
The Sensex gainers were DLF (up 9%), Maruti Suzuki, Hero Honda (up 8% each), Reliance Infrastructure and HDFC (up 7% each), while State Bank of India ended flat. There were no losers in the week.
All sectoral indices gained too, with the BSE Realty (up 7%) and BSE Consumer Durables (up 6%) emerging as the top performers.
The Sensex has added 1,606 points and the Nifty gained 469 points in the eight-day rally till 31 March 2011. The two benchmarks advanced 9.1% and 9.4% respectively through the month. However, on a quarterly basis the market has declined 5%, its first quarterly loss since the 25% slump in the December 2008 quarter, when the global financial crisis broke.
While the market has shown signs of stabilising after a poor performance in January and February, the forthcoming earnings season and the Reserve Bank of India's (RBI) monetary policy for the new fiscal will drive the market, going forward.
The US markets closed off the day’s highs, supported by upbeat unemployment data that boosted optimism about the global recovery process. The Labor Department said a total of 216,000 non-farm jobs were added last month, more than the 190,000 expected by analysts. The unemployment rate for March fell to a two-year low of 8.8%.
The Dow closed 56.99 points (0.46%) higher at 12,376.72. The S&P 500 rose 6.56 points (0.49%) to 1,332.39 and the Nasdaq added 8.53 points (0.31%) at 2,789.60.
Markets in Asia, barring the Seoul Composite, were in the positive supported by a fall in the value of the yen against the dollar and upbeat US markets on Friday. However, higher crude prices will keep investors guarded. Investors brushed Japanese concerns and are expected to focus on corporate earnings, going ahead.
The Hang Seng surged 1.11%, the Jakarta Composite gained 0.41%, the KLSE Composite added 0.15%, the Nikkei 225 rose 0.72%, the Straits Times advanced 0.65% and the Taiwan Weighted rose 0.25%. On the other hand, the Seoul Composite lost 0.25% in early trade. The Chinese market is closed for a local holiday and will resume trade on Wednesday.
US crude oil futures prices jumped more than 1% to the highest close in two and half years as positive US jobs data reinforced economic growth expectations and as the ongoing conflict in West Asia and the Middle East kept investors worried about supply disruptions.
London Brent crude for May rose $1.34 to settle at $118.70 a barrel, the highest close since August 2008 and up $3.11 for the week.
Back home, credit rating agency Fitch downgraded Indian economy’s growth projection to 8.3% for 2011-12 on account of high inflationary pressures that has forced the Reserve Bank of India to hike key rates. The agency had earlier projected the country’s growth for the current fiscal at 8.5%. It, however, kept its projection for 2012-13 unchanged at 8%.
RTI Forum for Instant Information to petition Maharashtra chief minister, file public interest litigation, to check the toll charges collected by IRB that has a contract till 2019
Thanks to the Right To Information Act (RTI), it is pretty clear now that Ideal Road Builders (IRB), the private agency which operates, maintains and will collect the toll on the Pune-Mumbai Expressway until 2019, has already collected toll tax in excess of what it had envisioned, going by the ‘cash flow’ statement which it has submitted in the ‘contract agreement’ with the Maharashtra State Road Development Corporation (MSRDC). As per this latest document that I procured, it has already collected Rs949.45 crore until September 2010 by way of toll fees (it must have surely crossed the Rs1,000 crore mark by 31 March 2011). This collection is against its own projection of Rs606.05 in the contract agreement. MSRDC officials, on condition of anonymity, admitted this is a vital document for comparison with the actual toll collection. (Read, The grand Expressway robbery: How much toll is IRB allowed to collect and who monitors this?)
Concerned over the hoodwinking by the IRB and MSRDC turning a Nelson’s Eye to the issue, activists in Pune under the forum of the RTI Forum for Instant Information (RFII) are working towards taking up this matter with the MSRDC, the chief minister and they are also considering putting a public interest litigation before the High Court. A meeting will be held on Tuesday, 5th April, to chalk out the strategy.
Vivek Velankar, noted RTI activist and RFII member said, “MSRDC must use technology at toll nakas by putting up motion sensors. This would help in transparency in the actual number of vehicles passing through. Secondly, the MSRDC should declare openly as to for how long citizens will have to pay toll (by announcing a figure) by calculating toll collection up to now; adding interest of IRB’s initial capital investment of Rs918 crore deposited with MSRDC in 2004; adding expenditure by way of operation and maintenance of the expressway; and certain amount of profit to the IRB.’’
Accordingly, MSRDC should either reduce the toll charges in order to keep up with the spirit of the contract, which lasts till March 2019, wherein IRB has been allowed to levy toll charges, or then terminate toll collection and make the Pune-Mumbai Expressway a freeway. RFII has also demanded stern action against the MSRDC’s toll monitoring unit, which is an independent consultancy firm, and its admission that it does not look into the revenues that IRB is collecting, although it is binding on it according to the norms which are also put up on MSRDC’s website (www.msrdc.org) and also as per the central government guidelines.’’
Activists in Pune are agitated that the IRB has neglected the maintenance of the Expressway. Says Vijay Kumbhar, a leading RTI activist who was the first to invoke Section 4 of the RTI Act in the country at the Pune Municipal Corporation, “What has the IRB done about the safety of the commuters? The last two-three months have witnessed gory accidents and the cause of most of them is being conveniently labeled as ‘human error’. What action has been taken against trucks which are supposed to keep to the left lane, but jam the Expressway on all lanes, particularly during the night hours, leading to senseless accidents?’’
Chandmal Parmar, noted road accident prevention activist says, “IRB has completely failed in the maintenance and patrolling of the Expressway. It is collecting toll without giving proper services to the people.’’
In 2010, 443 accidents took place, of which 101 were fatal—103 people were killed. Since January 2011, more than 25 people have died in accidents.
After Moneylife exposed the Expressway toll scandal last week through the use of RTI, the issue has taken a political hue. Shiv Sena activists in Pune took up the issue by organising a rasta roko for half an hour on Friday and their leader Neelam Gorhe also raised the issue in the state legislative assembly.
We request citizens to join in the campaign to make the MSRDC and IRB accountable. RFII plans to draft a petition letter by Tuesday which will also be uploaded on the Moneylife website. Readers should sign this petition and send it to the chief minister of Maharashtra, as well as the MSRDC (we shall provide the email addresses for this), so that there is ample public pressure that will make them sit up and take note.
Interestingly, as per a central government notification issued by the Ministry of Road Transport and Highways on 13 January 2011, the base rate for toll charges for vehicles is as follows:
Car, jeep, LMV: Rs0.65 per km
Light commercial vehicles: Rs1.05 for every km
Bus, truck: Rs2.20 for every km
Three-axle commercial vehicles: Rs2.40 for every km
Heavy vehicles: Rs3.45 for every km
Over-sized vehicles: Rs4.20 for every km
This notification clearly states that these rates are not valid for earlier contracts. But considering that the IRB has overshot its projected profits, the RFII will request the MSRDC to adhere to this new notification in case IRB has yet to reach its target of collection. If you go by this new notification, a car on the expressway would have to pay only around Rs60 for the 95-km route as against Rs165 being charged from 1st April. Says Sinha, “I have traveled by car in states like Goa, Karnataka, Kerala and Tamil Nadu but find that the toll charges in Maharashtra are the highest.’’
RFII has requested the help of those who are well versed in the law and willing to help to assist in filing a public interest litigation. Individuals can write in at [email protected]