Rising oil prices may ground high-flying aviation stocks

Analysts feel it is difficult to take a call on these stocks at this level

Shares of airline companies have declined this year, as crude oil prices in the international market continue their upward march.

The listed aviation stocks — SpiceJet (18 per cent), Jet Airways (21 per cent), and Interglobe Aviation (20 per cent) — have all dropped on the BSE on a year-to-date basis despite posting profits in the fourth quarter.

Analysts remain divided on these stocks as they feel it is difficult to take a call on them at this level. It all depends on what level the oil stabilises, experts say.

In the global commodities market, the oil prices hit their highest in about eight months on Wednesday with Brent crude rising to $51.76 a barrel. This is a jump of nearly 96 per cent on a year-to-date basis when crude oil had hit a rock bottom of $26.39 on January 20, 2016, due to supply glut.

“We are negative on these (aviation) stocks for one or two months because oil prices have bounced over 90 per cent,” says G Chokkalingam, chief executive officer (CEO) and founder of Equinomics Research and Advisory.

Higher crude oil prices hurt aviation companies as aviation turbine fuel prices, which typically constitute about 50 per cent of airlines' operating costs, are directly linked to international crude oil prices. The jet fuel price in Mumbai according to the June-end contract is $498.3 a kilolitre, a rise of 10.2 per cent since January 2016.

Buoyed by lower oil prices last year, aviation companies posted profits in the March quarter. The combined profit of three companies for the quarter ended March 2016 was Rs 986 crore against a net loss of Rs 1,190 crore year-on-year.

Andrew Holland, CEO of Ambit Investment Advisors, say, “These companies have had a good run so far. (I believe) the growth will continue.” Holland believes the overall growth in the economy can also aid these companies and, in turn, their stocks.

However, Chokkalingam believes the upturn in profits is mainly due to lower oil prices. Should the prices continue to go up; the profitability of these companies can be reversed.

According to a report presented at the India Aviation 2016 Conference at Hyderabad in March, India is expected to be the fastest growing aviation market. By 2020, passenger traffic at the Indian airports is expected to increase to 450 million from 159.3 million in 2012-2013. Also, the travel and tourism market is forecast to grow 7.9 per cent to $270.5 billion by 2023 from $119.4 billion in 2012.

Holland says: “The growth story in this sector is intact. Any upward change in oil prices can have a sentimental impact and it might take away some of the profitability. But, overall, the economy is growing.”

U R Bhat, managing director at Dalton Capital Advisors, agrees. “It is interplay between capacity utilisation and raw materials. More usage of air travel facilitates higher operational business.”

But, Chokkalingam has a counter view. “If the global economy improves, so does the Indian economy. The demand for oil increases along with it. Thus, it can lead to higher oil prices.”

However, analysts offer a chorus as far as the government intervention in the sector is concerned.

Bhat says: “A lot also depends on the government policies regarding the sector. There is a government interference and control on pricing, which becomes difficult to predict.”

Chokkalingam agrees. “A bit of the problem also lies in government cap on prices. It is one of the perennial problems of the sector.”

Although difficult to analyse these stocks at the moment, Bhat cautions to stay clear from these stocks for the long term. “They are very volatile in nature. For the short term, study them well and take a tactical call,” he says.