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New deal to take SpiceJet higher

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Airline to see good times with new promoters expected to fund expansion plans.

With the low-cost carrier now having a new owner in the form of Kalanithi Maran, its prospects are looking even better. While the company has delivered better results compared to its peers, it should continue to outperform the industry considering the improving outlook and SpiceJet’s sound business model.

After Maran picked up a 37 per cent stake from billionaire investor and NRI promoter Bhupendra Kansagra, coupled with an open offer for 20 per cent, the new promoter’s holding should rise to about 57 per cent. There couldn’t have been a better time to get a financially strong promoter. Since the industry is capital intensive and the company in a growth phase, the new promoter should prove helpful for the airline. Although the open offer price of Rs 57.76 is about five per cent higher than Monday’s closing price, investors should be better off holding on to the stock.

FY10 in Rs crore Jet Airways Kingfisher Spicejet
Net sales  11,878 5,067 2,181
Ebitdar 2,224 398 416
Net profit -591 -1,647 61
EV/sales (x) 2.4 1.6 0.8
EV/Ebitdar (x) 12.7 20.6 4.4
P/E FY11E 13.1         ---- 9.0
P/E FY12E 6.6      ------ 7.7
E:Estimates, Source: Company, analyst reports

Bright prospects
On the business front, the company has delivered good results, registering its first ever annual profit of Rs 61 crore in 2009-10. Revenues were up 29 per cent year-on-year at Rs 2,181 crore. In line with the robust growth in domestic demand for the sector since December (an average four million passengers a month), the company has been consistently recording load factors in excess of 80 per cent.

These high loads, coupled with better control on costs, have helped deliver higher revenues and profits. Given the better demand prospects and limited competition, analysts believe the company will be in a strong position to reap the gains.

Demand boost
SpiceJet’s strategy of leasing aircraft rather than outright purchase has helped it to keep its debt under control and will now come in handy. With demand growing 13-15 per cent and supply at only five per cent, SpiceJet and Indigo (being the most profitable) are the only two players that are adding to their capacity.

India’s largest carriers, Kingfisher Airlines and Jet Airways, have either reduced their aircraft strength or are adopting the lease route to cut down costs. This leaves the field open to the most efficient companies to grow their market share, with SpiceJet expected to increase its share to about 15 per cent in 2010-11 from about 12 per cent in 2008-09.

The Maran factor
Considering that SpiceJet now has approvals to fly to international locations in the South Asian region (these new services are expected in August 2010) and will need cash to expand, a promoter with a majority control and deep pockets would be a definite advantage for the airline. Going international will also help the company improve its fleet utilisation levels, currently at about 12.5 hours.

The company plans to lease eight aircraft over the next two years and could opt to buy two planes going ahead to strengthen its asset base. While Maran will have his nominee on the SpiceJet board, analysts say there is unlikely to be any change in the running of the airline.

Stay invested
While prospects for the company are bright, analysts say profits will depend on the movement of aviation turbine fuel (ATF) costs as these account for 36 per cent of operating costs. ATF prices are currently at Rs 40 to a litre with crude oil prices hovering at $75 a barrel.

If these conditions remain unchanged, analysts believe, SpiceJet will be a winner as current loads (at around 80 per cent) are much higher than the break-even levels of 70-75 per cent. At Rs 55, the stock is trading at 7.5 times 2011-12 earnings (estimate) and should deliver good returns if investors stay put for a period of 12-24 months.

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