Stock Review: AP PAPER

At first glance, the valuations attributed for the acquisition of Andhra Pradesh Paper Mills (AP Paper) by global giant International Paper appear to defy gravity. The US-based giant, on a valuation metric enterprise value (EV) to EBITDA, is paying nearly 16 times, on annualising the nine-month results of the current financial year of this Indian firm. However, we have not included the non-compete fee for the promoters of AP Paper while computing this valuation metric.

In contrast, prior to the announcement of this acquisition, stocks, like JK Paper and Ballarpur Industries traded on this valuation metric EV/EBITDA, in the range of 2.8 and 5 times, on annualising their financial results. It was no surprise that stocks in this sector have surged since the announcement of the AP Paper acquisition.

For instance, AP Paper has risen nearly 28% during the past two days to close at . 236 on Wednesday while JK Paper has gained 18%, and Ballarpur Industries improved by 17.7% during this period. Analysts at broking houses highlight the difficulties in setting up a new paper plant, given the peculiarities of the paper market here, to justify the valuations offered by International Paper.

The US giant through this acquisition would get access to the distribution and marketing channels of AP Paper for its repertoire of paper products, coupled with key raw materials and relevant production facilities. The operating profit margins of AP Paper are at 22.8% in the first nine months of the current financial year, and are broadly in tune with its peers. It would appear logical for the US giant to aggressively scale up AP Paper operations over the next few years, in order to take advantage of the growth opportunities here, and also justify the valuations for this acquisition.

And with growth opportunities in the paper sector increasingly located in emerging markets in the foreseeable future, it was no surprise that the International Paper stock price rose nearly 4.7% on Tuesday in US trading. Minority shareholders of AP Paper could consider tendering their shares in the forthcoming open offer, given that it would be at a substantial premium to the stocks current price.