Aviation stocks see improved returns post Spicejet deal

Aviation stocks have given returns of up to 7 per cent post Spicejet stake sale, reflecting investors' increased confidence in the sector which had been treated as outcast for long.

According to analysts, the Indian aviation industry has come out of blues and this is the right time to enter the sector as it may see a complete turnaround on account of consolidation in the industry and the increased demand due to pick-up in the business activity.

Since media baron Kalanithi Maran picked up majority stake in budget carrier Spicejet, all the three listed aviation stocks have seen a good run-up on the bourses.

Shares of Spicejet have climbed almost 6 per cent from June 10, when reports of stake sale by the company surfaced, till date.
    
During the period under review, the BSE index Sensex has given a return of nearly 6 per cent to settle at 17,876.55 points yesterday.
    
The scrip of Jet Airways has witnessed an upsurge of nearly 7 per cent and Kingfisher Airlines has gone up by about 4 per cent during the same period.
    
"The aviation sector will see a complete turnaround in the next two years. The economy is showing signs of recovery and the per capita income is improving, and the domestic usage of airlines is going up.
    
"So, slowly and gradually, the sector is picking up, therefore one should take a long-term investment view on the sector for good returns," CNI Research CMD Kishore P Otswal said.
    
Earlier this month, Sun TV's CEO Kalanithi Maran picked up nearly 38 per cent stake in Spicejet for Rs 740 crore and also launched an open offer at a price of Rs 57.76 a share  to acquire an additional 20 per cent in the no-frills carrier. The open offer would involve an outgo of around Rs 480 crore, taking the overall deal size to 1,220 crore.
    
The aviation stocks have remained under pressure for long with Kingfisher Airlines touching its year low of Rs 39.20 on May 26, down 15 per cent from yesterday's closing level of Rs 46.15.
    
"I am quite optimistic on the sector as the air turbine fuel (ATF) prices have fallen sharply which will be reflected in the companies' profits, the demand in the sector has also risen, and specially after the Spicejet-Maran deal, we can see that a lot of consolidation is taking place in the sector.
    
"So, an investor can put his money in the sector but must keep a close watch on the crude prices," Ashika Stock Brokers Research Head Paras Bothra said.
 
Spicejet has moved from Rs 16.10 to Rs 60.35, a return of whopping 73 per cent in last one year. Similarly Jet Airways, which was trading at its 52-week low of Rs 210 on June 23, 2009, has risen to Rs 532.55 on June 21, 2010.
    
After having suffered losses for two consecutive years, investors have started looking at the aviation industry after International Air Transport Association (IATA) released its revised financial forecast for 2010.
    
According to IATA estimates, the global industry is expected to report net profit of $2.5 billion in calendar year 2010. It had earlier forecast net loss of $2.8 billion for 2010 for the industry.
    
But at the same time market experts also feel that crude prices need to be watched very closely before putting money in the airline industry. Because if crude prices will increase, cost of air turbine fuel will go up which in turn may hurt the margins of the aviation companies.