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Cairn + Zee Entertainment to Underperform – Kotak Securities

August 27, 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.

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