No respite from fuel, rupee

The SpiceJet stock rose over 15 per cent in the last three days to Rs 32 after the aviation ministry proposed a reduction in jet fuel taxes. These taxes make up for up to 30 per cent of the total fuel bill of an airline. Additionally, oil marketing firms cut aviation turbine fuel (ATF) prices by two per cent on June 1, after a 0.4 per cent reduction in mid-May.

While continuing losses on the back of high fuel costs still remains the key headache, a possible government approval for foreign investment in the aviation sector, further drop in ATF prices and the company’s plan to start importing the fuel by July are positives.

Though the operating environment continues to be challenging, Rashesh Shah, an analyst at ICICI Securities Ltd, said in a recent report the move to import fuel and focus on international routes could improve profitability. With the start of the peak season and partly due to a reduction in overall capacity (aided by fewer flights by the crisis-hit Kingfisher Airlines Ltd), the company has also been able to improve its load factor from 73 per cent in March to 80 per cent in April.
 

NO PROFITS IN FY13
In Rs crore	Q4’FY12	FY12	FY13E
Net sales	1,113	3,998	5,239
% change y-o-y	47.0	39.0	31.0
Fuel expenses	620	2,196	–
% change y-o-y	57.0	79.0	–
Ebitda	-200	-518	46
% change y-o-y	–

–

–

Adjusted net profit -223-580-89 % change y-o-y––– E: Estimates                                                         Source: Company, B&K Research

Given the market share gains, lower fuel prices and higher yields, most analysts (70 per cent) have a buy rating on the stock. However, given the rupee depreciation, analysts have reduced their target prices, with consensus price pegged at Rs 33.74.

Poor Q4 show
While a 57 per cent rise in fuel costs in the March quarter was on expected lines, the company’s employee and maintenance costs doubled due to capacity expansion. Deprec-iation charges rose five-fold due to the newly inducted Bombardier aircraft. However, while the company expanded its passenger capacity by a steep 26 per cent, passenger traffic growth was lower at 16 per cent, leading to a passenger load factor for the quarter at 74 per cent. Due to this, while revenues were up 47 per cent year-on-year to Rs 1,100 crore on the back of traffic growth as well as higher yields, the company posted losses to the tune of Rs 249 crore for the quarter, about six times more than a year ago. SpiceJet, on its part, said it was implementing various measures such as fare/route rationalisation, optimising aircraft utilisation, improving operational efficiencies and renegotiating contracts to improve cash flows.

While its promoters have put in Rs 230 crore in the company (Rs 130 crore in October 2011 and Rs 100 crore in April 2012), SpiceJet is again looking to raise additional money (networth is eroded) to meet its short and long-term obligations.

Rupee negates gains
The company improved its market share by 350 basis points to 17.1 per cent, thanks to an increase in its number of flights and lower supply/issues at other carriers such as Air India and Kingfisher Airlines. “SpiceJet’s yields for the March quarter were flat sequentially, and given that the quarter is a lean season compared to the December quarter, it is indicative of a strong yield environment,” said Jasdeep Walia, an analyst at Kotak Institutional Equities in a recent report.

Walia said industry yields had risen (by 12 per cent in the June quarter to date versus the March quarter) on account of recent capacity reduction by Kingfisher Airlines as also higher load factors. Thus far, a depreciating rupee has offset most gains accruing from higher yields, he said, adding an appreciation in the value of the rupee will act as a catalyst.