Making sense of Aditya Birla’s breakup with the paper business

An explainer on why Aditya Birla Real Estate decided to sell its paper business to ITC.    ​    ​An explainer on why Aditya Birla Real Estate decided to sell its paper business to ITC.   ​

In today’s Finshots, we tell you why Aditya Birla Real Estate has struck a deal with ITC to sell off its pulp and paper business.

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The Story

Back in the late 19th century, cotton was king. The world couldn’t get enough of it. But then came the American Civil War. And just like that, cotton production in the Southern United States, then the world’s biggest cotton supplier, came to a halt. Exports dried up and the rest of the world was left scrambling to find alternatives. And out of that demand was born the Century Spinning and Manufacturing Company.

Fast forward to 1951, the Birlas took over the management of the company. And from there, it was full steam ahead. They didn’t just stick to cotton. Over the years, they kept expanding into textiles, chemicals, cement, paper, real estate… you name it.

But here’s the thing. Running multiple capital heavy businesses isn’t exactly a walk in the park. It’s not just about money. It’s about having the focus, the manpower, execution – all of it. And over time, the company realised that doing a lot of things averagely wasn’t as good as doing a few things exceptionally well.

So they began streamlining. One by one, the non-core businesses were pruned. And now all that’s left are two — real estate and paper.

Oh, and it’s no longer called Century Spinning and Manufacturing Company either. Somewhere along the journey, it became Century Textiles and Industries. And again, just last year it went through another transformation and got renamed to Aditya Birla Real Estate. We’ll just call it ABREL from here on.

That new name says a lot. It signals where the company’s heart is — real estate. Which means anything that doesn’t fit that vision has to go. Including its paper division. 

So a few days ago, ABREL announced selling off its pulp and paper business, better known as Century Pulp and Paper (CPP), to ITC for about ₹3,500 crores.

And no, this isn’t one of those overnight decisions. In fact, ABREL’s been trying to exit the paper business for nearly a decade. Back in 2015, it tried to strike a deal with ITC itself. And then again in 2017, there was talk about selling it to JK Paper. But nothing materialised because valuation became a sticking point. ABREL wanted ₹5,000 crores for the business back then, which was a price tag that potential buyers weren’t too keen to pay.

But now, ITC’s back at the discussion table. And that makes you ask ― What changed in the last ten years? And why the heck is ABREL so eager to become a pure play real estate company?

Well, for starters, let’s not assume CPP is a weak link. It actually brings in the big bucks, accounting for over 75% of ABREL’s revenue. That’s huge. But revenue alone doesn’t tell the whole story.

Making paper isn’t exactly easy business. It’s not just capital intensive but also relies on delicate raw materials with prices that swing all over the place.

It all starts with trees. Making paper means you need wood, typically from pine or eucalyptus trees. But Indian wood producers face a massive problem — land. The government only allots about 12 lakh hectares of forest land for pulpwood plantations. That’s just a measly 4% of what’s actually needed. So supply is always tight.

Then came the pandemic, and things got worse. Tree planting took a hit. And since these trees take 5–6 years to mature, a delay in planting during those years means a delayed harvest now. That has created a shortage. But as supply fell, demand didn’t. Because other industries like furniture, construction and biomass energy were also in the race to grab the same wood. So naturally, prices shot up. Virgin wood became expensive. And recycled paper, the logical alternative, didn’t help either. Its prices more than doubled between FY21 and FY23.

Even imported pulp wasn’t spared. CPP saw its imported pulp costs go up 17% over the past year. And wood prices were up by 7%.

But that’s not the end of the list. Indian paper manufacturers also face stiff competition from cheap imports. Thanks to free trade agreements, paper from China and ASEAN members enters India with little to no import duties. That means it’s cheaper than domestically produced paper. 

These countries also heavily subsidise their paper industries. So they can afford to sell at lower prices. And when the US and EU slapped trade restrictions and higher import duties on products from these countries, they had to find new markets. India became the obvious choice. So their surplus paper flooded our market.

Sidebar: In September 2024, the Indian Paper Manufacturer Association requested the government for imposition of anti dumping duty on cheap paper imports.

To keep up, Indian giants like JK Paper had no choice but to increase their prices. That helped them hold onto their healthy EBITDA margins, typically in the range of 20–25% or sometimes even higher.

But CPP wasn’t as lucky.

Even though it made smart moves like using renewable energy and switching to alternative raw materials like bagasse (a residue from sugarcane), its EBITDA margins stayed stuck between 12–17% since FY21. And that’s a tough game when you’re up against competitors with nearly double the margins.

Here’s something you should know though. Companies like JK Paper and West Coast Paper Mills (another competitor) have the advantage of focus. JK Paper is a complete paper and packaging company. While West Coast makes mostly optic fibre cables alongside paper. But even then, its scale and concentration give it a leg up. 

ABREL, on the other hand, has been trying to balance two very demanding sectors ― paper and real estate.

So it had to make a choice. And it chose the one with more promise — real estate!

Sure, real estate margins aren’t shining right now either. EBITDA margins have fallen from 21.8% in FY21 to just 3.6% in FY24 (and are around 6.2% so far in FY25). But that’s expected. ABREL is in investment mode right now. It’s busy acquiring land, literally laying the groundwork and setting up for the long game. So sales realisation, the real money, will only start kicking in around FY27. And when it does, margins are projected to zoom between 25%-35%, and even up to 45% in premium markets like Mumbai’s Worli.

In fact, the money from the sale will also help ABREL reduce its debt burden. For context, its consolidated net debt stood at ₹4,300 crores as of 9MFY25. That’s a debt to equity ratio of 1.06 times, which is significantly higher than 0.61x in FY24. And becoming debt free in the real estate business is a rare feat.

So it’s safe to say that ABREL is letting go of short term gains to build something far bigger in the long run.

But Finshots – If the paper business is struggling, why on earth does ITC want it?!

Well, for ITC, this is more than just a bargain. 

ITC already has a sizeable paper presence with an annual manufacturing capacity of 8 lakh metric tonnes. But it wants to grow. And CPP, with its 4.8 lakh metric tonnes of installed capacity, fits the bill perfectly. It instantly gives ITC a 60% boost in capacity, without the time, risk or cost of building something from scratch.

There’s also geography. ITC’s paper facilities are mostly in South India, except for a tissue mill in the North. But CPP’s plant in Lalkuan, Uttarakhand opens up a whole new region for ITC. It’s like unlocking a new market without having to dig the foundations.

Also, here’s what we haven’t told you yet. The paper industry might be in a bit of a slump right now, but it’s slowly turning the page. Things are beginning to look up.

India’s FMCG market for instance is said to grow 7% annually till FY27, which means more demand for packaging.

Then, with single-use plastics banned, paper straws and coffee cups are in.

Also, the National Education Policy 2020, effective from 2024, could boost rural education and push up demand for textbooks, notebooks and other printed material.

And let’s not forget the e-commerce boom which is also fuelling demand for kraft (containerboard) paper and boxes. So if you thought digitalisation was going to bury the paper industry, think again.

And for ITC, the timing couldn’t be better. The paper industry’s current down cycle means that CPP’s valuation is far more reasonable than it was in 2017. ITC is essentially buying at a discount.

So yeah, it looks like a smart, well timed deal where everyone walks away happy.

But whether these bets pay off is something we’ll have to wait and see.

Until then…

Correction: In an earlier version of this story, the graph titled “What does Aditya Birla Real Estate Limited do?” had the margins of the real estate and pulp and paper segments mixed up. We regret the error and have now corrected it.

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