SpiceJet: Hold ::Business Line

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The airline has strong promoter backing and is better placed than peers to attract foreign investment.

Existing investors in low-cost carrier SpiceJet can adopt a wait-and-watch approach.

The stock price has more than doubled since our buy recommendation last December, and has gained 49 per cent since our next buy call in April. In a market in churn, SpiceJet’s prospects appear good.

The airline has strong promoter backing, is expanding in nascent markets, and is better placed than many other carriers to attract investment from foreign airlines. But given the sharp run-up in the stock and slowing passenger growth in the aviation sector, investors can refrain from taking fresh exposure at this juncture.

At its current price of Rs 44, the stock’s enterprise value is 0.6 times the company’s sales, lower than peers in Asia.

But this is not surprising, given the difficult operating environment for airlines in India compared to other countries, mainly due to high taxes. Concrete action on direct fuel imports and foreign investment in the company could provide fresh triggers for the SpiceJet stock.

STRONG RUN

The stock’s strong run over the last year was aided by a few factors. First, the exit of Kingfisher Airlines enabled other carriers to raise fares and combat high costs. This pared SpiceJet’s losses significantly and even enabled it to post profits in the June quarter. Next, the Government’s announcements to aid the struggling airline sector improved investor sentiment.

Early in the year, airlines were given permission to directly import aviation turbine fuel to get around high taxes.

Then in September, foreign airlines were allowed to invest up to 49 per cent in Indian carriers. Third, the stock benefited from regular fund infusions by the promoters.

Promoter stake in SpiceJet increased from 38.6 per cent in September 2011 to 48.6 per cent in September 2012 and is set to go up to 53.6 per cent through the infusion of an additional Rs 184 crore.

Finally, SpiceJet increased its reach to high-potential Tier-II and Tier-III cities with the continued addition of cost-efficient Q400 turboprop aircraft to its fleet.

This aided improvement in the airline’s domestic market share from 16.3 per cent at the beginning of 2012 to 19.5 per cent currently.

It has also significantly increased (almost five-fold) the number of its international flights, capitalising on the Government’s move to liberalise overseas flying rights. This will provide the airline some hedge from difficult domestic market conditions, and improve its aircraft utilisation time.

BETTER PLACED

SpiceJet carries much less debt than airlines such as Jet Airways and Kingfisher Airlines. This makes it better placed to attract investment from a foreign carrier. If and when SpiceJet decides to seek foreign equity participation, it is likely to be able to negotiate from a position of strength. This could mean a premium over market price. The airline has also indicated that it plans to commence direct fuel imports soon. If this fructifies, there could be savings on fuel cost.

RISKS

But there are concerns. The increase in fares has taken a toll on passenger traffic in the country.

While capacity has been reducing in the domestic market, the fall in demand has been sharper. Unlike the strong growth seen in earlier years, domestic air passenger traffic declined in 2012. Between January and November, there was a 3 per cent dip.

This trend, if it continues, could mean trouble for airlines.

Also, SpiceJet, which managed to post profits in the June quarter helped by a combination of high fares, lower fuel cost and the rupee strengthening returned to losses in the September quarter (though much lower than in the previous year).

This was attributed in part to a lean quarter, and the airline is expected to do better in the December quarter which is peak season.

But consistent profitability along with traffic growth will be imperative for the SpiceJet stock to maintain the upward momentum in price seen over the last year.