Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jet Airways (JETIN IN)
OW(V): 3Q below estimates but positive outlook intact
3Q11 net below estimates; EBITDAR in line with
expectations
Positive operational outlook remains intact; forecasts cut to
reflect changed fuel, interest & tax assumptions
Remain OW(V), reduce target to INR750 (from INR1,000)
3Q11 net below estimates. 3Q11 reported profit for the Group was INR1.4bn, up 31% yo-y but 48% below our forecast mainly due to a one time deferred tax provision of
INR996m created in this quarter. If we strip this out, profit was up 122% y-o-y and 12%
short of our forecast owing to two main factors. First, interest expense was 8% above
expectation and second, non-operating income was 22% below forecast. The main driver
of the y-o-y rebound in pre-tax profit was a 58% y-o-y growth in the airline EBIT.
But positive operational outlook still intact. In the short term, we expect 4Q11 to show
stronger performance that has traditionally been the trend, benefiting largely from the
Cricket Wold Cup to be held in India and neighbouring countries from 19 Feb-2 April. In
the medium term, we argue that the earnings quality of Jet should remain good. Rising oil
prices remain a concern but we think that the demand is strong enough to pass on
increased fuel prices to consumers. In addition to this, we have been witnessing interest
cost savings q-o-q in FY11 and expect these savings to accelerate going forward.
Estimates cut to reflect changed assumptions. We cut our FY11 forecast to mainly
reflect the below forecast 3Q results. FY12e-13e cut 30-36% on changed fuel, interest &
tax assumptions.
Remain OW (V), reduce TP to INR750. Jet’s share price has fallen 33% y-t-d,
underperforming the Bombay Sensitive Index by 23%. We believe these low levels
provide a good entry point into the stock. We continue to value Jet using relative valuation
metrics and reduce our target price from INR1,000 to INR750 to reflect the cut in our
estimates. This offers 45% potential total return. Hence, we remain Overweight (V) on the
stock. Fuel price increase remains a key negative share price driver
3Q11 net below estimate; EBITDAR in line
3Q11 reported profit for the Group was INR1.4bn, up 31% y-o-y but 48% below our forecast. The
reported profits fell short of our forecast mainly due to a one time deferred tax provision of INR996m
created in this quarter. If we strip this out, profit was up 122% y-o-y and 12% short of our forecast.
The result was below expectation owing to two factors. First, interest expense was 8% above expectation
and second, non-operating incomes were 22% below our forecast.
The main driver of the y-o-y rebound in pre-tax profit was a 58% y-o-y growth in the airline EBIT, driven
by an 8% rise in overall traffic coupled with a 10% rise in overall yields.
Key highlights from the conference call
Equity fund raising plan is on the backburner. As we had argued in our November note, the
company’s plans of additional equity raising has been put on the backburner while it awaits
unconditional approval from the Foreign Investment Promotion Board (FIPB), which we consider a
major hurdle.
BKC property development deal drawing to a closure. The BKC property development deal is
being negotiated with Godrej. With the legal documentation in place, an agreement may be signed
soon. We estimate this should help raise roughly INR5.5bn upfront besides placing 25% of the land
under Jet’s ownership for life and a profit sharing agreement on the remaining 75%. We believe only
INR5.5bn can be of immediate use to the company (once the contract is sealed) for partly repaying its
high cost debt.
Positive outlook remains intact
For the domestic traffic, 4
th
quarter (Jan-Mar) tends to be a seasonally weaker quarter than the 3
rd
(OctDec) while international traffic tends to uphold the strong 3Q performance. However, during the
conference call, the company guided that forward bookings for 4Q have been showing encouraging signs
this year, a part of which could be attributed to the Cricket World Cup to be held over 19 Feb-2 April in
various parts of India, Bangladesh and Sri Lanka and this should help boost traffic.
In the medium term, we believe that the earnings quality of Jet will continue to remain good. Our positive
operational outlook for Jet remains intact and we continue to argue that Jet Airways is indeed the best
positioned airline in the fast growing Indian market with a sustained domestic market share of 26% in
3Q11. The company’s performance on the international routes is increasingly adding to the bottom line as
average route loads range 60%-86% with a majority falling towards the upper end with the recently
introduced route to Milan already registering a 85%+ load factor.
Rising oil prices remain a concern but we assume this is seasonal (cold winters in China, US and Europe)
pushing up the demand for heating oil and jet fuel prices will fall as winter ends. Further, the company
also guided that increased fuel prices will be passed on to consumers in the form of higher fuel surcharge.
We do not believe that this will negatively affect traffic as the demand outlook remains very strong. In
addition to this, industry supply is expected to remain constrained and therefore we argue improvements
in net yields (ex-surcharge) will be possible. We thus remain positive on Jet’s operational outlook.
Jet plans to repay INR10bn of debt every year and it started these repayments in 2010. In addition to this,
some high cost INR denominated loans were converted into lower cost USD loans. Both these helped to
reduce interest payments and the same have been reducing on a q-o-q basis over FY11. We expect more
of these interest cost savings to come through going forward and assume an annual saving of roughly
INR1.3bn for each of the next two years.
Earnings estimate changes
We reduce our FY11estimates to reflect higher than expected interest costs, lower non-operating incomes
and the one time deferred tax provision of INR996m made in 3Q11.
The 30-36% reduction in our FY12e-FY13e estimates is reflective of a higher fuel price assumption
(USD105/bbl for FY12 and USD115/bbl for FY13 versus USD95/bbl for both years earlier), slightly
higher interest costs, higher staff costs (expected to grow under inflation pressures) and an assumption of
tax charge going forward. During the conference call, the company guided an effective tax rate of 33% to
be partially offset by the Minimum Alternate Tax (MAT) credit entitlements going forward. In the
absence of clarity on the portion of current tax that could be offset by MAT, we assume an effective tax
rate of 25% for FY12e-13e (previously 0.3%).
Maintain OW, target reduced to 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, HKD20.35, TP HKD23, N) and
Air China (an emerging market airline-753 HK, HKD8.17, TP 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 therefore place the fair value of Jet at INR750— roughly the midpoint of the average fair value range
suggested in Table 4 and Jet’s own price to book historical trading range. We thus reduce our target price
from INR1,000 to INR750. 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 45% potential return from the current share price; we
therefore remain Overweight (V) on the stock.
Investment risks
Jet fuel and USD strength are key 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).
Jet is short the US dollar; it is negatively impacted by dollar strength. About 25% of its revenues and 35-
40% of its costs are dollar denominated. In addition to this, roughly 85% of Jet’s cINR130bn loans are
dollar denominated and dollar strength would mean increased interests payments.
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 IN)
OW(V): 3Q below estimates but positive outlook intact
3Q11 net below estimates; EBITDAR in line with
expectations
Positive operational outlook remains intact; forecasts cut to
reflect changed fuel, interest & tax assumptions
Remain OW(V), reduce target to INR750 (from INR1,000)
3Q11 net below estimates. 3Q11 reported profit for the Group was INR1.4bn, up 31% yo-y but 48% below our forecast mainly due to a one time deferred tax provision of
INR996m created in this quarter. If we strip this out, profit was up 122% y-o-y and 12%
short of our forecast owing to two main factors. First, interest expense was 8% above
expectation and second, non-operating income was 22% below forecast. The main driver
of the y-o-y rebound in pre-tax profit was a 58% y-o-y growth in the airline EBIT.
But positive operational outlook still intact. In the short term, we expect 4Q11 to show
stronger performance that has traditionally been the trend, benefiting largely from the
Cricket Wold Cup to be held in India and neighbouring countries from 19 Feb-2 April. In
the medium term, we argue that the earnings quality of Jet should remain good. Rising oil
prices remain a concern but we think that the demand is strong enough to pass on
increased fuel prices to consumers. In addition to this, we have been witnessing interest
cost savings q-o-q in FY11 and expect these savings to accelerate going forward.
Estimates cut to reflect changed assumptions. We cut our FY11 forecast to mainly
reflect the below forecast 3Q results. FY12e-13e cut 30-36% on changed fuel, interest &
tax assumptions.
Remain OW (V), reduce TP to INR750. Jet’s share price has fallen 33% y-t-d,
underperforming the Bombay Sensitive Index by 23%. We believe these low levels
provide a good entry point into the stock. We continue to value Jet using relative valuation
metrics and reduce our target price from INR1,000 to INR750 to reflect the cut in our
estimates. This offers 45% potential total return. Hence, we remain Overweight (V) on the
stock. Fuel price increase remains a key negative share price driver
3Q11 net below estimate; EBITDAR in line
3Q11 reported profit for the Group was INR1.4bn, up 31% y-o-y but 48% below our forecast. The
reported profits fell short of our forecast mainly due to a one time deferred tax provision of INR996m
created in this quarter. If we strip this out, profit was up 122% y-o-y and 12% short of our forecast.
The result was below expectation owing to two factors. First, interest expense was 8% above expectation
and second, non-operating incomes were 22% below our forecast.
The main driver of the y-o-y rebound in pre-tax profit was a 58% y-o-y growth in the airline EBIT, driven
by an 8% rise in overall traffic coupled with a 10% rise in overall yields.
Key highlights from the conference call
Equity fund raising plan is on the backburner. As we had argued in our November note, the
company’s plans of additional equity raising has been put on the backburner while it awaits
unconditional approval from the Foreign Investment Promotion Board (FIPB), which we consider a
major hurdle.
BKC property development deal drawing to a closure. The BKC property development deal is
being negotiated with Godrej. With the legal documentation in place, an agreement may be signed
soon. We estimate this should help raise roughly INR5.5bn upfront besides placing 25% of the land
under Jet’s ownership for life and a profit sharing agreement on the remaining 75%. We believe only
INR5.5bn can be of immediate use to the company (once the contract is sealed) for partly repaying its
high cost debt.
Positive outlook remains intact
For the domestic traffic, 4
th
quarter (Jan-Mar) tends to be a seasonally weaker quarter than the 3
rd
(OctDec) while international traffic tends to uphold the strong 3Q performance. However, during the
conference call, the company guided that forward bookings for 4Q have been showing encouraging signs
this year, a part of which could be attributed to the Cricket World Cup to be held over 19 Feb-2 April in
various parts of India, Bangladesh and Sri Lanka and this should help boost traffic.
In the medium term, we believe that the earnings quality of Jet will continue to remain good. Our positive
operational outlook for Jet remains intact and we continue to argue that Jet Airways is indeed the best
positioned airline in the fast growing Indian market with a sustained domestic market share of 26% in
3Q11. The company’s performance on the international routes is increasingly adding to the bottom line as
average route loads range 60%-86% with a majority falling towards the upper end with the recently
introduced route to Milan already registering a 85%+ load factor.
Rising oil prices remain a concern but we assume this is seasonal (cold winters in China, US and Europe)
pushing up the demand for heating oil and jet fuel prices will fall as winter ends. Further, the company
also guided that increased fuel prices will be passed on to consumers in the form of higher fuel surcharge.
We do not believe that this will negatively affect traffic as the demand outlook remains very strong. In
addition to this, industry supply is expected to remain constrained and therefore we argue improvements
in net yields (ex-surcharge) will be possible. We thus remain positive on Jet’s operational outlook.
Jet plans to repay INR10bn of debt every year and it started these repayments in 2010. In addition to this,
some high cost INR denominated loans were converted into lower cost USD loans. Both these helped to
reduce interest payments and the same have been reducing on a q-o-q basis over FY11. We expect more
of these interest cost savings to come through going forward and assume an annual saving of roughly
INR1.3bn for each of the next two years.
Earnings estimate changes
We reduce our FY11estimates to reflect higher than expected interest costs, lower non-operating incomes
and the one time deferred tax provision of INR996m made in 3Q11.
The 30-36% reduction in our FY12e-FY13e estimates is reflective of a higher fuel price assumption
(USD105/bbl for FY12 and USD115/bbl for FY13 versus USD95/bbl for both years earlier), slightly
higher interest costs, higher staff costs (expected to grow under inflation pressures) and an assumption of
tax charge going forward. During the conference call, the company guided an effective tax rate of 33% to
be partially offset by the Minimum Alternate Tax (MAT) credit entitlements going forward. In the
absence of clarity on the portion of current tax that could be offset by MAT, we assume an effective tax
rate of 25% for FY12e-13e (previously 0.3%).
Maintain OW, target reduced to 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, HKD20.35, TP HKD23, N) and
Air China (an emerging market airline-753 HK, HKD8.17, TP 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 therefore place the fair value of Jet at INR750— roughly the midpoint of the average fair value range
suggested in Table 4 and Jet’s own price to book historical trading range. We thus reduce our target price
from INR1,000 to INR750. 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 45% potential return from the current share price; we
therefore remain Overweight (V) on the stock.
Investment risks
Jet fuel and USD strength are key 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).
Jet is short the US dollar; it is negatively impacted by dollar strength. About 25% of its revenues and 35-
40% of its costs are dollar denominated. In addition to this, roughly 85% of Jet’s cINR130bn loans are
dollar denominated and dollar strength would mean increased interests payments.
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.
No comments:
Post a Comment