SpiceJet offers valuation comfort; best play among aviation stocks: Experts

Airline companies did not have much to cheer about in financial year 2018 – 19 (FY19) as rise in aviation turbine fuel (ATF) prices, depreciation in rupee and intense fare competition hit their financials and stock prices hard. In addition, troubles in individual companies such as Jet Airways (acquisition talks) and pilot shortage at InterGlobe Aviation (IndiGo’s parent) also added to their woes.

At the bourses, Jet Airways, InterGlobe Aviation and SpiceJet have underperformed the benchmark S&P BSE Sensex so far in FY19. According to the data compiled from ACE Equity, Jet Airways has crashed 62 per cent (as of February 18), while SpiceJet has slumped 41 per cent. Shares of InterGlobe Aviation, too, have slipped 14 per cent during this period. In comparison, the S&P BSE Sensex moved up nearly 8 per cent.

Name	Closing price as on Feb 18, 2019	Closing price as on Feb 16, 2018	% change
S&P BSE Sensex	35498.44	32968.68	7.67
Interglobe Aviation Ltd.	1105.20	1286.50	-14.09
Spicejet Ltd.	73.75	125.15	-41.07
Jet Airways (India) Ltd.	231.65	609.50	-61.99

Despite the underperformance, most analysts seem optimistic on the long-term prospects of these stocks and suggest the negatives seem to be getting priced in now. An uptick in demand amid stable crude oil and ATF prices, rising disposable income and growing penetration are some of the factors that are likely to lend stability to the sector, feels Gagan Dixit, vice-president for institutional equity research at Elara Capital.

Dr Ravi Singh, Head of Research at Karvy Broking, agrees. Airlines, he says, are expected to benefit from a likely increase in passenger traffic over the next few quarters, especially during the holiday season / summers. That apart, Singh expects crude oil and rupee to remain steady.

Clear skies ahead?

Post its December 2018 quarter results (Q3FY19), most analysts have recommended a ‘buy’ rating on SpiceJet, which reported a turnaround in the recently concluded quarter with a net profit at Rs 55 crore. It’s yield of Rs 4.1/km (up 4 per cent YoY) surpassed Indigo’s Rs 3.8/km (up 3.7 per cent YoY), mainly due to higher pricing power on tier-2 routes, which make up 70 per cent of volumes at the airlines, say analysts at Edelweiss Securities. 

“That apart, considering the airline operates on tier-2/3 routes, it is not directly into a pricing war with its key rival on tier-1 routes. We expect it to maintain the elusive combination of industry leading passenger load factors (PLFs) and yield expansion. Trading at 7x FY21E EV/EBITDAR, SpiceJet offers greater valuation comfort than Indigo,” wrote Jal Irani, research analyst at Edelweiss Securities in a co-authored note with Vijayant Gupta. They maintain a target price of Rs 127 on the stock.

With the domestic market growth moderating from the earlier highs there seems to be some pricing discipline coming back into the system, said analysts at SBI Cap Securities in a recent report. “This, coupled with efforts to reduce cost should drive improvement in profitability, going ahead. “We maintain ‘buy’ on SpiceJet with a target price of Rs 109/share, valuing the company at 8.5x FY20e EV/EBITDAR,” they said.

On the financials front, for the nine-month period ended December 2018 (9MFY19), InterGlobe Aviation’s net profit nosedived nearly 120 per cent year-on-year to Rs 433 crore, as against Rs 2,125 crore. Operating profit also declined 96 per cent during the period. On the other hand, Jet Airways reported a loss of Rs 3,208 crore, as against net profit of Rs 268.38 crore y-o-y. The company's operating loss stood at Rs 2,138 crore against Rs 1,330.45 crore profit. SpiceJet had posted a net loss of Rs 372 crore during the comparable period.

Dixit of Elara is positive on Interglobe Aviation / IndiGo, given its cost leadership, strong balance sheet and greater market share.  “We are less bullish on Jet Airways due to weak balance sheet and out of control cost as well as its highest exposure in highest competition trunk routes that commands least pricing power, unlike strong price power in regional routes,” he says.