Hiving off logistics biz, fund raise to unlock value for SpiceJet investors

Analysts say the move will remove key overhangs from SpiceJet's stock and suggest investors 'hold' it in their portfolios

SpiceJet shares soared 5 per cent to Rs 72.4 apiece on the BSE in the intra-day trade on Tuesday, but ended 4.6 per cent higher at Rs 71.9, after the budget airline announced transferring of its cargo and logistics services business, on a slump sale basis, to SpiceXpress and Logistics Pvt. Limited subject to shareholders’ approval. 
 

Besides, it has also sought shareholders’ approval to raise funds worth Rs 2,500 crore through Qualified Institutions Placement. 
 

Analysts say the move will remove key overhangs from the stock and suggest investors ‘hold’ it in their portfolios, for now.
 

"There is a significant growth opportunity in the international cargo market. Almost 90 per cent of international cargo has been carried by the international carriers, which implies that there is a significant growth opportunity for Indian carriers. So, we think that SpiceJet’s strategy of having a strong presence in the international cargo market out of India is sensible," highlighted a HSBC report dated August 17.
 

Currently, SpiceJet’s logistics arm has a network which spans over 68 domestic and over 110 international destinations including US, Europe and Africa. The Ajay Singh-owned airline has been strengthening its cargo business, using the flexibility available in its capacity, which has helped it to reduce losses, protect liquidity to some extent, and ensured survival.
 

During the April-June quarter, SpiceXpress reported a strong growth with a net profit of Rs 30 crore. The revenue increased by a whopping 285 per cent to Rs 473 crore as compared to Rs 166 crore in the same quarter last year. This also helped SpiceJet to limit its overall net loss to Rs 729 crore and lifted revenue to Rs 1,266 crore.
 

As per an independent valuation exercise, the logistics business has been valued at Rs 2,555.77 crore and the purchase consideration for the same, as per SpiceJet, shall be discharged by SpiceXpress by issuance of shares of SpiceXpress to the airline. 
 

“It is expected that SpiceXpress will operate as a separate entity upon transfer of business on or around October 1, 2021… While it will operate as a separate entity, the airline will continue to provide certain transportation services, ground and logistics support, management services, sharing and provisioning of resources etc. to SpiceXpress,” it said in a statement.
 

ICICI Securities believes the company’s decision to hive off the logistics platform will unlock significant value for SpiceJet and its shareholders. This will also allow SpiceXpress to raise capital to fuel its rapid growth, it added.

As regards the liquidity proposal, HSBC said the company’s decision to raise funds via QIP could possibly restore investors’ confidence in the stock.

"SpiceJet had a negative networth of Rs 2,604 crore as on March 31, 2021, and we are not expecting any significant positive contribution from PAT in FY22. The QIP of Rs 2,500 crore could improve the networth significantly, but the estimated negative cash flow in FY22 is expected to keep it in the red zone. Therefore the possibility of further fundraising is high," says Vinit Bolinjkar, Head of Research at Ventura Securities.
 

From a long-term perspective, however, analysts remain cautious on the stock as concerns about the significant challenges for the industry persists, including the high fuel price, low fares, weak demand, and unfavourable forex, and particularly the demand/supply imbalance and lack of consolidation in the industry. 
 

“Our analysis suggests that the supply/demand equation may continue to remain stretched for the industry in the medium term, and that means yield and profitability could remain under pressure,” said the HSBC report.
 

Likhita Chepa, senior research analyst at CapitalVia Global Research adds that while the company’s efforts to recover its lost ground by ramping up operations, adding new stations and flights might help the firm witness some green shoots, the outlook remains uncertain.

"Decrease in domestic traffic, load factor and higher fuel costs have significantly impacted the margins of the firm. With revamping of its operational activities, we expect to see some improvement in its margins by the end of this fiscal. However, the sector is prone to the risk of possible third wave and therefore predicting its profitability is a bit tricky. The road to profitability would be highly dependent on the effective utilization of the proceeds being raised and the aforementioned external factors," she added.