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Jet Airways
Intensifying competition;
Reiterate Underperform
„Profits to remain elusive; Lower forecasts and PO to Rs225
We reiterate our Underperform on Jet Airways and cut our PO to Rs225. Lower
our EBITDAR estimates by 5%/8% over FY12/13. This is on the back of ~2%-3%
cut in yields over FY12-13E for both domestic & international business due to the
increased competitive intensity in both the segments. Expect Jet to post losses for
next 2 yrs which will result in significant equity erosion (~50% over FY11-13E).
Despite recent underperformance, we believe competitive intensity and the macro
headwinds will likely push the stock lower. We therefore cut our PO to Rs225
(from Rs400) based on an unchanged multiple of 8.5x FY13E EV/EBITDAR.
Domestic: Yield growth to be muted despite strong traffic
Expect Jet’s domestic traffic CAGR to be strong at ~11% over FY11-13. However,
expect yield growth to be 2% over FY12/13 on account (a) strong industry
capacity addition (~15% CAGR over FY11-13), (b) shifting of capacity (85% from
current 70%) to low-fare segment JetKonnect. Yields have a high sensitivity to
EBITDAR with 1% change in domestic yields changes FY13E EBITDAR by ~2%.
International: Vulnerable to new players & slower growth
Being geared to the corporate premium travel, international business of Jet is
more susceptible to global slowdown. Also Jet is expected to face increased
competition (a) in economy segment from new LCCs e.g. Indigo, Air Arabia, Air
Asia etc, (b) in premium segment from established legacy carriers like Qantas,
SIA etc who have renewed their focus in SE Asia.
What can change our view?
Our negative view on the sector and Jet can change only if (a) carriers delay their
deliveries, (b) pricing in the industry becomes rational, (c) there is strong growth in
the premium segment and (d) there is significant drop in ATF prices. However, we
do not expect these to happen in the near term
Reiterate underperform; Cut PO
We reiterate our underperform rating on Jet, with a lower PO of Rs225 (earlier
Rs400). Our new PO is based on an unchanged target multiple of 8.5x FY13E
EV/EBITDAR.
Revision in estimates and assumptions
We have cut our EBITDAR estimates by 5%/8% over FY12/13 on account of
intensifying competition in both domestic and international businesses. To reflect
the increasing competition we have cut our yield assumptions by 2%-3% for both
domestic and international segments over FY12E-13E. We have largely retained
our traffic and load factor assumptions on account of relatively resilient traffic.
PO revised to Rs225
Given the high leverage we value Jet on EV/EBITDAR basis. Based on the 8%
cut in FY13E EBITDAR, on an unchanged multiple of 8.5x we arrive at the new
PO of Rs225 (from Rs400). Due to the high leverage the cut in PO is sharper
than the cut in the EBITDAR estimates.
Muted domestic yield growth
Domestic market continues to be over-aggressive in terms of capacity addition.
We expect yield growth for Jet to be muted on account of:
„ High capacity growth: We expect ~15% capacity growth over the next 2
years which is expected to exceed the traffic growth. This would lead to
erosion of pricing power of carriers.
„ Increasing competition in high yielding Tier II & Tier III routes: Tier II &
Tier III markets have been somewhat underserved till now with only 1 or 2
airlines flying from there. However, with the increasing focus of all airlines to
these routes will increase competition and reduce yields.
„ Shifting of capacity to Low fare arm JetKonnect: Majority of the traffic
growth in India is expected at the low-fare end. To tackle this Jet has
indicated that it would increase its low-fare capacity to 85% of the total
capacity by shifting capacity from full service Jet Airways to JetKonnect.
International business to face challenges from
newer incumbents
On account of increased focus of new LCCs and more established global legacy
carriers, Jet is expected to face new competition. In the economy segment it is
expected to face LCCs like Indigo, Air Asia, Air Arabia etc who are expanding
their India footprint. On the other hand, in the premium segment competition is
expected to increase as established legacy carriers like Qantas, SIA etc increase
their focus in the region.
Global slowdown fears to add to the pain
International business of Jet is highly leveraged to the premium traffic as
compared to its domestic business. Jet derives ~30% of the international revenue
from the premium traffic. With the recent cuts in global growth across most
regions, we believe this segment to be highly vulnerable.
Balance sheet worries back as environment
worsens
Jet’s current gearing of ~8x is high and is expected to worsen due to the
expected losses over the next 2 year. We expect Jet’s equity to witness more
than 50% erosion over FY11-13E. Company is looking to raise equity of up to
~$400mn in the near term. However, given the current market conditions, we
expect this to happen only beyond FY13.
Interest & lease obligations comfortable now but
vulnerable to further worsening
Jet has an outstanding debt of Rs137bn of which ~Rs90bn is the aircraft related,
long tenored (>10yrs), foreign currency loan. The aircraft debt of Jet is financed
from aircraft manufacturers & foreign financial institutions and is guaranteed by
the US EXIM Bank and European export credit agencies. Jet is also taking some
steps to lower its interest burden by shifting from high cost (>12%) INR loans to
low cost USD loans (~6%). This would enable Jet to have additional buffer for
servicing its current interest and lease payment obligations. However, any
worsening in operating environment would make Jet highly vulnerable.
Valuations expensive compared to peers
Jet trades at FY13E EV/EBITDAR of 8.7x making it one of the most expensive
airlines in the region. Even on the price to book measure Jet is one of the most
expensive airlines in the region. Given the low visibility of break-even over the
next 2 years, we expect Jet to de-rate from its current multiples.
What would make us positive on the stock?
YTD Jet has sharply underperformed the benchmark index Sensex. However, we
continue to have our negative stance on the stock and would turn positive only if
few of the following issues are addressed:
„ Carriers delay their deliveries: Domestic carriers have been aggressive in
terms of adding capacity. Any announcement of deferring the capacity would
be considered to be a positive for the sector.
„ Pricing in the industry becomes rational: Led by the ailing legacy carriers,
pricing has been irrational leading to a fare-war among the carriers. Return of
pricing discipline among the carriers would make us more positive.
„ Resilience in the premium traffic: Compared to the other Indian carriers,
Jet is more geared towards the premium traffic especially in the international
segment. Given the current macro headwinds there has been a pressure on
the premium traffic. Resilience in the premium traffic will be a positive for Jet.
„ Correction in ATF price: Any sharp correction in ATF prices could narrow
the losses for Jet. Our estimates for FY12-14 are based on $120/bbl. And we
calculate each 1% decline in JetKero prices adds ~2.5% to FY13E EBITDAR.
Price objective basis & risk
Jet Airways (JTAIF)
Our PO of Rs225 is based on 8.5x FY13E EV/EBITDAR. We value the stock at
the early-stage down-cycle multiple, which is consistent with regional airlines in a
similar environment. At our PO, the stock would trade at 3.1x P/BV, which is at
premium to all regional peers. Upside risk: sharp decline in fuel prices and fasterthan-expected economic growth. Downside risk: further increase in fuel prices
and increase in competitive intensity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jet Airways
Intensifying competition;
Reiterate Underperform
„Profits to remain elusive; Lower forecasts and PO to Rs225
We reiterate our Underperform on Jet Airways and cut our PO to Rs225. Lower
our EBITDAR estimates by 5%/8% over FY12/13. This is on the back of ~2%-3%
cut in yields over FY12-13E for both domestic & international business due to the
increased competitive intensity in both the segments. Expect Jet to post losses for
next 2 yrs which will result in significant equity erosion (~50% over FY11-13E).
Despite recent underperformance, we believe competitive intensity and the macro
headwinds will likely push the stock lower. We therefore cut our PO to Rs225
(from Rs400) based on an unchanged multiple of 8.5x FY13E EV/EBITDAR.
Domestic: Yield growth to be muted despite strong traffic
Expect Jet’s domestic traffic CAGR to be strong at ~11% over FY11-13. However,
expect yield growth to be 2% over FY12/13 on account (a) strong industry
capacity addition (~15% CAGR over FY11-13), (b) shifting of capacity (85% from
current 70%) to low-fare segment JetKonnect. Yields have a high sensitivity to
EBITDAR with 1% change in domestic yields changes FY13E EBITDAR by ~2%.
International: Vulnerable to new players & slower growth
Being geared to the corporate premium travel, international business of Jet is
more susceptible to global slowdown. Also Jet is expected to face increased
competition (a) in economy segment from new LCCs e.g. Indigo, Air Arabia, Air
Asia etc, (b) in premium segment from established legacy carriers like Qantas,
SIA etc who have renewed their focus in SE Asia.
What can change our view?
Our negative view on the sector and Jet can change only if (a) carriers delay their
deliveries, (b) pricing in the industry becomes rational, (c) there is strong growth in
the premium segment and (d) there is significant drop in ATF prices. However, we
do not expect these to happen in the near term
Reiterate underperform; Cut PO
We reiterate our underperform rating on Jet, with a lower PO of Rs225 (earlier
Rs400). Our new PO is based on an unchanged target multiple of 8.5x FY13E
EV/EBITDAR.
Revision in estimates and assumptions
We have cut our EBITDAR estimates by 5%/8% over FY12/13 on account of
intensifying competition in both domestic and international businesses. To reflect
the increasing competition we have cut our yield assumptions by 2%-3% for both
domestic and international segments over FY12E-13E. We have largely retained
our traffic and load factor assumptions on account of relatively resilient traffic.
PO revised to Rs225
Given the high leverage we value Jet on EV/EBITDAR basis. Based on the 8%
cut in FY13E EBITDAR, on an unchanged multiple of 8.5x we arrive at the new
PO of Rs225 (from Rs400). Due to the high leverage the cut in PO is sharper
than the cut in the EBITDAR estimates.
Muted domestic yield growth
Domestic market continues to be over-aggressive in terms of capacity addition.
We expect yield growth for Jet to be muted on account of:
„ High capacity growth: We expect ~15% capacity growth over the next 2
years which is expected to exceed the traffic growth. This would lead to
erosion of pricing power of carriers.
„ Increasing competition in high yielding Tier II & Tier III routes: Tier II &
Tier III markets have been somewhat underserved till now with only 1 or 2
airlines flying from there. However, with the increasing focus of all airlines to
these routes will increase competition and reduce yields.
„ Shifting of capacity to Low fare arm JetKonnect: Majority of the traffic
growth in India is expected at the low-fare end. To tackle this Jet has
indicated that it would increase its low-fare capacity to 85% of the total
capacity by shifting capacity from full service Jet Airways to JetKonnect.
International business to face challenges from
newer incumbents
On account of increased focus of new LCCs and more established global legacy
carriers, Jet is expected to face new competition. In the economy segment it is
expected to face LCCs like Indigo, Air Asia, Air Arabia etc who are expanding
their India footprint. On the other hand, in the premium segment competition is
expected to increase as established legacy carriers like Qantas, SIA etc increase
their focus in the region.
Global slowdown fears to add to the pain
International business of Jet is highly leveraged to the premium traffic as
compared to its domestic business. Jet derives ~30% of the international revenue
from the premium traffic. With the recent cuts in global growth across most
regions, we believe this segment to be highly vulnerable.
Balance sheet worries back as environment
worsens
Jet’s current gearing of ~8x is high and is expected to worsen due to the
expected losses over the next 2 year. We expect Jet’s equity to witness more
than 50% erosion over FY11-13E. Company is looking to raise equity of up to
~$400mn in the near term. However, given the current market conditions, we
expect this to happen only beyond FY13.
Interest & lease obligations comfortable now but
vulnerable to further worsening
Jet has an outstanding debt of Rs137bn of which ~Rs90bn is the aircraft related,
long tenored (>10yrs), foreign currency loan. The aircraft debt of Jet is financed
from aircraft manufacturers & foreign financial institutions and is guaranteed by
the US EXIM Bank and European export credit agencies. Jet is also taking some
steps to lower its interest burden by shifting from high cost (>12%) INR loans to
low cost USD loans (~6%). This would enable Jet to have additional buffer for
servicing its current interest and lease payment obligations. However, any
worsening in operating environment would make Jet highly vulnerable.
Valuations expensive compared to peers
Jet trades at FY13E EV/EBITDAR of 8.7x making it one of the most expensive
airlines in the region. Even on the price to book measure Jet is one of the most
expensive airlines in the region. Given the low visibility of break-even over the
next 2 years, we expect Jet to de-rate from its current multiples.
What would make us positive on the stock?
YTD Jet has sharply underperformed the benchmark index Sensex. However, we
continue to have our negative stance on the stock and would turn positive only if
few of the following issues are addressed:
„ Carriers delay their deliveries: Domestic carriers have been aggressive in
terms of adding capacity. Any announcement of deferring the capacity would
be considered to be a positive for the sector.
„ Pricing in the industry becomes rational: Led by the ailing legacy carriers,
pricing has been irrational leading to a fare-war among the carriers. Return of
pricing discipline among the carriers would make us more positive.
„ Resilience in the premium traffic: Compared to the other Indian carriers,
Jet is more geared towards the premium traffic especially in the international
segment. Given the current macro headwinds there has been a pressure on
the premium traffic. Resilience in the premium traffic will be a positive for Jet.
„ Correction in ATF price: Any sharp correction in ATF prices could narrow
the losses for Jet. Our estimates for FY12-14 are based on $120/bbl. And we
calculate each 1% decline in JetKero prices adds ~2.5% to FY13E EBITDAR.
Price objective basis & risk
Jet Airways (JTAIF)
Our PO of Rs225 is based on 8.5x FY13E EV/EBITDAR. We value the stock at
the early-stage down-cycle multiple, which is consistent with regional airlines in a
similar environment. At our PO, the stock would trade at 3.1x P/BV, which is at
premium to all regional peers. Upside risk: sharp decline in fuel prices and fasterthan-expected economic growth. Downside risk: further increase in fuel prices
and increase in competitive intensity.
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