Month: August 2007

Indian government has approved Cairn Energy India’s plan to construct a crude oil pipeline to evacuate crude oil from its Rajasthan block RJ-ON-90/1. The cost of the pipeline (US$500 mn net to Cairn) is treated as part of the upstream capex and Cairn will recover both capex and opex related to the pipeline as part of the overall production sharing contract for the block.

Cairn Energy factors in US$780 mn of additional value (20% of base valuation of Cairn’s 70% stake in the block for potential upward revision to reserves). Cairn will likely provide updates on its crude reserves/production profile by end-2007 in terms of (1) outcome of further EOR studies including ASP simulation and pilot project for Mangala and (2) conversion of current contingent resources to reserves including ‘tight’ oil in Mangala Barmer Hill, Vijaya/Vandana/NR.

At US$60/bbl crude price in perpetuity from 2013E, our DCF-based 12-month fair valuation for Cairn stock would come to Rs154. At US$70/bbl in perpetuity, the same would increase to Rs166. Kotak Maintains an Underperform rating on Cairn Energy with a target price of Rs 140 based on DCF Model.

Zee Entertainment Enterprise Limited [ZEEL] has reportedly increased its prime-time ad rates for its flagship Zee TV channel by 15-20% and non-prime time rates by 40% following the 15%-25% increase in March 2007. The increase in ad rates for Zee TV will likely help ZEEL achieve our projected 24% growth in ad revenues for FY2008E and partially support ZEEL’s current rich valuations.

A 37% increase in ad revenues for FY2008E for Zee TV on the back of a 45% increase in ad revenues in FY2007E. The key to sustenance of ZEEL’s multiples would be (1) continued high ratings for Zee TV particularly after start of new competing channels and (2) continued improvement in domestic pay-TV subscription revenues.

ZEEL stock trades at 32.5X FY2008E EPS of Rs8.7 and 24.5X FY2009E EPS of Rs11.5. Kotak maintains an underperform rating on the stock with a price target of Rs 230.

Update on ZEEL from Merill Lynch [ML]:
ML reiterates a BUY with Price Objective of Rs 400 is at 30x 1-yr forward PER – 7% discount to current multiples & in-line with Indian media average.

HSBC Global Research in a report has said that it is overweight on Jyoti Structures Limited with a price target of Rs 254.

The stock corrected 10% in last week’s trading. This fall should be taken as an opportunity to buy the stock. HSBC is positive for the following reasons.

• Strong order backlog of INR23bn which is 2.3x of FY07 sales
• Based on current order backlog and buoyancy in the power transmission line, expect sales CAGR of 30% for the period of FY07-FY10e
• Expect EBITDA margin to improve on improved execution and expect EPSCAGR of 35% for the period
• Q1 FY08 results confirms our forecast with sales growth of 34% and EPS growth of49% y-o-y due to improvement in EBITDA margins

The new target price – INR254 is the mid-point of DCF fair value INR201 and PE multiple based fair value of INR307. You can send comments and suggestions to feedback @ dalalstreet.biz

Citigroup Research has recommended an Exit on India’s premier pharmaceuticals company Cipla. Citi’s target price is Rs 191 a modest 11% over CMP of Rs 171.

Cipla indicated that its PAT may be lower in FY08 due to rupee appreciation, higher cost of imports from China and pricing pressures. Cipla plans to incur capex of around Rs9.5bn over FY08-09 primarily on its facilities in Sikkim, Goa and Indore. With profitability under pressure this will take a heavy toll on return ratios.

Guidance of 10-12% sales growth and lower profits in FY08; tie up for 125 products across 10 partners in the US/ 94 ANDAs filed and expects to file 20-25 in FY08. Cipla is a steadily growing company, thus P/E based valuation is the right tool for the company. Target price of Rs191 is based on 20x June 08E earnings. Historically, the stock has traded at 15-30x forward earnings. Although Cipla is an Indian pharma major, Citi believe it should trade at a marginal discount to peers in the sector, justified by the lower value addition to the business.

Update on Aug-29th:
Citi has downgraded the target price of Cipla to Rs 165 and also revised EPS estimates for FY08 to Rs 7.93 a fall of 7.7%.