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• Three initiations: We initiate coverage on three aviation stocks: 1) Jet
Airways, with an OW rating and PT of Rs1,090 based on 8x FY12E
EV/EBITDAR, 2) Kingfisher Airlines, with an OW rating and PT of
Rs83 based on 8x FY12E EV/EBITDAR, and 3) Spicejet, with an OW
rating and PT of Rs115 based on 9x FY12E EV/EBITDAR.
• Demand-supply balance to remain benign until 2H FY12: We expect
domestic passenger traffic demand to grow by a 13.5% CAGR over the
next two years. However, net industry fleet additions will lag, at about
10%, by our estimates, although ASKM capacity will likely faster at
15% as operators increase efficiency. As a result, we expect load factors
to remain close to 75% over FY11E-FY12E and yield improvement to
continue until 2H FY12. We assume yield improvement of 10%-15% in
FY11E and 3%-5% in FY12E in our estimates.
• Balance sheets in play in 2011: JETIN and KAIR have high gearing
levels (SJET has net cash), which is being addressed through debt
restructuring, asset sales and equity infusion. We expect these
restructuring measures to be concluded over the next few months. Delevering,
interest rate reductions, and improved cash flow profile are
likely to aid in a valuation re-rating.
• Risks are aplenty; keep an eye on exit triggers too: There is nothing
structural about Indian airline earnings growth, in our view (despite what
we tell you about the structural Indian passenger growth story), so keep
an eye on exit triggers: fuel (we assume Singapore jet kerosene
US$100/bbl for FY11E, US$105/bbl for FY12E in our estimates), supply
(any aggressive additions by LCCs from market leases), and regulations
(although we are not worried about the recent noise on potential fare
caps, it can hurt sentiment nonetheless).
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