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Jet Airways (JET.BO)
Alert: 2QFY12 - Conference Call Takeaways
Competition remains intense — On both international and domestic operations.
Mgmt noted that on international routes, entry of the domestic LCCs on West Asian /
SE Asian routes impacted yields slightly in 2Q (though these have recovered into 3Q).
Within the domestic market, Air India’s ‘fare wars’ impacted 2Q yields. Looking ahead,
management notes that yields in Nov improved ~18-20% over Oct levels (in line with
Sept yields) – this implies 3Q yields should improve ~14% Q/Q – impressive, but less
than the typical 18-20% seasonal uptick witnessed in the past years.
Debt levels steady, cash flows augmented by asset sales — Management notes
that currency translation-inflated debt by ~Rs10bn. Over the next 6 months, ~Rs15bn
of debt has to be repaid, which will be partly funded through cash from the Godrej –
BKC transaction (~US$100m) and sale and lease back (US$150-300m).
Cost Restructuring: a long-term positive — Management noted that it plans to cut
costs (ex fuel) / ASK by 5-10% pa. Areas targeted are IT overheads, manpower
expenses, better aircraft utilization, et al. We think this is a positive, and necessary,
given that oil prices remain sticky, and cost structures of the aviation sector in India
must reflect the ‘new reality’ – a price sensitive market, within which the corporate
travel market has a far lower proportion today than 5 years ago (corporate segment
accounts for ~33% of Jet’s revenues – at the time of Jet’s IPO it was estimated that
~80% of passenger travel was business related). One tangible improvement: that we
highlight - fuel burn / block hour that’s improved by ~10% in the past four years.
Brand repositioning — Management expects operations to be consolidated into two
different formats: full service and low fare. Before it embarks on this initiative, it needs
to reduce structural costs to ensure the low fare model is sustainable over the long
term – we think this is critical given that 75% of seats offered by Jet are low cost now.
Maintain Sell — Jet is interestingly positioned – recent developments from a
competitive perspective implies some relief for its full service business. However, we
think oil and a depreciating rupee trump possible market share gains, for now. Longer
term, we like management’s focus on cost reduction initiatives as the business is
realigned to the current demand environment.
Jet Airways
Valuation
Airlines are trading plays - given the cyclical nature of their business, high operational
and financial leverage and an earnings profile that is excessively volatile and sensitive
to macro variables like oil prices and currency movements. Given the excessive
volatility in earnings of airlines, we prefer to utilize a more stable metric to value
airlines. Our target price of Rs215 is based on 9x EV/EBITDAR on FY13 estimates.
Our multiple of 9x pegs Jet at a significant premium to other LCC / regional growth
carriers. Typically, in the past we've pegged Jet at a premium (of around 20-25%) to its
regional peers; given more than 5-6 years of trading history, we now begin to peg the
stock against its own trading history. Jet's average forward EV/EBITDAR since its IPO
has been around 12x, excluding the 2 exceptional years of CY07-08 (these years were
the confluence of the global financial crisis and the ramp-up in competition in the
industry - we reckon they are somewhat exceptional and the collapse in earnings
precipitated by both factors will not likely play out over the near term). Our fair-value
multiple of 9x (which is a 25% discount to the 12x average) provides a sufficient buffer -
in our view - to the risk that oil prices continue to remain elevated.
Risks
We assign a default High Risk rating to Jet Airways given that the stock is deemed to
be relatively volatile by our quantitative risk-rating model (based on stock price
movements in the past year) or that it has a trading history of less than 3 months. Our
High Risk rating emanates from very high sensitivity of Jet Airways' earnings (and thus
stock price) to macro environment, mainly oil prices and foreign exchange rates- both
of which are inherently volatile. Key upside risks to our recommendation and target
price are: a) Stronger-than-forecast yield growth in the domestic market could boost
revenues / EBITDAR, b) a sustained decline in ATF prices (driven by a significant fall in
global oil prices), c) Strong appreciation of the rupee vs. USD; and d) Legislative
changes - FDI permitted for other foreign airlines and/or lower sales tax on aviation
turbine fuel. Key downside risks that could result in stock falling below our target price
include a) increased competitive intensity, marked by a pro-longed reduction in fares by
other airline companies, could put pressure on yields, and b) sustained cost pressures
due to high oil prices and a depreciating rupee against USD
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jet Airways (JET.BO)
Alert: 2QFY12 - Conference Call Takeaways
Competition remains intense — On both international and domestic operations.
Mgmt noted that on international routes, entry of the domestic LCCs on West Asian /
SE Asian routes impacted yields slightly in 2Q (though these have recovered into 3Q).
Within the domestic market, Air India’s ‘fare wars’ impacted 2Q yields. Looking ahead,
management notes that yields in Nov improved ~18-20% over Oct levels (in line with
Sept yields) – this implies 3Q yields should improve ~14% Q/Q – impressive, but less
than the typical 18-20% seasonal uptick witnessed in the past years.
Debt levels steady, cash flows augmented by asset sales — Management notes
that currency translation-inflated debt by ~Rs10bn. Over the next 6 months, ~Rs15bn
of debt has to be repaid, which will be partly funded through cash from the Godrej –
BKC transaction (~US$100m) and sale and lease back (US$150-300m).
Cost Restructuring: a long-term positive — Management noted that it plans to cut
costs (ex fuel) / ASK by 5-10% pa. Areas targeted are IT overheads, manpower
expenses, better aircraft utilization, et al. We think this is a positive, and necessary,
given that oil prices remain sticky, and cost structures of the aviation sector in India
must reflect the ‘new reality’ – a price sensitive market, within which the corporate
travel market has a far lower proportion today than 5 years ago (corporate segment
accounts for ~33% of Jet’s revenues – at the time of Jet’s IPO it was estimated that
~80% of passenger travel was business related). One tangible improvement: that we
highlight - fuel burn / block hour that’s improved by ~10% in the past four years.
Brand repositioning — Management expects operations to be consolidated into two
different formats: full service and low fare. Before it embarks on this initiative, it needs
to reduce structural costs to ensure the low fare model is sustainable over the long
term – we think this is critical given that 75% of seats offered by Jet are low cost now.
Maintain Sell — Jet is interestingly positioned – recent developments from a
competitive perspective implies some relief for its full service business. However, we
think oil and a depreciating rupee trump possible market share gains, for now. Longer
term, we like management’s focus on cost reduction initiatives as the business is
realigned to the current demand environment.
Jet Airways
Valuation
Airlines are trading plays - given the cyclical nature of their business, high operational
and financial leverage and an earnings profile that is excessively volatile and sensitive
to macro variables like oil prices and currency movements. Given the excessive
volatility in earnings of airlines, we prefer to utilize a more stable metric to value
airlines. Our target price of Rs215 is based on 9x EV/EBITDAR on FY13 estimates.
Our multiple of 9x pegs Jet at a significant premium to other LCC / regional growth
carriers. Typically, in the past we've pegged Jet at a premium (of around 20-25%) to its
regional peers; given more than 5-6 years of trading history, we now begin to peg the
stock against its own trading history. Jet's average forward EV/EBITDAR since its IPO
has been around 12x, excluding the 2 exceptional years of CY07-08 (these years were
the confluence of the global financial crisis and the ramp-up in competition in the
industry - we reckon they are somewhat exceptional and the collapse in earnings
precipitated by both factors will not likely play out over the near term). Our fair-value
multiple of 9x (which is a 25% discount to the 12x average) provides a sufficient buffer -
in our view - to the risk that oil prices continue to remain elevated.
Risks
We assign a default High Risk rating to Jet Airways given that the stock is deemed to
be relatively volatile by our quantitative risk-rating model (based on stock price
movements in the past year) or that it has a trading history of less than 3 months. Our
High Risk rating emanates from very high sensitivity of Jet Airways' earnings (and thus
stock price) to macro environment, mainly oil prices and foreign exchange rates- both
of which are inherently volatile. Key upside risks to our recommendation and target
price are: a) Stronger-than-forecast yield growth in the domestic market could boost
revenues / EBITDAR, b) a sustained decline in ATF prices (driven by a significant fall in
global oil prices), c) Strong appreciation of the rupee vs. USD; and d) Legislative
changes - FDI permitted for other foreign airlines and/or lower sales tax on aviation
turbine fuel. Key downside risks that could result in stock falling below our target price
include a) increased competitive intensity, marked by a pro-longed reduction in fares by
other airline companies, could put pressure on yields, and b) sustained cost pressures
due to high oil prices and a depreciating rupee against USD
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