ITC Stocks Under Spotlight Following Acquisition of Century Pulp & Paper

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15 hours agoPWG Publications

ITC Stocks Under Spotlight Following Acquisition of Century Pulp & Paper

In a strategic move aimed at bolstering its presence in the paper industry, ITC Limited, a diversified Indian conglomerate, has signed a business transfer agreement with Aditya Birla Real Estate (ABREL) to acquire Century Pulp & Paper (CPP). This transaction, valued at up to ₹3,498 crore, marks a significant expansion of ITC's paperboards and specialty papers business. The deal is expected to be completed within six months, subject to necessary regulatory approvals.

Background of Century Pulp & Paper

Established in 1984 at Lalkuan, Nainital, Century Pulp & Paper is a prominent player in the Indian paper industry, with an installed capacity of 480,000 metric tonnes per annum. CPP is renowned for producing a diverse range of products, including packaging boards such as FBB and SBB, virgin tissues, and specialty papers. This acquisition aligns perfectly with ITC's strategy to enhance its paperboards and specialty papers segment by expanding capacity beyond its existing facilities in South India.

Reasons Behind the Acquisition

ITC's decision to acquire Century Pulp & Paper is driven by several strategic objectives:

Capacity Expansion: The acquisition immediately increases ITC's paper capacity by approximately 60%, from 8 lakh MT to 12.8 lakh MT per annum. This jump is crucial, given the saturation of ITC's existing facilities.
Operational Synergies: The deal provides a locational advantage, enabling efficient customer servicing and proximity to key raw material sources. This reduces operational risks by diversifying across multiple sites.
Market Opportunities: It enhances ITC's resilience across industry cycles through portfolio diversification and opens new avenues in domestic and international markets.

Impact on ITC’s Financial Performance

The acquisition of Century Pulp & Paper is anticipated to drive significant financial gains for ITC. In FY24, CPP reported revenues of ₹3,375 crore and an EBITDA of ₹500 crore. ITC expects the deal to be EPS (Earnings Per Share) accretive from the first year itself. The company is targeting a 30% to 40% increase in EBITDA per ton of paper in the medium term and aims for a Return on Capital Employed (RoCE) in the high teens.

Industry Trends and Growth Potential

The Indian paper industry is experiencing rapid growth, driven by increasing demand from sectors such as FMCG, food service, pharmaceuticals, e-commerce, education, and stationery. With India being the fifth-largest producer of paper and paperboards globally, the industry sees immense potential for expansion. The per capita consumption of paper in India is relatively low compared to global averages, indicating substantial room for growth. This acquisition positions ITC favorably to capitalize on these trends.

Market Reaction and Strategic Implications

The acquisition has received positive attention from market analysts. Nomura has maintained a Buy rating on ITC and Aditya Birla Real Estate, highlighting the potential for significant debt reduction in ABREL, which could lead to enhanced business development opportunities. The deal also reflects ABREL's strategy to sharpen its focus on the real estate sector.

Key Takeaways from the Acquisition

Financial Consideration: The acquisition is on a cash-free, debt-free basis for a lump sum of ₹3,498 crore.
Operational Synergies: ITC aims to leverage Total Productive Maintenance (TPM) and digital initiatives to enhance efficiency and quality.
Growth Opportunities: The acquisition opens new markets for ITC both domestically and internationally.
Regulatory Approvals: Completion of the deal is subject to necessary approvals from regulatory bodies.

Conclusion

ITC's acquisition of Century Pulp & Paper represents a strategic move to bolster its presence in the paper industry, leveraging growth opportunities and enhancing operational efficiencies. As the Indian paper market continues to grow, driven by increasing demand from multiple sectors, this deal positions ITC favorably for future expansion and profitability.

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