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India Airlines
Oil slick: Cutting estimates, TPs on oil price spike
• Incorporating higher oil prices: Our global commodities team recently
increased Brent oil price forecasts to USD104/bbl for 2011E and
USD110/bbl for 2012E, up from USD95 and USD105, respectively.
Accordingly, we are assuming higher fuel costs - Singapore jet kerosene
of USD115/bbl for 2011E (vs. USD100/bbl previously) and USD127/bbl
for 2012E (vs. USD105/bbl previously) for aviation stocks under our
coverage. Every USD1/bbl increase in oil assumptions would have an
adverse 5%-5.5% earnings impact on aviation stocks under our
coverage.
• Current valuations pricing in USD115/bbl oil: Stocks have corrected
45%-50% over last 3 months with increasing worries on rising oil prices,
exacerbated by recent events in the Middle East. Based on our estimates,
current stock valuations are factoring in USD115/bbl oil price and
USD135/bbl Singapore jet kerosene for FY12E vs. our revised oil price
assumptions of USD104/bbl and USD110/bbl respectively.
• Demand-supply dynamics favorable, but full pass through of oil
unlikely: While passenger traffic growth continues to be healthy, up
19% YTD FY11E, we believe that air lines will not be able to pass
through the increase fuel prices in full measure, esp. in context of the
recent increase in passenger service taxes imposed in the budget. We are
assuming 10%-15% yield improvement in FY11E and 1%-5% in FY12E.
• Price target, valuation, key risks: 1) JETIN: We cut our FY11EFY13E
EBITDAR estimates by 1%-18% and reduce our Sep-11 PT to
Rs518. 2) KAIR: We cut FY11-FY12E EBITDAR estimates by 11%-
22% incorporating higher oil. We also account for higher equity dilution
(debt conversion to common equity at a lower price – Rs40 vs. Rs70
earlier). As a result, we downgrade the stock to Underweight from OW
and cut our Sep-11 PT to Rs39. 3) SJET: We cut our FY11E-FY13E
EBITDAR estimates by 8%-30% and reduce our Sep-11 PT to Rs60. Key
downside risks to our ratings and target prices include further rise in oil
prices and Singapore jet kerosene, slowdown in domestic passenger
demand, regulatory cap on fares and weaker rupee against the USD. Key
upside risk to our estimates and target prices could come from lower than
estimated oil and Singapore jet kerosene prices.
Incorporating higher oil price assumptions
Our global commodities team has recently increased Brent oil price forecasts to
USD104/bbl for 2011E and USD110/bbl for 2012E, up from USD95 and USD105
respectively.
Our global commodities team has arrived at these forecasts considering likely paths
for oil market developments, in context of the recent turmoil in the Middle East. Our
commodities team has outlined three scenarios for oil prices and assigned
probabilities to each scenario. The 2011E oil price forecast is a probability weighted
average of oil prices in each of the scenarios.
Current valuations implying US$115/bbl crude
Indian aviation stocks have corrected by 45%-50% over the past 3 months, driven by
concerns pertaining to rising crude oil prices and ability of airlines to pass through
the entire crude price hike. Over the last 3 months, crude oil price has increased by
almost 20%, while Singapore jet kerosene price has risen by almost 25%. Full
service carries have recently increased the fuel surcharge, but the quantum of the
increase (Rs200 per passenger) is not enough to cushion the full impact of oil prices.
Based on our estimates, every 1% increase in oil prices would adversely impact
earnings for airline stocks under over coverage by 5%-6%.
While the recent correction in stock prices is not unwarranted, we believe that current
valuations are assuming prevalent crude prices to remain at these levels for next year.
Based on our estimates, current stock prices are implying Brent crude prices at
USD115/bbl and Singapore jet kerosene at USD135/bbl for FY12E. Our earnings
estimates are based on 2012 Brent crude oil forecast of USD110/bbl and Singapore
jet kerosene of USD127/bbl.
Revise earnings and price targets incorporating higher oil
We are revising estimates for airline stocks under our coverage, incorporating higher
fuel prices. Although, we expect airlines to pass on some increase in fuel prices by
way of fuel surcharges, we do not expect price hikes to fully compensate the rise in
fuel prices. Additionally, the recent increases in service tax in the union budget will
further curtail the ability to pass through fuel prices in full measure.
Our revised fuel price assumptions are building in Singapore jet kerosene of
USD115/bbl for 2011E (vs. USD100/bbl previously) and USD127/bbl for 2012E (vs.
USD105/bbl previously). This roughly corresponds to Brent crude of USD104/bbl
for 2011E and USD110/bbl for 2012E. Our revised earnings estimates and price
target are enumerated below:
Jet Airways (India) Ltd.
We are reducing our FY11E-FY13E EBITDAR estimates by 1% to 18% on account
of higher fuel costs and cutting FY11E-FY13E EPS estimates by 54%-67%.
Accordingly, we cut our Sep-11 price target to Rs518 (previously Rs1090) based on
8x Sep-12 EV/EBITDAR, at apremium of 6% to Asian airlines peer group and at a
discount of 9% to Chinese airlines. Our PT still leaves 17% upside from current
levels; hence we maintain an OW rating on JETIN. Key downside risks include
slowdown in passenger demand, further rise in crude/jet kerosene prices,
unfavourable outcome of litigation with Sahara Group and weaker INR. Key upside
risk could come from lower than estimated Crude/Jet kerosene prices.
Kingfisher Airlines Limited
We are cutting FY11E-FY13E EBITDAR estimates by -11% to 22% and reducing
EPS estimates by 52%-113%, incorporating higher oil prices and assuming a higher
potential dilution to equity on account of debt conversion. Our new conversion price
is assumed at Rs40 per share v/s Rs70 per share earlier. In addition, KAIR has
postponed its USD250MM equity raising plan, which we believe will curtail its
ability to stream-line operations quickly. As a result, we downgrade KAIR to
Underweight (from OW) and cut our Sep11 price target to Rs39 (previously Rs83)
based on 8x Sep-12 EV/EBITDAR, at apremium of 6% to Asian airlines peer group
and at a discount of 9% to Chinese airlines. Key upside risk could come from lower
than estimated Crude/Jet kerosene prices, higher conversion price for potential
dilution to equity than expected and Potential GDR issuance of USD250MM. Key
downside risks include slowdown in passenger demand, further rise in crude/jet
kerosene prices, inability to successfully restructure debt, delays in plane
redeployment and weaker INR.
Spicejet Ltd
We cut our FY11E-FY13E EBITDAR estimates by 8% to 30% and EPS estimates by
15%-82%, incorporating higher fuel prices. Accordingly, we cut our Sep11 price
target to Rs60 (previously Rs115) based on 9x Sep-11 EV/EBITDAR (at 13%
premium to our target multiple for JETIN and KAIR), maintain our OW rating. Key
downside risks include slowdown in passenger demand, further rise in crude/jet
kerosene prices, increase/changes to airport charge regulations, difficulties in
inducting Bombardier Q400s in India and weaker INR. Key upside risk could come
from lower than estimated Crude/Jet kerosene prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Airlines
Oil slick: Cutting estimates, TPs on oil price spike
• Incorporating higher oil prices: Our global commodities team recently
increased Brent oil price forecasts to USD104/bbl for 2011E and
USD110/bbl for 2012E, up from USD95 and USD105, respectively.
Accordingly, we are assuming higher fuel costs - Singapore jet kerosene
of USD115/bbl for 2011E (vs. USD100/bbl previously) and USD127/bbl
for 2012E (vs. USD105/bbl previously) for aviation stocks under our
coverage. Every USD1/bbl increase in oil assumptions would have an
adverse 5%-5.5% earnings impact on aviation stocks under our
coverage.
• Current valuations pricing in USD115/bbl oil: Stocks have corrected
45%-50% over last 3 months with increasing worries on rising oil prices,
exacerbated by recent events in the Middle East. Based on our estimates,
current stock valuations are factoring in USD115/bbl oil price and
USD135/bbl Singapore jet kerosene for FY12E vs. our revised oil price
assumptions of USD104/bbl and USD110/bbl respectively.
• Demand-supply dynamics favorable, but full pass through of oil
unlikely: While passenger traffic growth continues to be healthy, up
19% YTD FY11E, we believe that air lines will not be able to pass
through the increase fuel prices in full measure, esp. in context of the
recent increase in passenger service taxes imposed in the budget. We are
assuming 10%-15% yield improvement in FY11E and 1%-5% in FY12E.
• Price target, valuation, key risks: 1) JETIN: We cut our FY11EFY13E
EBITDAR estimates by 1%-18% and reduce our Sep-11 PT to
Rs518. 2) KAIR: We cut FY11-FY12E EBITDAR estimates by 11%-
22% incorporating higher oil. We also account for higher equity dilution
(debt conversion to common equity at a lower price – Rs40 vs. Rs70
earlier). As a result, we downgrade the stock to Underweight from OW
and cut our Sep-11 PT to Rs39. 3) SJET: We cut our FY11E-FY13E
EBITDAR estimates by 8%-30% and reduce our Sep-11 PT to Rs60. Key
downside risks to our ratings and target prices include further rise in oil
prices and Singapore jet kerosene, slowdown in domestic passenger
demand, regulatory cap on fares and weaker rupee against the USD. Key
upside risk to our estimates and target prices could come from lower than
estimated oil and Singapore jet kerosene prices.
Incorporating higher oil price assumptions
Our global commodities team has recently increased Brent oil price forecasts to
USD104/bbl for 2011E and USD110/bbl for 2012E, up from USD95 and USD105
respectively.
Our global commodities team has arrived at these forecasts considering likely paths
for oil market developments, in context of the recent turmoil in the Middle East. Our
commodities team has outlined three scenarios for oil prices and assigned
probabilities to each scenario. The 2011E oil price forecast is a probability weighted
average of oil prices in each of the scenarios.
Current valuations implying US$115/bbl crude
Indian aviation stocks have corrected by 45%-50% over the past 3 months, driven by
concerns pertaining to rising crude oil prices and ability of airlines to pass through
the entire crude price hike. Over the last 3 months, crude oil price has increased by
almost 20%, while Singapore jet kerosene price has risen by almost 25%. Full
service carries have recently increased the fuel surcharge, but the quantum of the
increase (Rs200 per passenger) is not enough to cushion the full impact of oil prices.
Based on our estimates, every 1% increase in oil prices would adversely impact
earnings for airline stocks under over coverage by 5%-6%.
While the recent correction in stock prices is not unwarranted, we believe that current
valuations are assuming prevalent crude prices to remain at these levels for next year.
Based on our estimates, current stock prices are implying Brent crude prices at
USD115/bbl and Singapore jet kerosene at USD135/bbl for FY12E. Our earnings
estimates are based on 2012 Brent crude oil forecast of USD110/bbl and Singapore
jet kerosene of USD127/bbl.
Revise earnings and price targets incorporating higher oil
We are revising estimates for airline stocks under our coverage, incorporating higher
fuel prices. Although, we expect airlines to pass on some increase in fuel prices by
way of fuel surcharges, we do not expect price hikes to fully compensate the rise in
fuel prices. Additionally, the recent increases in service tax in the union budget will
further curtail the ability to pass through fuel prices in full measure.
Our revised fuel price assumptions are building in Singapore jet kerosene of
USD115/bbl for 2011E (vs. USD100/bbl previously) and USD127/bbl for 2012E (vs.
USD105/bbl previously). This roughly corresponds to Brent crude of USD104/bbl
for 2011E and USD110/bbl for 2012E. Our revised earnings estimates and price
target are enumerated below:
Jet Airways (India) Ltd.
We are reducing our FY11E-FY13E EBITDAR estimates by 1% to 18% on account
of higher fuel costs and cutting FY11E-FY13E EPS estimates by 54%-67%.
Accordingly, we cut our Sep-11 price target to Rs518 (previously Rs1090) based on
8x Sep-12 EV/EBITDAR, at apremium of 6% to Asian airlines peer group and at a
discount of 9% to Chinese airlines. Our PT still leaves 17% upside from current
levels; hence we maintain an OW rating on JETIN. Key downside risks include
slowdown in passenger demand, further rise in crude/jet kerosene prices,
unfavourable outcome of litigation with Sahara Group and weaker INR. Key upside
risk could come from lower than estimated Crude/Jet kerosene prices.
Kingfisher Airlines Limited
We are cutting FY11E-FY13E EBITDAR estimates by -11% to 22% and reducing
EPS estimates by 52%-113%, incorporating higher oil prices and assuming a higher
potential dilution to equity on account of debt conversion. Our new conversion price
is assumed at Rs40 per share v/s Rs70 per share earlier. In addition, KAIR has
postponed its USD250MM equity raising plan, which we believe will curtail its
ability to stream-line operations quickly. As a result, we downgrade KAIR to
Underweight (from OW) and cut our Sep11 price target to Rs39 (previously Rs83)
based on 8x Sep-12 EV/EBITDAR, at apremium of 6% to Asian airlines peer group
and at a discount of 9% to Chinese airlines. Key upside risk could come from lower
than estimated Crude/Jet kerosene prices, higher conversion price for potential
dilution to equity than expected and Potential GDR issuance of USD250MM. Key
downside risks include slowdown in passenger demand, further rise in crude/jet
kerosene prices, inability to successfully restructure debt, delays in plane
redeployment and weaker INR.
Spicejet Ltd
We cut our FY11E-FY13E EBITDAR estimates by 8% to 30% and EPS estimates by
15%-82%, incorporating higher fuel prices. Accordingly, we cut our Sep11 price
target to Rs60 (previously Rs115) based on 9x Sep-11 EV/EBITDAR (at 13%
premium to our target multiple for JETIN and KAIR), maintain our OW rating. Key
downside risks include slowdown in passenger demand, further rise in crude/jet
kerosene prices, increase/changes to airport charge regulations, difficulties in
inducting Bombardier Q400s in India and weaker INR. Key upside risk could come
from lower than estimated Crude/Jet kerosene prices.
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