Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jet Airways (JETIN)
Others
Cough syrup for ICU patients; not enough. In our view, the Government’s proposal
to allow airlines to import fuel directly offers limited benefits. The proposed savings on
state sales tax (~24% on average) would be offset by costs of leasing the infrastructure.
Besides, there would be incremental working capital limits, which would be difficult for
most players. We downgrade the stock to ADD (not REDUCE) due to hope of a cyclical
uptrend and more useful reforms, given that the Government has shown willingness to
act. We have revised our TP to Rs380 (marginally increased the multiple).
How to implement? Industry scratches its head
According to industry sources, the Cabinet will shortly approve a proposal to allow the direct
import of fuel by airlines. We consider the move positive only as it signals willingness of the
Government to take incremental steps. However, we see limited benefits for the sector. Our
discussions with industry sources indicate lack of clarity on operational and costing aspects. Most
of the companies would start planning once the detailed note is available after Cabinet clearance.
There are several issues related to implementation and, in our view, most of the gains would be
eroded by the cost of leasing infrastructure. The issues are:
In all probability, airlines would have to lease infrastructure from oil marketing companies.
Given that infrastructure provision is a monopoly or duopoly at various airports, the cost of
leasing infrastructure is expected to be steep. According to industry sources, none of the airlines
has begun discussions with OMCs for possible arrangements.
The bigger problem would be to arrange incremental working capital lines to import fuel. As of
now, airlines get a credit period of ~60 days for payment to OMCs. In case of direct imports,
airlines would have to arrange for incremental working capital lines from domestic banks,
which would be difficult, particularly for players with stretched balance sheets.
Besides, there are other issues like the possibility (low) of states imposing a countervailing ‘entry
tax’ to offset revenue losses from sales tax. This was done in the 1990s, when a similar proposal
was approved by the Central Government.
Downgrade to ADD with a revised target price of Rs380
We have revised our TP to Rs380 and tweaked earnings multiple marginally (8.7X versus 8.5X).
Downgrade to ADD (not REDUCE) due to possibility of further policy reforms as the Government
has shown willingness to act. Besides, we are awaiting a cyclical upturn in sector earnings.
Small gains could be passed on to the market given competitive intensity
A plain sensitivity analysis will not lead to the right conclusions as most of the gains (some of
the players suggest ~5% cost advantage on direct import of ATF) would be passed to the
market, given the competitive market and commodity nature of the product (air ticket). Jet’s
expected fuel bill for the domestic business would be close to Rs40 bn in FY2012E.
Assuming 5% savings would suggest Rs2 bn incremental addition at the PBT level (assuming
yield will remain constant). Practically, it is unlikely that the benefits would flow to the PBT
as competition would take yields down, neutralizing any benefit. The only advantage it
could offer is lower prices, which could lead to incremental demand.
Changing classification of ATF to ‘declared goods’ would have been more useful
In our view, it would have been more useful and simpler had the Government changed the
classification of ATF to ‘declared goods’, which would have reduced sales tax to a uniform
level of 4% across India. This would have required a much greater political consensus in
order to move the states to ratify such a proposal.
More than the ATF policy, we are positive about the sector as:
1. Yields are holding out much better in 4QFY12 versus usual trends
Yields (revenue per RPKM) are holding out much better in 4QFY12 versus the usual trend
over the past few years. An analysis of past trends suggests that due to seasonality, yields
dip ~5% qoq from 3Q to 4Q on average. In 4QFY12, yields have managed to hold at
average levels of 3QFY12 so far. Besides, the recent appreciation of the Rupee should lead
to a fall in cost pressure, which was present in previous quarters as US Dollar-denominated
costs increased on a depreciating Rupee.
2. Capacity growth to fall significantly in FY2013E; augurs well for PLF, profitability
Industry sources point out that they expect the capacity of the industry to grow by midsingle
digits, at best, in FY2013 and could actually shrink if some stressed players cut
capacity to reduce cash losses. In such a scenario, assuming normalized growth in
passenger numbers of 12-15%, the implications are that the industry’s PLF would improve
yoy in FY2013E, which augurs well for yields and hence profitability. One of the reasons for
weak yields in FY2012E (apart from Air India discounting prices) is that the industry’s
capacity has grown faster than growth in passenger numbers, leading to declining PLFs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jet Airways (JETIN)
Others
Cough syrup for ICU patients; not enough. In our view, the Government’s proposal
to allow airlines to import fuel directly offers limited benefits. The proposed savings on
state sales tax (~24% on average) would be offset by costs of leasing the infrastructure.
Besides, there would be incremental working capital limits, which would be difficult for
most players. We downgrade the stock to ADD (not REDUCE) due to hope of a cyclical
uptrend and more useful reforms, given that the Government has shown willingness to
act. We have revised our TP to Rs380 (marginally increased the multiple).
How to implement? Industry scratches its head
According to industry sources, the Cabinet will shortly approve a proposal to allow the direct
import of fuel by airlines. We consider the move positive only as it signals willingness of the
Government to take incremental steps. However, we see limited benefits for the sector. Our
discussions with industry sources indicate lack of clarity on operational and costing aspects. Most
of the companies would start planning once the detailed note is available after Cabinet clearance.
There are several issues related to implementation and, in our view, most of the gains would be
eroded by the cost of leasing infrastructure. The issues are:
In all probability, airlines would have to lease infrastructure from oil marketing companies.
Given that infrastructure provision is a monopoly or duopoly at various airports, the cost of
leasing infrastructure is expected to be steep. According to industry sources, none of the airlines
has begun discussions with OMCs for possible arrangements.
The bigger problem would be to arrange incremental working capital lines to import fuel. As of
now, airlines get a credit period of ~60 days for payment to OMCs. In case of direct imports,
airlines would have to arrange for incremental working capital lines from domestic banks,
which would be difficult, particularly for players with stretched balance sheets.
Besides, there are other issues like the possibility (low) of states imposing a countervailing ‘entry
tax’ to offset revenue losses from sales tax. This was done in the 1990s, when a similar proposal
was approved by the Central Government.
Downgrade to ADD with a revised target price of Rs380
We have revised our TP to Rs380 and tweaked earnings multiple marginally (8.7X versus 8.5X).
Downgrade to ADD (not REDUCE) due to possibility of further policy reforms as the Government
has shown willingness to act. Besides, we are awaiting a cyclical upturn in sector earnings.
Small gains could be passed on to the market given competitive intensity
A plain sensitivity analysis will not lead to the right conclusions as most of the gains (some of
the players suggest ~5% cost advantage on direct import of ATF) would be passed to the
market, given the competitive market and commodity nature of the product (air ticket). Jet’s
expected fuel bill for the domestic business would be close to Rs40 bn in FY2012E.
Assuming 5% savings would suggest Rs2 bn incremental addition at the PBT level (assuming
yield will remain constant). Practically, it is unlikely that the benefits would flow to the PBT
as competition would take yields down, neutralizing any benefit. The only advantage it
could offer is lower prices, which could lead to incremental demand.
Changing classification of ATF to ‘declared goods’ would have been more useful
In our view, it would have been more useful and simpler had the Government changed the
classification of ATF to ‘declared goods’, which would have reduced sales tax to a uniform
level of 4% across India. This would have required a much greater political consensus in
order to move the states to ratify such a proposal.
More than the ATF policy, we are positive about the sector as:
1. Yields are holding out much better in 4QFY12 versus usual trends
Yields (revenue per RPKM) are holding out much better in 4QFY12 versus the usual trend
over the past few years. An analysis of past trends suggests that due to seasonality, yields
dip ~5% qoq from 3Q to 4Q on average. In 4QFY12, yields have managed to hold at
average levels of 3QFY12 so far. Besides, the recent appreciation of the Rupee should lead
to a fall in cost pressure, which was present in previous quarters as US Dollar-denominated
costs increased on a depreciating Rupee.
2. Capacity growth to fall significantly in FY2013E; augurs well for PLF, profitability
Industry sources point out that they expect the capacity of the industry to grow by midsingle
digits, at best, in FY2013 and could actually shrink if some stressed players cut
capacity to reduce cash losses. In such a scenario, assuming normalized growth in
passenger numbers of 12-15%, the implications are that the industry’s PLF would improve
yoy in FY2013E, which augurs well for yields and hence profitability. One of the reasons for
weak yields in FY2012E (apart from Air India discounting prices) is that the industry’s
capacity has grown faster than growth in passenger numbers, leading to declining PLFs.
No comments:
Post a Comment