Corporate: ITC Bhadrachalam Pages Profits

TURNAROUND
ITC Bhadrachalam Pages Profits

Three years after it first sank into the red, the paper maker has begun to claw its way back up.

By E. Kumar Sharma

In April, 1999, when Pradeep Dhobale had just taken over as the Managing Director of ITC Bhadrachalam Paperboards, his wife Sharvari went to visit a friend in her hometown of Pune. When Sharvari told her friend about Dhobale's elevation, the friend's husband quickly excused himself to fetch a sheaf of documents. They were certificates for about a hundred ITC Bhadrachalam shares. Thrusting them into Sharvari's hands, the husband rued that the shares were worth less than the paper they were printed on. The loss-making company's shares were trading at a pathetic Rs 15.

The complaint promptly reached Dhobale. It's taken him a little more than a year, but he's avenged the slight, all right. For the first time in three years, the company is back in the black. In the quarter ended June 30, 2000, it reported a net profit of Rs 9.90 crore on sales of Rs 143 crore. Its shareholders-including Sharvari's friend's rueful husband, who has since bought another 1,000 shares of the company-are happy. For one, the stock price has risen to Rs 45. For another, it isn't just the recent surge in paper prices that has heaved the firm's bottomline out of the red. A lot of the profits have also come from the company tightening its belt. Says Y.C. Deveshwar, 52, Chairman, ITC, the majority stakeholder: ''Paperboards is one of ITC's identified core businesses."

A painful past

Ever since paper prices began their nosedive around the mid-90s, things had been tough for ITC Bhadrachalam. And in April 1998 when it embarked on a Rs 675-crore expansion and modernisation programme in a bid to improve efficiencies and introduce value-added paper products, the high cost of debt ate into the dwindling profits. Matters were made worse by an impulsive foray into non-banking financial services that resulted in the company having to book losses of Rs 40 crore incurred by ITC BPL Finance & Investment.

In 1997-98, the company reported its first net loss of Rs 48.9 crore in 15 years. The following year, dismal paper prices and staggering interest costs of Rs 68 crore pushed losses up to a record Rs 98 crore.

Finding the situation unsustainable, Dhobale and his team began a clean-up act. There were three key elements to their strategy: one, focus on value-added products; two, gains in operational efficiencies; and three, replacement of high-cost debt with cheaper loans. ''It was clear that the effort had to be comprehensive and made in earnest,'' reminisces Dhobale.

Today, of the two lakh tonnes that the company manufactures, 90,000 tonnes per annum (tpa) is devoted to coated paperboards, 60,000 tpa to uncoated paperboards, 20,000 tpa to writing and printing paper, and only 30,000 tpa to value-added paperboards. But increasingly, the focus is on value-added paperboards. The reason is simple. At Rs 70,000 per tonne, premium paperboards fetch three times more per tonne than ordinary paperboards.

The hitch, however, is that the domestic market for value-added products such as folding box board and solid bleached sulphate is a just 40,000 tpa, a quarter of which is imported. The company, which controls three-fourths of that market, is working on convincing fast moving consumer goods (FMCG) companies to use more of high-quality paperboards in packaging. Notes R. Narayanamoorthy, 50, Secretary, Indian Paper Manufacturers Association: ''Growing sophistication in packaging will make value-added paperboards popular.''

Benchmarking itself against global competitors such as Metsa Serla of Finland, and Meyrmelnhof of Austria, the company has also lowered input costs of chemicals, water, energy, and manpower. And even though exports fetched Rs 2,000 less per tonne, the company continued overseas sales to maximise capacity utilisation. The result: From 68 per cent in April 1998, the capacity utilisation went up to 90 per cent in 1999. Today, it is at 105 per cent.

As a result, cash cost per tonne fell from Rs 23,950 in 1998-99 to Rs 20,600 in the first quarter of 2000-01.

Parent ITC helped out with the biggest problem: the much-too-expensive debt. In December, 1998, ITC pumped in around Rs 150 crore in equity, raising its stake in the company from 37 per cent to 51 per cent.

Restoring health

Its expensive debt pared and fresh capacity put in place, the company has begun work on a Rs 200-crore modernisation programme. The focus is on improving efficiency by managing fibre cost and pulp-making capacity. Dwindling forest-based inputs have prompted it to look at plantation-based fibre. Ergo, the company-along with ITC and the Andhra Pradesh Government-is pursuing a clonal propagation programme that envisages the planting of 2.5 million high-yield, disease-resistant saplings on nearly 1,500 acres of degraded forest land.

Still, the immediate priority is to wipe out the Rs 150 crore it has accumulated in losses over the last three years. Also, the domestic market hasn't fully mirrored the rise in international paper prices. Moreover, the domestic paperboard capacity of seven lakh tpa is nearly a lakh more than what is consumed, because of which a price war is brewing in some segments. Opines Kenneth Andrade, 30, Portfolio Advisor, Sharekhancom: "It will be another three years before it returns to the pink of health."

The company, however, has a few things going for it. Almost a fifth of its production is consumed by parent ITC, and another 15 per cent is exported.

Besides, Dhabole says, there isn't any price war in the segments the company is in. In fact, the company is toying with the idea of investing another Rs 1,000 crore in capacity expansion, so that its market share can be doubled to 40 per cent in another seven years. As a first step, though, the plan must pass muster at ITC.

By March 2002, ITC Bhadrachalam expects to wipe out all its losses and-despite Dhobale's personal cynicism-e-nable itself. It has begun work on a virtual exchange for paper buying and selling. Ironic? Probably. But as long as cereals, soaps and scanners don't get delivered online, Dhobale's doomsday is more than just a click away.

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