Ballarpur Industries Ltd., India's biggest paper maker, plans to invest

July 3 (Bloomberg) -- Ballarpur Industries Ltd., India's biggest paper maker, plans to invest about $1 billion in overseas acquisitions and expanding plants at home to quadruple capacity in five years, its finance chief said.

The paper maker and its units, part of billionaire Gautam Thapar's Avantha Group, will double capacity to 1 million tons next year and increase to 2 million tons by 2013, B. Hariharan, group director of finance, said in an interview. The expansion will be funded by loans and share sales, he said.

``In India, there is a small base and there is no way paper demand will come down,'' Hariharan said yesterday in his office in Gurgaon, near New Delhi.

India's market for coated paper, office products and newsprint is estimated to double by 2015, driven by record economic growth. Indians use an average of 7.7 kilograms of paper products a year, compared with 45 kilograms in China and Japan's 250 kilograms, according to Ballarpur's annual report.

``The only concern would be if they face problems such as water availability, environmental clearances and pulp prices,'' said Chintan Mewar, an analyst at Tower Capital & Securities Ltd. in Mumbai, who rates the stock a ``buy.'' ``Ballarpur's expansion is coming on time and they have the best distribution network to take advantage of low usage of paper.''

Raising Prices

The shortage of capacity helps Ballarpur raise prices at a faster pace than expenses, JPMorgan Chase & Co. said in a note to clients on July 1. This shields the company from increases in costs for energy, wood fiber and chemicals that have curbed profits for producers including International Paper Co., the world's largest forest-products maker by sales.

Shares of Ballarpur have gained 18 percent since resuming trading on March 31 after a stock split. The benchmark Sensitive index of the Bombay Stock Exchange has declined 16.3 percent in the same period.

The shares fell 1.1 percent to 32.1 rupees today, compared with a 4.2 percent decline in the Sensex. All nine analysts tracking Ballarpur rate the stock a buy, according to data compiled by Bloomberg.

The company is scouting for acquisitions in South East Asia, Hariharan said, without providing details.

Ballarpur and JP Morgan Securities (Asia Pacific) Ltd. paid $261 million for Malaysia's Sabah Forest Industries Sdn. in 2006.

The Malaysia unit is increasing its capacity to make pulp by 100,000 tons and for paper by 60,000 tons by December next year, Hariharan said.

Expanding Plants

Ballarpur's unit at Bhigwan, in India's western Maharashtra state, is adding 200,000 tons of annual capacity to make coated paper, used in printing brochures, advertisements and marketing materials. This will start production in November, he said.

Another 110,000 tons of capacity to make uncoated paper will become operational at its unit at Ballarpur, Maharashtra, by June, he said. These additions will allow Ballarpur and its subsidiaries to produce 1 million tons of paper by the end of next year, Hariharan said.

Ballarpur will raise prices of coated and uncoated paper in the next quarter, JPMorgan said. The company increased charges of coated paper by 1,500 rupees ($34.70) to about 47,000 rupees a ton, and uncoated paper by 800 rupees to about 43,000 rupees, this week, Hariharan said.

Ballarpur expects to increase its margins by 50 basis points after it starts to export more coated paper from November, Hariharan said. Overseas shipments will rise to as much as 70,000 tons a year from 10,000 tons now, he said.

The company's earnings margin before interest, tax, depreciation and amortization may widen to 26.5 percent from 26 percent, Hariharan said. The products will fetch higher prices overseas than in the domestic market, he said.

``The fixed overheads are going to be amortized over a larger capacity,'' said Hariharan. ``That in itself is a gain, plus whatever market related increases we get.''