Analysts maintain 'buy' call on SpiceJet despite loss in Q2; here's why

ICICI Securities remains positive on the stock considering the overall low capacity growth in Indian airlines & expected improvement in operations over the next two years with better cost management

SpiceJet tumbled up to 7 per cent at Rs 105.8, also its 7-month low, on the BSE on Thursday after the budget carrier's loss widened in the September quarter at Rs 462 crore on the back of higher costs during a seasonally weak quarter.

"The net loss of Rs 462.58 crore in the latest September quarter was mainly on account of inflated costs with respect to MAX grounding and a seasonally weak quarter," the airline said in a statement. The figure includes a loss of Rs 180.3 crore on account of accounting standard Ind AS 116, it added.

All Boeing Max aircraft have been grounded worldwide since mid-March of this year, following two fatal crashes that killed over 300 people. SpiceJet, which has 13 B737 Max aircraft in its fleet, has claimed compensation from Boeing for the grounding. However, the process hasn’t been started by Boeing yet. The airline had claimed compensation of Rs 114 crore in the previous quarter, and is yet to receive the amount. READ REPORT HERE

The loss came as a surprise to most analysts as D-Street had factored-in a narrowed loss for the recently concluded quarter. Edelweiss Securities, for instance, had pegged the loss at Rs 322.4 crore, compared to loss of Rs 389.4 crore incurred in Q2FY19. The low cost carrier (LCC), in the previous quarter of the current fiscal (Q1FY20), reported a standalone profit of Rs 261.7 crore. 

Meanwhile, the airline's total income jumped to Rs 3,073.50 crore in the quarter under review from Rs 1,902.08 crore in the same period a year ago. Operating revenue rose to Rs 2,845.3 crore from Rs 1,874.8 crore YoY. 

The airline's maintenance cost grew 45 per cent YoY in the September quarter, with total expenses coming higher at 54.7 per cent to Rs 3,537.49 crore, even though fuel costs fell 77per cent to Rs 63.25 crore. Besides, the airline warned on Wednesday that the threshold for a fare hike had decreased substantially, on account of the ongoing economic slump — the second to do so after IndiGo.

At 9:48 AM, the stock was trading 5.15 per cent lower at Rs 107.85 per share. In comparison, the S&P BSE Sensex was trading 0.08 per cent lower. Nearly, 1.4 million shares have changed hands on the NSE and BSE till the time of writing of this report. Thus far in 2019, the stock of the LCC has outperformed the benchmark index. The counter has surged 29 per cent YTD, relative to a 12 per cent gain in the S&P BSE Sensex.

What now for the stock?

Analysts maintain 'buy' call on the stock on the back of the airline's growth prospects and expected compensation from Boeing.

ICICI Securities, for instance, remains positive on the stock considering the "overall low capacity growth in Indian airlines and expected improvement in operations over the next two years with better cost management". 

"SpiceJet reported better than expected performance considering that Q2FY20 witnessed significant increase in capacity (51 per cent YoY) compared to passenger growth (29 per cent YoY) juxtaposed with the fact that Q2 is seasonally the weakest quarter. Passenger load factor (PLF) should improve with better inventory management as new capacity matures with time," analysts at the brokerage said in a results review note. The brokerage firm maintains its 'buy' rating on the stock, but has cut the target price to Rs 150 (from rs 175).

"While FY20E RPKM growth at 44 per cent has been boosted by addition of 30 B-737 NGs taken from Jet, FY21 growth will be buttressed by addition of 737 Max. Several slots, currently lying idle due to 737 Max grounding, will be serviced through these aircraft. Higher capacity (220 seats versus 180 in 737 NG) along with greater fuel efficiency (20 per cent lower than 737 NG) will also boost profitability," said analysts at Edelweiss Securities. 

They believe the airline could overtake IndiGo in terms of passenger growth (FY20: 44 per cent versus 26 per cent) with takeover of Jet’s aircraft. Non-fuel CASK gap versus IndiGo has narrowed to 5 per cent in Q2FY20, which is ahead of our estimate. 

"Despite this, the counter trades at a 35 per cent discount to IndiGo, at 4.2x FY21E EV/EBITDAR. We, thus, maintain 'buy'," they said.