Corporate Front: Strategy [Will BILT's Restructuring Remain A Paper Plan?]

CORPORATE FRONT: STRATEGY
Will BILT's Restructuring Remain A Paper Plan?

BT presents a sneak preview of the paper major's Strategic Business Plan, 1997-2002.

By Rajeev Dubey

Vikram Thapar Like the will, this too may not be worth the paper it is written on. Over the last 24 months, with Lalit Mohan Thapar, 68, wrestling with the restructuring of the Rs 4,821.53-crore L.M. Thapar Group, its division (between his nephews Vikram, 49, Gautam, 37, and Karan, 39), and the trifurcation of the Rs 1,428-crore Ballarpur Industries (between Vikram, Gautam, and himself), the paper giant's business strategy for the future has been shrouded in mystery.

Although Gautam was, suddenly, appointed the Joint Managing Director of the Rs 1,275.12-crore BILT Paper in June, 1998, despite the fact that Vikram has been formally managing the company since April, 1997-which has muddled the lines of control and created fresh fissures between them-the Thapars have still been busy drafting a growth plan for BILT Paper, which has a 7 per cent share of the paper market. Perhaps because of this, the closely-guarded Strategic Business Plan: 1997-2002-which BT managed to obtain a copy of-seems to lack a vision.

If anything, the 200-page document-detailing the company's plans in terms of investments, raw material procurement, cost-reduction, and marketing-clearly indicates that the Thapars have chosen to give up their leadership of the Rs 9,000-crore paper business. A combination of hiving off two units into joint ventures and selling off another may leave a highly-truncated BILT Paper in 2003, which will focus only on high-quality, high-margin products.

In fact, the lynchpin of the company's future strategy seems to be a focus on marketshare in niche segments rather than a major share of the paper market. Although all three Thapars refused to discuss the SBP, BT unveils the paper designs-and a critique-of the L.M. Thapar Group's plans.

Gautam Thapar RESTRUCTURING. According to the SBP, once the trifurcation is formalised, BILT Paper will restructure its operations by striking strategic alliances with global majors for 2 of its 5 paper units at Ashti (Maharashtra) and Choudwar (Orissa). To raise the finances to fund BILT Paper's expansion, these units will be hived off as wholly-owned subsidiaries, with the foreign partners being invited to purchase critical-even majority-stakes in them. In addition-although the SBP does not mention the possibility-BILT Paper may sell off its 26,000-tonnes per annum (tpa) unit at Sewa (Orissa), which will incur a loss of Rs 180.13 crore in the next 5 years.

States the SBP: ''Strong possibilities exist of developing this (Ashti) unit through a major strategic alliance for which a dialogue is on with two global majors.'' And in the case of the Choudwar Unit, the Thapars feel that it is the ''right time'' to increase its 20,000-tpa capacity by an additional 1 lakh tpa ''possibly through a strategic alliance.''

The aim: ''To increase its (BILT Paper's) presence in the industrial segment (comprising speciality paper, boards, and paper-sacks), which is growing at almost double the rate-15 per cent-as compared to the writing and printing segment-5 to 7 per cent.'' At present, the company has a technical collaboration with an American company, Clupack, to manufacture 44,500 tpa of paper-sacks at the Ashti Unit, which has enabled it to capture a 63 per cent share of this segment. And the Choudwar unit produces 20,000 tpa of cream-wove paper and boards, a highly competitive segment where over 6,000 small-scale manufacturers operate.

However, it may not be easy for BILT Paper to attract financial partners for the latter. First, according to the SBP itself, it is expected to incur a loss of Rs 65 crore between 1997-98 and 2001-02. Moreover, it faces raw material constraints: while the Orissa government had promised to supply 1.30 lakh tpa of bamboo and hardwood to the Choudwar and Sewa Units, the supply fell short by 55,000 tpa in 1996-97. Agrees M.P. Jatia, 68, the Managing Director of the Rs 141.63-crore Pudumjee Pulp & Paper: ''All paper-makers are in for a tough time. BILT Paper, despite its size, is no exception.''

But the Thapars are likely to retain the other two units at Ballarpur (Maharashtra), which manufactures 1.05 lakh tpa of writing and printing paper, and Shree Gopal (Haryana), which makes 82,000 tpa of coated paper. One, the highly-profitable Ballarpur Unit-with its depreciated plant, and technological edge in making quality paper from hardwood-is expected to earn net margins of 15.44 per cent in 2001-02. Two, although the Sewa Unit is expected to earn meagre net profits of Rs 13.02 crore on a turnover of Rs 737.40 crore in the same year, its profitability will jump subsequently due to lower depreciation and interest costs. And three, Vikram is unlikely to let go of the only company he manages.

INVESTMENT. Perhaps the most controversial element of the SBP is the fact that BILT Paper has a 5-year Capital Expenditure plan of a mere Rs 300 crore, mainly to set up a new pulp unit to supply raw materials to the Shree Gopal Unit, and to increase the company's 2.70-lakh tpa paper-making capacity to 2.91 lakh tpa at the Shree Gopal, Ashti, and Ballarpur. In addition, the company plans to spend Rs 182.21 crore on maintenance and technological upgradation.

At the same time, the demand for paper is expected to grow from 3.95 million tpa in 1996-97 to 5.34 million tpa by 2001-02. Which, actually, would necessitate an investment of Rs 9,730 crore by the paper companies in the country. Suggests B.T. Sridharan, 62, the President of JK Corp's Paper Division: ''In a bad market, most manufacturers would prefer to consolidate, upgrade, and cut costs rather than go in for expansion.'' That, apart from the opposition from LMT and Gautam, is possibly why Vikram's dream project of setting up a 1.60 lakh-tpa board-manufacturing unit at Choudwar finds no mention in the SBP.

Obviously, Ballarpur Industries-whose net profits dropped by 62.92 per cent from Rs 102.48 crore in 1995-96 to Rs 38 crore in 1996-97-has no money to spend on expanding the capacities of the various units. Which is also reflected by the SBP, which states that ''no major investment has been earmarked (even) for major growth in the industrial segment over the next 5 years...''

FINANCIAL PROJECTIONS. Essentially, everything BILT Paper proposes to execute in the next 5 years will depend on its cash-flows. That's because it has to finance its capital expenditure mostly through internal accruals due to Ballarpur Industries' debt-burden of Rs 1,031.73 crore (pre-trifurcation). Although the SBP projects cash-flows of Rs 175.34 crore over the next 5 years, they could be based on a set of rather unrealistic assumptions.

For instance, the company had assumed that the paper industry would witness a boom in mid-1998, which would last longer than the previous boom of 1994-95. Conversely, the prices of writing- and printing-paper have fallen by 10.08 per cent: from Rs 34 per kg in end-1996 to Rs 30 per kg in 1998. Similarly, the Thapars had estimated their 1998-99 revenues on the basis of a selling price of Rs 28.62 per kg for coated paper, and expected it to go up to Rs 36.25 per kg by 2001-02. The reality-check: prices now hover around Rs 27 per kg.

Moreover, prices will continue to stay depressed for another 18 months because of the Asian crisis and the continuing imports of paper in the garb of newsprint, which has a 5 per cent Customs duty levied on it as opposed to 30 per cent on other paper products. Consequently, BILT Paper's cash-flows during the 5-year period may be much less than it estimates.

That could spell doom for BILT Paper, which is obviously trying to consolidate rather than grow over the next 5 years. Coupled with the tensions between the Thapars, the economic slowdown, and the growing competition, it is obvious that Vikram will have to rewrite this strategic script if he wishes to stay on in the paper business. That's why the SBP may well be a paper plan in more ways than one.

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