SpiceJet: Buy :: Business Line

�� -->

Investors with a stomach for risk can buy the stock of low-cost carrier SpiceJet. Despite the recent run-up in price, the stock may hold potential for upside.

The airline’s improving operating and financial performance, strong promoter backing, the impetus provided by the recent Jet-Etihad deal, and reasonable valuation are positives.

At its current price of Rs 40, the enterprise value of the SpiceJet stock is around five times its annualised operating profits (based on December quarter EBIDTA).

This is lower than the levels airlines in Asia and Jet Airways trade at (6-8.5 times).

IMPROVED SENTIMENT

In the latest twist to its roller coaster ride over the past year, the SpiceJet stock rallied almost 30 per cent over the past week and half.

This has been on the back of expectations that the airline might also be able to land a sweet deal with a foreign airline — as good as or even better than the Jet-Etihad one.

On April 24, the UAE-based Etihad Airways agreed to buy a 24 per cent stake in Jet Airways for around Rs 2,060 crore. This represented a 31.5 per cent premium to the market rate for the Jet stock, and translated into an enterprise value to EBIDTA multiple of around nine times.

SpiceJet is in a better financial shape than Jet Airways, with debt at around one-tenth the latter’s levels, and higher profits. SpiceJet also has strong promoter backing, reflected in the regular fund infusion by the promoters (the latest equity infusion of Rs 130 crore in the current calendar was at a price of Rs 36.18 a share).

If and when SpiceJet decides to seek out a foreign partner, it is likely to do so from a position of strength, and command a good price.

SHORING UP PERFORMANCE

Meanwhile, after a difficult FY-12 and a mixed first half in FY-13, SpiceJet shored up its performance in the December quarter. The airline capitalised on higher domestic yields after the exit of Kingfisher Airlines.

This along with fleet optimisation and an increased number of international flights helped SpiceJet report a profit of Rs 102 crore in the December quarter compared to a loss of Rs 39 crore in the year-ago period. A moderation in finance costs from the September quarter also helped.

In contrast to the slump in domestic passenger traffic in the sector, the number of passengers who flew with SpiceJet within India last calendar increased around 21 per cent.

This was aided by the airline’s increased penetration in Tier II and Tier III cities using its Q400 turboprop aircraft, which enjoy cost advantages on fuel and airport charges.

SpiceJet’s market share in the domestic skies has increased to 19.2 per cent in December 2012 from 16.8 per cent a year ago.

Also, the airline has also been steadily improving its international passenger traffic (up 40 per cent last calendar) where it enjoys better margins.

It expects international revenues to account for 20 per cent of total income over the next year and half, from around 7 per cent currently.

This should help SpiceJet hedge its business better from vagaries in the domestic market.

The current moderation in the price of aviation turbine fuel (ATF), if it sustains, should help contain costs. Also, SpiceJet’s plans to directly import ATF, when it fructifies, should aid its earnings by circumventing high taxes on the fuel.

The SpiceJet stock rallied sharply late last year on liberalisation of foreign investment norms in the aviation sector. But it gave up these gains and some more, earlier this year when Malaysia-based low-cost carrier Air Asia announced its plans to enter the Indian market in collaboration with the Tata Group.

THE AIR ASIA FACTOR

Apart from fears of an impending price war, Air Asia’s plans to have its base in Chennai, from where many of SpiceJet’s flights originate, added to the stock’s pain.

But the concerns seem overdone. One, Air Asia which is expected to make its debut in the Indian skies sometime later this year, plans to start with only four aircraft and expand its fleet over the next few years. It also does not plan to operate on trunk routes such as Delhi-Mumbai.

So, a meaningful impact on domestic traffic will take time. Apprehensions of a price war driving down yields to unsustainable levels may also not materialise.

Compared to other countries, airfares in India are quite low and so the headroom to indulge in a protracted price war is limited.

The incumbent airlines in India, having gone through a period of churn, are not unfamiliar with discounted fares and are equipped to adapt to pricing strategies of new players.

SpiceJet is expanding its wings wider in the domestic and international skies.

So, it may not be particularly hit as a result of Air Asia having its base in Chennai.