SpiceJet– 3QFY2011 Result Update- Angel Broking

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SpiceJet– 3QFY2011 Result Update

Angel Broking maintains a Neutral on SpiceJet.

SpiceJet reported strong 3QFY2011 numbers. Net sales grew by 29.3% yoy to

`830cr (`642cr). EBITDA margin came in at 13.7% (15.9%) and EBIDTA stood at

`114.0cr (`102cr), up by 11.5%, largely on account of increased passenger

traffic, which lead to higher top line. Consequently, the company reported net

profit growth of 833.8% qoq of `94cr; net profit, however, fell by 13.3% yoy.

We remain Neutral on the stock.

Strong top-line growth, while margins decline: SpiceJet reported growth of 29.3%

yoy and 32.2 qoq to `830cr mainly because 1) 3Q is a peak season for the

airline industry and 2) lower capacity addition in the industry lead to lesser

competition compared to the previous year. EBITDAR margin declined to 446bp

yoy to 26.5% (31%) and EBITDA also declined by 220bp yoy to 13.7% (15.9%),

owing to higher fuel cost during the quarter. The company registered a 13.3% yoy

decline in its net profit to `94cr compared to profit of `109cr in 3QFY2010,

largely due to lower EBITDA margin and tax paid during the quarter.

Outlook and valuation: SpiceJet is well placed to service future demand with a

current fleet of 25 aircraft and existing expansion plan of three more aircraft by

FY2012-end. SpiceJet has also ordered 30 new planes from Bombardier Inc. of

Canada, of which we conservatively expect it to add four planes in FY2012; and

of the balance, one aircraft would be added every quarter going ahead.

We expect net sales to post a 26% CAGR to `3,463cr and net profit to post a

123% CAGR over FY2010–12 to `306cr. At current levels, the stock is trading at

9.1x FY2012E earnings. We remain Neutral on the stock.

Strong top-line growth: The company’s net sales grew by 29.3% yoy to `830cr

(`642cr) for the quarter, driven by strong passenger growth, which increased by

32.9% yoy to 2.39mn pax (1.80mn pax). On a qoq basis, net sales increased by

32.2%, which was expected as the third quarter is usually the strongest for the

airline industry. During the quarter, departures increased by 21.4% yoy to 14,184

(11,680), largely due to the addition of five new aircraft during the year. Average

number of aircraft increased from 19 to 22.4 during the quarter.

EBITDA margin declines yoy on higher fuel cost: SpiceJet’s EBITDA margin

declined by 220bp yoy to 13.7% (15.9%) for the quarter, mainly on account of

higher ATF prices during the quarter, which increased by 516bp yoy to 37.5%, as

a percentage of sales, compared to 32.4% in 3QFY2010. However, EBITDA grew

by 11.5% to `114cr due to an increase in the top line. On a qoq basis, margins

witnessed an increase of 1,317bp due to higher load factor during the quarter of

87.8% (73.6% in 2QFY2011) on account of the peak season. Overall, owing to

better operations and high load factors, the company managed to increase its

revenue/ASKM yoy to `3.0 (`2.8).

Bottom line declines due to tax paid, but PBT increases yoy: In 3QFY2010,

SpiceJet reported net profit of `94cr v/s a profit of `109cr in 3QFY2010, largely

because the company paid tax of `24cr in 3QFY2011 compared to zero tax paid

in 3QFY2010. However, at the PBT level, the company reported an increase of

8.3% yoy to `118cr (`109cr), despite a dip in EBITDA margin, thus showing strong

operational efficiency. Also, on a qoq basis, net profit margin improved by

977bp to 11.4% (1.6%), as the third quarter is usually the strongest quarter for the

airline industry.

Investment rationale

Load factor to remain healthy: Driven by huge losses, most airlines reduced fleets

and no new capacities have been added since FY2009. With full cost carriers

(FCCs) such as Air India and Kingfisher still registering huge losses, and Jet

Airways barely breaking even, we expect negligible fleet addition over FY2011–12.

However, demand bounced back sharply in FY2010 and low-cost carriers (LCCs)

have been reporting 80%+ load factor. Going ahead, given that demand is

expected to outpace supply, the industry’s load factor is expected to remain around

77% for FY2011E.

Higher load factor to increase profitability: With the aviation industry characterised

by very high operating leverage, an improvement in load factor is expected to

drive a substantial spurt in profit. With 88% load factor in 3QFY2011 (74% in

2QFY2011), SpiceJet's net profit shot up to `94cr v/s `10cr in 2QFY2011.

Additionally, aided by a strong fleet addition (25% CAGR over FY2010–12E), we

expect the company’s net profit to post a 123% CAGR over the period to `306cr.

Increasing fleet and strengthening balance sheet: SpiceJet currently has

25 aircraft and is one of the few airlines that will expand its fleet size in the coming

years. The company is expected to add another three aircraft by FY2012. Over

and above the old delivery schedule, the company has ordered 30 new planes

from Bombardier Inc. of Canada. We conservatively expect the company to add

four planes in FY2012; and of the balance, one aircraft would be added every

quarter going ahead. The company has also placed order for another 30 aircraft

from Boeing, which will be delivered 2014 onwards.

SpiceJet is expected to build strong cash reserve – `537cr as of FY2011E and

`878cr by FY2012E. In a worst-case scenario, even if the company witnesses a

load factor of just 50% (lowest load factor till date is of 67% reported in FY2009),

it would have enough cash to sustain its operational expenditure for seven months

without diluting any equity. Moreover, with FCCBs of US $79.8mn fully converted,

the company’s balance sheet strength has beefed up and net worth would stand at

`748cr in FY2012E.