SpiceJet:: De-risking initiatives bearing fruit; best placed to attract FDI ::MoST

De-risking initiatives bearing fruit; best placed to attract FDI
Industry outlook positive; fares up ~20% YTD
We met the management of SpiceJet (SJET), India's second largest low cost carrier (LCC),
having a market share of ~18.5%. Our key takeaways:
 Outlook for the Indian Aviation industry is positive, given (1) sharp moderation in
industry capacity, (2) rational pricing by key players, and (3) recent regulatory measures.
 SJET's de-risking initiatives are bearing fruit, which is reflected in the 31% drop in net
losses in 2QFY13. SJET is poised for a turnaround by FY14.
 Given SJET's industry positioning and strong balance sheet, it would be a prime target
for any international airlines looking to gain a strategic foothold in India, one of the
fastest growing aviation markets in the world.
 SJET trades at an EV of 15x/ 8.5x its consensus FY13E/FY14E EBITDAR. Not Rated

�� -->


Industry outlook positive
 The medium term outlook for the Indian Aviation industry is positive, given
(1) sharp moderation in industry capacity, (2) rational pricing by key players,
and (3) recent regulatory measures.
 Since FY11, the operational domestic fleet size has shrunk from 252 aircraft
to 237 aircraft, primarily due to withdrawal of the Kingfisher fleet (~56 aircraft).
Also, Indigo and SpiceJet have deployed ~15 aircraft for international
operations. Consequently, the domestic carriers have gained significant
pricing power (industry fares up ~20% YTD).
 Recent government measures such as (a) approval of FDI, and (2) flexibility
to import ATF / hedge ATF purchases are key positives.
De-risking initiatives bearing fruit
 SJET has taken de-risking initiatives such as: (a) focusing on under-served
tier-2/3 routes to reduce dependence on key metro routes, (b) foraying into
international market to boost aircraft utilization, and (c) starting pilot import
of ATF to lower cost, which is now bearing fruit and is reflected in the 31% YoY
drop in net losses in 2QFY13.
 Currently, it has a fleet of 37 B-737s and 12 Q-400s and has an extensive
network in India and few international destinations in South Asia. SJET
introduced 12 Bombardier Q-400, smaller aircraft with 78 seats, allowing it to
increase its domestic network from 22 stations to 34 stations in FY12. Addition
of under-served routes has allowed SJET to not only lower its dependence on
the highly competitive trunk routes, but also gain synergistic advantages.
 Introduction of international routes has helped SJET to increase its aircraft
utilization rates and gain synergistic traffic benefits in its domestic operations.
 In FY13, SJET also started pilot import of ATF, which accounted for ~53% of its
sales in 2QFY13. Partial transition to imports for ATF requirement could be a
key positive. In the domestic market, there is lack of transparency in the
pricing of ATF, which is controlled by the three leading oil PSUs. Also, ATF is
subjected to very high taxes at the state level.


Valuation and view
We believe, given positive industry outlook and successful de-risking initiatives, SJET
is well poised to turnaround in the near term. SJET is one of the most cost efficient
LCC carrier in India with relatively strong balance sheet (net debt of ~INR10.5b in
FY13). Recent equity infusion by the promoters is positive and will strengthen its
financials. SJET is in talks with major international airlines for a strategic stake sale,
any such successful deal could be a key positive and re-rate the company. SJET trades
at an EV of 1.6x/1.3x its consensus FY13E/ FY14E sales and an EV of 15x/ 8.5x its consensus
FY13E/FY14E EBITDAR. Not Rated.