Company Update : ITC Ltd By Motilal Oswal Financial Services Ltd
ITC acquires paper business from Aditya Birla Real Estate
ITC announced the acquisition of Aditya Birla Real Estate (ABREL)’s paper business, operated under the name ‘Century Pulp and Paper (CPP)’, as a going concern on a slump sale basis. This transaction strengthens ITC’s presence in the pulp and paper industry, expanding its capacity and market reach.
* Acquirer: ITC Limited
* Seller: Aditya Birla Real Estate (Century Pulp and Paper)
* Transaction value: INR35b (on a cash-free, debt-free basis)
* Capacity expansion: ITC’s paper capacity to increase by 60% from 8 lakh metric tonnes (Lk Mt) to 12.8 Lk Mt.
* Expected closure: Approximately six months, subject to statutory approvals (including land lease transfer and Competition Commission of India clearance).
* Financial performance of ABREL’s paper business: The business reported a revenue of INR28.2b/INR35.7b/INR33.8b during FY22/FY23/FY24. The company reported an EBITDA of ~INR5b on average during the last five years.
Strategic rationale
1. Market expansion & locational advantage:
* ABREL has a strong presence in North India, complemented by in-house pulp manufacturing using wood and bagasse.
* ITC’s existing facilities are primarily in South India, and this acquisition enables efficient customer servicing across key markets while ensuring proximity to raw material sources.
2. Vertical integration & operational resilience:
* Strengthens ITC’s supply chain and backward integration, reducing dependency on external pulp sources.
* Multi-site operations with matching capabilities help de-risk operations and improve resilience across industry cycles.
3. Synergy targets & financial impact:
* The company is targeting a 30-40% increase in EBITDA per ton after two years of operations through efficiency gains and capacity debottlenecking.
* The company is looking to achieve a high-teens Return on Capital Employed (RoCE) in the medium term.
* The Paperboards, Paper & Packaging segment is expected to continue generating strong free cash flows (~INR40b from FY20 to FY24).
Industry outlook and growth potential
The paper business has been in a cyclical downturn over the past two years, but an expected market recovery should improve key performance metrics. This acquisition positions ITC to capitalize on the growth cycle through product innovation, enhanced sustainability initiatives, and an expanded market footprint. India is the fifth-largest producer of paper and paperboards in the world, with an estimated production of around 23mMT per annum and an annual industry turnover of over INR800b. India’s per capita consumption at ~16Kg per annum is low as compared to the global average of 57Kg. The end-user industries such as FMCG, Food Service / Quick Service Restaurants, Pharmaceuticals, e-commerce, and Education & Stationery, and increasing demand for sustainable packaging solutions are expected to be the key drivers of growth going forward.
Valuation
We value ITC’s paper business at 15x EV/EBITDA of FY27, with a target value of INR20 per share. The acquisition is EPS accretive from year one, and as per our estimation, it will contribute ~1% to ITC’s total EPS. Although the financial and valuation impact will be less, it will strengthen ITC’s position in the paper & paperboard business.
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