ITC LIMITED HAS SIGNED A BUSINESS TRANSFER AGREEMENT TODAY TO ACQUIRE THE PULP AND PAPER UNDERTAKING (CENTURY PULP AND PAPER (CPP)) OF ADITYA BIRLA REAL ESTATE LIMITED

News: ITC Limited has signed a Business Transfer Agreement today to acquire the Pulp and Paper Undertaking (Century Pulp and Paper (CPP)) of Aditya Birla Real Estate Limited (‘ABREL’). Established in 1984 at Lalkuan (Nainital, Uttarakhand), CPP is a well-established player in the Indian Paper industry with an installed capacity of 4.8 Lakh MT per annum. Acquisition will happen at Lumpsum consideration of up to Rs3,500 crores on a cash-free debt-free basis, payable on Closing, subject to adjustments in accordance with the terms and conditions set out in the BTA. Acquired entity revenues and EBIDTA stood at Rs3,375crore and Rs418crore in FY24 (5 year Average EBIDTA of 500cr) . The deal is valued at 1.03x its revenues and ~8x its EV/EBIDTA. The acquisition is in line with ITC’s strategy to drive the next phase of growth in its Paperboards and Specialty Papers Business by expanding capacity (~14.8 lakh or ~1.5mn MT per annum) at a new location, given the limited scope for expansion at the existing facility. Inorganic route is the fastest way of expanding the capacity compared to expanding the facility through green field expansion which takes around 5-6 years. It provides a locational advantage with presence in north India complementing ITC’s existing facility at south India. The Business expects to drive structural improvement in profitability of CPP through several value unlock interventions such as capacity debottlenecking, product quality upgrade, efficiency improvement leveraging TPM/Digital initiatives, supply chain optimisation, overhead rationalisation, and procurement efficiencies.

View: We believe it’s a good acquisition by ITC having a great asset with locational and manufacturing advantage coupled with timing of the acquisition at the down-cycle of the industry. Domestic industry size is 23mn MT p.a with annual incremental demand of 1mn MT p.a. Industry was impacted by low price imports into India and other international markets and unprecedented surge in the domestic wood prices. Industry expects wood prices to moderate in the next few quarters and the government has initiated investigation on cheap imports, which might help in revival in the industry in the coming years. ITC expects acquisition to be EPS accretive in first full year of operations. Expects 30-40% increase in EBIDTA/Ton post 2 full years operation and expects high teen RoCE on investments in the medium term. ITC paper, paperboard and packaging business has free cash flow generation of Rs4000crore over FY20-24 and with integration of acquisition, it expects the free cash flow generation to further improve in the medium term. ITC remains one of our preferred pick in the consumer goods space.

Impact: Positive