BPH is likely to be valued at double the BILT’s existing valuations.BILT is likely to place about 23-25% stake in BILT Paper Holding (BPH) and is likely to attract valuations of 11-13x EV / EBITDA while at present BILT commands EV/ EBITDA of 5.6x in domestic market on FY08 estimates.

Valuations comparable with global peers

The valuations looks aggressive if compared with domestic valuations, but they are in line with global valuations. Global pulp and paper companies generally command EV/ EBITDA multiple of 9-14x and P/E multiple of 15-20x.

Why BILT should command global valuations

We believe that BILT is no more a domestic player after the acquisition of Sabah Forest (SFI) in Malaysia. BILT also have valuable forest inventory, which will take care of its fiber (raw material) requirement in long term. On business front BILT is now a fully integrated player starting from wood (forest resources) to captive pulp including captive power plant to paper and to high end retail stationery products including tissue paper. BILT has strong product portfolio, which includes coated paper, copier paper, maplitho, creamwove while it has strong presence in branded retail segment through ‘BILT’ brand.

BILT offers better growth opportunities compared to global players

Consumption growth in India is expected to be 10-12% in line with economic growth, which is second highest growing market after the China. As on one side, we believe that the BILT should command premium valuations over to global players because of strong growth opportunities, better profitability and returns while on the flip side it is trading at significant discount of approx 50% to global peers.

BILT is poised for strong case of re-rating

We believe that there is strong case of re-rating and planned reorganization exercise by the company will give better comparable valuations. On the basis of BPH valuations, we believe that BILT has a potential upside of 56%-122% based on potential target price in range of Rs 204-291. For the potential target price, we have worked on two scenarios and guidance given by the management.

We reiterate our ‘BUY’ recommendation on the stock; however we maintain our current price target of Rs 161 for the company and may revise the same after more clarity on this development.

Risks and concerns

However weather the company will be able to attract the private equity players at the price and valuations which the management has guided remain our key concern. The deal is subject to high court approval and is expected to be completed by Dec’07. Our potential target price is based on this particular event.