Analysts prefer SpiceJet to Jet Airways

Lower debt, efficient operations, price correction cited as reasons

Despite the recent positive news on the sale of airport slots and possible stake sale to Etihad, analysts prefer SpiceJet to its larger rival Jet Airways.

This is because of SpiceJet’s efficient operations, higher growth over the next two years, strong balance sheet and low cost structure.

Analysts led by Princy Singh of J P Morgan say they prefer SpiceJet to full service players such as Jet Airways attributing a 13% premium on valuation multiples for SpiceJet. While SpiceJet is trading at 12 times EV/Ebidta, Jet Airways is available at 10 times for that metric.

Another reason for the preference for the smaller airline could be the recent price spike of Jet Airways which has gone up 70% since reports (in November 2012) of an equity investment by a foreign carrier while SpiceJet is flat over the four month period.

In fact SpiceJet has corrected over 30% since February 1 while Jet has lost about 16%.

Jasdeep Walia of Kotak Institutional Equities prefers SpiceJet to Jet Airways due to concerns of higher debt for the larger carrier. Analysts estimate that debt for Jet Airways at the end of FY13 would be to the tune of Rs 13,000 crore while that of SpiceJet would be a tenth of that at about Rs 1,300 crore.

According to Bloomberg consensus estimates, under 10% of analysts have a sell on SpiceJet as compared to 50% who have a sell on Jet Airways.   

In addition to debt, analysts are skeptical about Jet Airways strategy post the discount schemes launched by the airline last month. Walia believes that the company launched the scheme to shore up cash flows and improving leisure travel demand was a secondary objective.

Unlike SpiceJet’s offer in January which was to stimulate leisure travel during the leaner period February to April, Jet’s offer at the end of February was for travel dates till December 2013 which includes the October to December peak demand quarter.

HSBC analysts Rajani Khetan and Mark Webb say that there is strong investor interest in SpiceJet and there are expectations that it could be a potential acquisition target. A strong December quarter has increased the possibility of higher earnings growth going ahead.