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Jet Airways (JETIN)
Downgrade to N(V): Yield pressure and high fuel prices
drive our downgrade
Post recent developments, our view is that FY12 will be a
challenging year for Jet
We forecast a FY12 loss driven by yield pressures in a highcost setting as irrational pricing by Air India continues to
dent yields; interest cost savings are only marginal
Downgrade to N(V) (from OW(V)) and lower TP to INR500
(from INR580). Upside limited if risks persist; fuel key catalyst
Post recent developments, we believe that if the fuel price stays high and Air India continues
its irrational pricing, FY12 will be a difficult year for Jet.
Outlook challenging. Continued irrational pricing by Air India is putting private airlines in a
very difficult situation – yield pressure in a high fuel cost environment. We argue that despite
some q-o-q yield increases in 1Q12, under-recovery of costs remain. Further, 2Q being a
seasonally weak quarter puts the outlook of 1H12 at greater risk.
Downgrade to N(V), lower TP to INR500 (from INR580). We continue to value Jet using
relative valuation metrics. We use three approaches: EV/EBITDAR, P/BV and PE. Applying
these multiples to our revised FY13 estimates gives us a target price of INR500 (down from
INR580). At our target, Jet would trade at 7x EV/EBITDAR, 2.5x book and 22x EPS on our
FY13 estimates. Since our target price implies 11% potential return (falling within the Neutral
band range of 1-21%), we downgrade the stock from OW(V) to N(V).
Catalysts for Jet. Management is likely to conclude the BKC property development deal by
end-June. Jet guided that this would help raise about INR5bn upfront, of which roughly
INR3.6bn would be used to repay debt in FY12. An announcement of this deal could be a
positive catalyst for the stock in the short term. Fuel prices, however, remain the key catalyst.
What if fuel falls? Our assumption for jet fuel is USD126/bbl for FY12e and USD120/bbl for
FY13-14e. A correction in the jet fuel price remains the biggest upside risk to our forecast
earnings, target price and rating on the stock. We estimate that every USD1 reduction in fuel
price from our assumed level will add USD9m (roughly INR410m) to Jet’s profitability for
FY12 and INR51 to our target price for Jet, ceteris paribus.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jet Airways (JETIN)
Downgrade to N(V): Yield pressure and high fuel prices
drive our downgrade
Post recent developments, our view is that FY12 will be a
challenging year for Jet
We forecast a FY12 loss driven by yield pressures in a highcost setting as irrational pricing by Air India continues to
dent yields; interest cost savings are only marginal
Downgrade to N(V) (from OW(V)) and lower TP to INR500
(from INR580). Upside limited if risks persist; fuel key catalyst
Post recent developments, we believe that if the fuel price stays high and Air India continues
its irrational pricing, FY12 will be a difficult year for Jet.
Outlook challenging. Continued irrational pricing by Air India is putting private airlines in a
very difficult situation – yield pressure in a high fuel cost environment. We argue that despite
some q-o-q yield increases in 1Q12, under-recovery of costs remain. Further, 2Q being a
seasonally weak quarter puts the outlook of 1H12 at greater risk.
Downgrade to N(V), lower TP to INR500 (from INR580). We continue to value Jet using
relative valuation metrics. We use three approaches: EV/EBITDAR, P/BV and PE. Applying
these multiples to our revised FY13 estimates gives us a target price of INR500 (down from
INR580). At our target, Jet would trade at 7x EV/EBITDAR, 2.5x book and 22x EPS on our
FY13 estimates. Since our target price implies 11% potential return (falling within the Neutral
band range of 1-21%), we downgrade the stock from OW(V) to N(V).
Catalysts for Jet. Management is likely to conclude the BKC property development deal by
end-June. Jet guided that this would help raise about INR5bn upfront, of which roughly
INR3.6bn would be used to repay debt in FY12. An announcement of this deal could be a
positive catalyst for the stock in the short term. Fuel prices, however, remain the key catalyst.
What if fuel falls? Our assumption for jet fuel is USD126/bbl for FY12e and USD120/bbl for
FY13-14e. A correction in the jet fuel price remains the biggest upside risk to our forecast
earnings, target price and rating on the stock. We estimate that every USD1 reduction in fuel
price from our assumed level will add USD9m (roughly INR410m) to Jet’s profitability for
FY12 and INR51 to our target price for Jet, ceteris paribus.
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