ICICI Securities: Indian aviation sector: Raise target for Jet Airways, SpiceJet and Kingfisher

Flying high...
The Indian airline sector continued to put up an impressive performance
(domestic pax traffic growth of 20% YoY during April-August 2010). This
was driven by strong macroeconomic growth (average GDP growth of
~8% YoY in Q2FY10-Q1FY11), conversion of FSC’s major capacities
towards low cost (in line with the changing preference of customers)
and stable crude oil prices (average of US$75 per barrel in Q2FY10-
Q1FY11 vs. US$121 per barrel Q1-Q2FY09). We reiterate our positive
outlook for the sector given strong operational performance of the
players and forthcoming government support for debt restructuring.
􀂃 Growth momentum continues
With the shift of the domestic airlines sector towards low cost services
and strong capacity rationalisation, major players have reported high load
factors (in the range of 75-80% for FSCs and 84-89% for LFCs) in Q1FY11.
We believe domestic demand will remain buoyant driven by strong
macroeconomic growth (GDP expected to grow at higher than 8% YoY,
as per RBI), affordable airfares and stable crude oil prices. In our view,
higher load factor will drive earnings growth in the sector as capacity
addition has been deferred by players for the next one or two years.
􀂃 Debt restructuring coming at right time
The government has agreed to a debt restructuring plan for major FSCs,
which are reeling under massive debt burden of ~` 60,000 crore (FY10).
According to the plan, which has received final approval from the RBI,
domestic banks are expected to restructure the loans of the airlines that
will enable them to raise fresh funds in order to deleverage their balance
sheet and finance future expansion plans.
Recommendations
Due to strong improvement in the domestic pax traffic (growth of 14.3%
YoY in FY10 vs. de growth of 11.1% in FY09), capacity rationalisation and
low fuel expenses, airlines have posted a robust operational performance
in FY10. Further, the sector is increasingly getting support from the
government in terms of debt restructuring programme and permission of
fund raising through various options. In our view, this will enhance the
attractiveness of the sector, going forward. In light of the positive
development in the sector and improving operational performance of the
players, we are raising our target price for Jet Airways to ` 850/share
(from ` 690/share), SpiceJet to ` 80/share (from ` 72/share) and Kingfisher
Airlines to ` 71/share (from ` 52/share).