Jet Airways- Too fast, too soon; company update; downgrade to Hold:: Edelweiss,

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Jet Airways (JETIN IN, INR 336, downgrade to Hold)

Jet Airways (Jet) stock is up 40% since our sector update, Light at the end of the tunnel, dated November 17, 2011, and has nearly doubled from December lows. We believe the stock price has overreacted to the news on approval for direct ATF import by the Empowered Group of Ministers (EGoM). We understand there are several logistics issues, additional costs and possible taxes which could possibly off set most of the benefits of lower ATF prices. Further, improvement in yields, driven by easing competitive scenario, has clearly not been enough to offset the stubbornly high oil prices (INR terms). We continue to believe that a fall in oil price remains the key to a rebound in Jet’s performance. We downgrade to ‘HOLD’ with a TP of INR340 (INR295 earlier).    

Limited benefit likely from ATF import 

While allowing ATF imports is sentimentally positive, we note that there could be additional costs in terms of transportation, logistics, storage etc., which could partially offset the benefit of cheaper imported ATF (25-30% lower). Further, there is a possibility of state governments levying an entry tax (as much as 10-15%) to recover sales tax loss. Availability of requisite infrastructure is another issue.  

Sharp rise in yields highly unlikely

Assuming oil prices remain at the current level through FY13, Jet will need to take a yield increase of nearly 10% in domestic operations (3% in international) to earn meaningful profits (INR2.5bn). This, we believe, is highly improbable given that yield hike has been limited to 2-3% in most years. Further, a sharp rise in yield could impact demand significantly, in our view. 

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Outlook and valuations: Fall in oil prices key; downgrade to ‘HOLD’

We continue to believe that the industry demand-supply scenario remains favourable on resilient demand (10-12%) and limited supply growth (single-digit) given stressed balance sheets of key players. Hence, Jet will stand to benefit from a potential fall in oil prices – a 1% fall increase EBIDTAR by 3%. Our TP of INR340 is based on 7.25x FY13E EV/EBIDTAR which leaves limited room for upside. Hence, we downgrade to ‘HOLD.’

Jet Airways - Too fast, too soon; company update; downgrade to Hold