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Jet Airways (JETIN)
OW(V): Conference takeaways support positive outlook
Fuel contract renegotiations key, more interest cost
savings ahead
Upbeat on demand outlook but fuel price remains key risk
Remain OW(V), target price INR750
Jet Airways participated in the HSBC Inaugural India Investor Conference-Champions
of Growth, held over 7-8 February, 2011 in Mumbai, India. In this report, we
summarise the key highlights from the conference for Jet.
Jet was represented by Mr Ananth Iyer, Group Head-Finance and Mrs Shobha
Randeria, Vice President-Project Finance.
Fuel contract renegotiations key. Presently, Jet Airways receives a 7% discount on the base
price for fuel from suppliers. This is a volume discount on a 60-day credit period that Jet gets
from its suppliers. Jet now plans to use an INR10bn revolving credit facility to reduce its
credit period and bargain for increased discounts. The suppliers have agreed to increase the
discount to 10%, but Jet is bargaining for 11%. If Jet is able to do this, this would mean
increased savings on the biggest cost item which constitutes 35-40% of the operating cost.
More interest cost savings ahead. Jet has converted nearly half of its 12-13% interestbearing INR-denominated working capital loans into 5-6% USD-denominated loans
through FCNRB (foreign currency non-resident banking) funding during 2010 and plans
to either convert the remaining half by March 2011 or repay it. We expect that the full
impact of these measures will flow in FY12 and estimate this will help reduce the interest
cost by roughly INR1.3bn.
Share issue on the backburner. Jet stated that it is in no hurry to raise equity post healthy
improvements in its cash flow generation. However, management says it may come to the
market to raise USD400m when the valuations are good (the share price level indicated by
management was INR1,100-1,200) and on favourable terms (as against FIPB’s (Foreign
Investment Promotion Board) demand for a promoter holding dilution from the current 80%
to 49%). Jet also did not rule out a smaller block deal, if the need arises.
Remain OW(V), target price INR750. Jet’s share price has fallen 42% y-t-d,
underperforming the Bombay Sensitive Index by 32%. If fuel prices stabilise, we believe
these low levels provide a good entry point into the stock. We continue to value Jet using
relative valuation metrics and maintain our target price at INR750. This offers 68%
potential return. Hence, we remain Overweight (V) on the stock. Fuel price increase
remains a key negative share price driver.
Passenger mix offers pricing flexibility
Jet stated that nearly 80-85% of its total passenger traffic is business or business related. Since this
segment is relatively less sensitive to fare increases, this favourable mix offers it more flexibility in
passing the oil price increases through surcharges to customers. In addition to this, Jet believes that the
demand scenario will remain strong and expects increases in fuel surcharge will not affect demand
growth negatively.
No additions to debt levels
Jet does not plan to add any more debt to its balance sheet. All future fleet acquisition will be made
through sale and lease-back transactions. Instead, Jet plans to repay roughly INR10bn debt every year.
Indeed, Jet’s debt levels have reduced by INR7bn y-t-d in FY11 as per the last reported balance sheet
for 3Q11.
Ally with all but alliance with none
Jet is presently not a member of any global airline alliance (SkyTeam, Star, Oneworld) and does not
intend to join any in the foreseeable future. However, Jet has agreements with approximately 130 airlines
world-wide. The company believes that given its smaller size compared to international counterparts, it
may not be in its best interests to join any alliance as it may not be able to join on favourable terms.
Hence Jet prefers to stay out of alliances.
Rising airport charges and staff poaching concerns
The airport charges in India have been consistently increasing post the modernisation of the various
airports in the country. In addition to this, Jet stated that staff poaching is prevalent in the industry. Jet’s
staff is presently non-unionised and the company has a welfare associations for pilots that takes care of
non-pay-related issues.
Jet to grow organically
Jet (Jet and Jetlite) holds a 26% market share in the domestic market and 10% in the international. Over
the next 4-5 years, Jet wants to grow its domestic share to 45% and international to 25%.
Jet has roughly 40 aircrafts on firm order, of which nearly half will be delivered between now and 2014.
These are a combination of narrow body and wide body aircraft to be used to increase domestic
presence and launch new international routes. In addition to this, Jet is in the midst of some lease
negotiations for A320s.
Upbeat on outlook, fuel price key concern
Jet Airways management was very confident on the outlook and believed that demand outlook is very
promising indeed and supply is expected to lag demand in the short-medium term. However, jet fuel
prices remained a key concern and the management stated that a Brent crude price beyond USD120/bbl
would make it difficult to sustain business
Maintain OW(V), target at INR750
We continue to value Jet using relative valuation metrics. In using relative valuation, we value Jet at the
FY11e multiples of Cathay Pacific (a developed market airline: 293 HK, price HKD19.74, target HKD23,
Neutral) and Air China (an emerging market airline: 753 HK, price HKD7.52, target HKD10.25, N(V))
We use four approaches: EV/EBITDAR, price to book, PE, and rating to economic profit (REP).
We believe that the REP multiple for Air China can be unreliable as its book value tends to be skewed by
currency gains and losses. Hence, we ignore the fair values suggested by Air China’s price to book and
REP multiples. If we value Jet using its own average price to book of 3x over 2005-07, we arrive at a fair
value of INR845.
We set our target price for Jet at INR750 – roughly the midpoint of the average fair value range suggested
in the table above and Jet’s own price to book historical trading range. At our target, Jet would trade at 7x
EV/EBITDAR, 2.7x price to book and 12x PE on our FY12 estimates. Under the HSBC model, the
Overweight rating band for a volatile Indian stock is a total return of 1%-21%. Our target implies 68%
potential return from the current share price; we therefore remain Overweight (V) on the stock.
Investment risks
The stock tends to underperform the MSCI AEJ on a relative basis when jet fuel prices rise substantially.
The correlation tends to be negative when jet fuel price rises (2005-07) and turns positive when fuel price
falls or remains at low levels (0.63 correlation during 2009).
In addition, a major fall-off in non-operating income remains a risk and can affect forecasts and
valuations. Beside macro risks of a substantial downturn in Asian and global economic growth, we view
unexpected capacity increases as a risk that the company faces from its competitors.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jet Airways (JETIN)
OW(V): Conference takeaways support positive outlook
Fuel contract renegotiations key, more interest cost
savings ahead
Upbeat on demand outlook but fuel price remains key risk
Remain OW(V), target price INR750
Jet Airways participated in the HSBC Inaugural India Investor Conference-Champions
of Growth, held over 7-8 February, 2011 in Mumbai, India. In this report, we
summarise the key highlights from the conference for Jet.
Jet was represented by Mr Ananth Iyer, Group Head-Finance and Mrs Shobha
Randeria, Vice President-Project Finance.
Fuel contract renegotiations key. Presently, Jet Airways receives a 7% discount on the base
price for fuel from suppliers. This is a volume discount on a 60-day credit period that Jet gets
from its suppliers. Jet now plans to use an INR10bn revolving credit facility to reduce its
credit period and bargain for increased discounts. The suppliers have agreed to increase the
discount to 10%, but Jet is bargaining for 11%. If Jet is able to do this, this would mean
increased savings on the biggest cost item which constitutes 35-40% of the operating cost.
More interest cost savings ahead. Jet has converted nearly half of its 12-13% interestbearing INR-denominated working capital loans into 5-6% USD-denominated loans
through FCNRB (foreign currency non-resident banking) funding during 2010 and plans
to either convert the remaining half by March 2011 or repay it. We expect that the full
impact of these measures will flow in FY12 and estimate this will help reduce the interest
cost by roughly INR1.3bn.
Share issue on the backburner. Jet stated that it is in no hurry to raise equity post healthy
improvements in its cash flow generation. However, management says it may come to the
market to raise USD400m when the valuations are good (the share price level indicated by
management was INR1,100-1,200) and on favourable terms (as against FIPB’s (Foreign
Investment Promotion Board) demand for a promoter holding dilution from the current 80%
to 49%). Jet also did not rule out a smaller block deal, if the need arises.
Remain OW(V), target price INR750. Jet’s share price has fallen 42% y-t-d,
underperforming the Bombay Sensitive Index by 32%. If fuel prices stabilise, we believe
these low levels provide a good entry point into the stock. We continue to value Jet using
relative valuation metrics and maintain our target price at INR750. This offers 68%
potential return. Hence, we remain Overweight (V) on the stock. Fuel price increase
remains a key negative share price driver.
Passenger mix offers pricing flexibility
Jet stated that nearly 80-85% of its total passenger traffic is business or business related. Since this
segment is relatively less sensitive to fare increases, this favourable mix offers it more flexibility in
passing the oil price increases through surcharges to customers. In addition to this, Jet believes that the
demand scenario will remain strong and expects increases in fuel surcharge will not affect demand
growth negatively.
No additions to debt levels
Jet does not plan to add any more debt to its balance sheet. All future fleet acquisition will be made
through sale and lease-back transactions. Instead, Jet plans to repay roughly INR10bn debt every year.
Indeed, Jet’s debt levels have reduced by INR7bn y-t-d in FY11 as per the last reported balance sheet
for 3Q11.
Ally with all but alliance with none
Jet is presently not a member of any global airline alliance (SkyTeam, Star, Oneworld) and does not
intend to join any in the foreseeable future. However, Jet has agreements with approximately 130 airlines
world-wide. The company believes that given its smaller size compared to international counterparts, it
may not be in its best interests to join any alliance as it may not be able to join on favourable terms.
Hence Jet prefers to stay out of alliances.
Rising airport charges and staff poaching concerns
The airport charges in India have been consistently increasing post the modernisation of the various
airports in the country. In addition to this, Jet stated that staff poaching is prevalent in the industry. Jet’s
staff is presently non-unionised and the company has a welfare associations for pilots that takes care of
non-pay-related issues.
Jet to grow organically
Jet (Jet and Jetlite) holds a 26% market share in the domestic market and 10% in the international. Over
the next 4-5 years, Jet wants to grow its domestic share to 45% and international to 25%.
Jet has roughly 40 aircrafts on firm order, of which nearly half will be delivered between now and 2014.
These are a combination of narrow body and wide body aircraft to be used to increase domestic
presence and launch new international routes. In addition to this, Jet is in the midst of some lease
negotiations for A320s.
Upbeat on outlook, fuel price key concern
Jet Airways management was very confident on the outlook and believed that demand outlook is very
promising indeed and supply is expected to lag demand in the short-medium term. However, jet fuel
prices remained a key concern and the management stated that a Brent crude price beyond USD120/bbl
would make it difficult to sustain business
Maintain OW(V), target at INR750
We continue to value Jet using relative valuation metrics. In using relative valuation, we value Jet at the
FY11e multiples of Cathay Pacific (a developed market airline: 293 HK, price HKD19.74, target HKD23,
Neutral) and Air China (an emerging market airline: 753 HK, price HKD7.52, target HKD10.25, N(V))
We use four approaches: EV/EBITDAR, price to book, PE, and rating to economic profit (REP).
We believe that the REP multiple for Air China can be unreliable as its book value tends to be skewed by
currency gains and losses. Hence, we ignore the fair values suggested by Air China’s price to book and
REP multiples. If we value Jet using its own average price to book of 3x over 2005-07, we arrive at a fair
value of INR845.
We set our target price for Jet at INR750 – roughly the midpoint of the average fair value range suggested
in the table above and Jet’s own price to book historical trading range. At our target, Jet would trade at 7x
EV/EBITDAR, 2.7x price to book and 12x PE on our FY12 estimates. Under the HSBC model, the
Overweight rating band for a volatile Indian stock is a total return of 1%-21%. Our target implies 68%
potential return from the current share price; we therefore remain Overweight (V) on the stock.
Investment risks
The stock tends to underperform the MSCI AEJ on a relative basis when jet fuel prices rise substantially.
The correlation tends to be negative when jet fuel price rises (2005-07) and turns positive when fuel price
falls or remains at low levels (0.63 correlation during 2009).
In addition, a major fall-off in non-operating income remains a risk and can affect forecasts and
valuations. Beside macro risks of a substantial downturn in Asian and global economic growth, we view
unexpected capacity increases as a risk that the company faces from its competitors.
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