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Jet Airways to Crash. Citi Puts Aggressive SELL

April 11, 2007

Media reports suggest that Jet has sealed a deal to acquire Air Sahara at enterprise value of $450 million, marginally lower than $500 million that was decided upon when the two had inked the buy-out agreement in January 2006. The final price will only be clear after the formal announcement which is expected today, reports add.

Reports also suggest that Jet is willing to stick to its commitment to pay off outstanding creditors worth Rs 400 crore of Sahara which was part of the original enterprise value. After the January agreement, Jet had sought reduction in deal value. It had finally walked out of the deal in June 2006 after operating Air Sahara for about three months.

I may have never seen a research report recommendation as this one from Citigroup on Jet Airways. 3H – SELL because of High Risk. Target Price of Rs 390.

Citi analysts expect combined entity to report an EPS of Rs 23.83 for FY2008 and Rs 32.94 for FY2009. Visibility on Jet’s international operations remains limited; domestic market conditions are not expected to improve meaningfully over the next 12 months. Sahara integration another imponderable.

Target price of Rs390 is based on a 7.5x FY07E EV/EBITDAR multiple. Our multiple is based on a 15% discount to the average 8.8x CY06E EV/EBITDAR multiple of our regional airline universe (ex Air Asia). We believe the discount to the Asian airlines is justified given: a) the very competitive domestic landscape; b) delays in stabilization of Jet’s international operations; and c) soaring fuel costs (which Indian carriers cannot hedge).

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