ITC’s Papers Division in Talks to Buy India's Sirpur Paper Mills

According to a report this past week by the Mint, New Delhi, India, the paper division of ITC Ltd is evaluating a potential buyout of the defunct Sirpur Paper Mills Ltd in Telangana, a top company official said.

"The state government has approached us for the revival of Sirpur Mills. We are looking into it," said Sanjay Singh, the company’s divisional chief executive. Sirpur Paper Mills officials did not respond to calls, messages and an email seeking comment.

According to two persons familiar with the developments, ITC paperboards and specialty papers division, which has a half million metric tpy plant at Bhadrachalam in Telangana, is examining various options including offering voluntary retirement to Sirpur workers with more than 50 years. Officials from ITC visited the site on Wednesday for a technical evaluation, they said on condition of anonymity, as they are not authorized to speak to reporters.

Due to high labor and raw material costs as well as poor demand, Sirpur Paper Mills, which has around 3,000 workers, shut operations in 2014. It has struggled to pay salaries and repay debt.

The company is going through a corporate debt restructuring programme led by IDBI Bank. The company had borrowings of Rs.350 crore as of the quarter ended September 2014.

"The government is unofficially trying to revive Sirpur mills for the sake of the wide employment involved. While there were three queries regarding Sirpur mills, the government trusts ITC because of its market leadership," said a government official, who did not wish to be named.

"Also, as environmental clearances near the existing Bhadrachalam plant is tough to get, the government has asked ITC to consider taking over Sirpur mills from the banks. This way, they may get 680 acres of land and availability of wood from farmers at Adilabad (in Telangana)," the official added. "Any company that takes over Sirpur has to pay upfront Rs.300 crore of the principal amount. The interest component has not been considered yet."

ITC’s paper division wants to double capacity at Bhadrachalam by acquiring forest land, but the plans have not progressed for two years for lack of environment clearances.

In June, ITC chairman Y.C. Deveshwar had announced plans to invest Rs.8,000 crore in Telangana, half of which was earmarked for paper-related projects.

"The idea of finding land closer to the existing plant was to benefit from the already available resources and plantations. Before the bifurcation (of Andhra Pradesh), we had identified land at Anantapur but things stand changed now and it may take at least a year before we get clearances and two to three years from then to build capacities," said Singh. "Meanwhile, we are also looking at inorganic growth options, which will be an easier bet if synergies are met."

ITC needs to expand its paper producing capacity to take on cheaper imports and become more efficient.

The rise in input costs over three years and weak domestic demand have put the paper industry in a tight spot, according to India Ratings.

"Major companies in the sector continue to have a leveraged balance sheet due to past or on-going capex. Therefore, there is a limited chance of these companies going for inorganic growth at this point of time," said Chandan Sharma, associate director, corporates, India Ratings & Research. ITC, a debt-free company, could fund buyouts through internal accruals.

ITC’s paper division, which contributes 9%-10% to the group revenue, hopes to expand sales by 7%-8% this year.

"The growth will be higher next year if we take over a good plant or put up new machines through the Rs.4,000 crore allocated earlier. But the quality of the equipment and performance of potential buy-outs has to meet ITC standards and we will evaluate all aspects," Singh said.