SpiceJet stock may rise as IndiGo promoter dispute goes sour: Analysts

The stock of the country’s largest domestic airline InterGlobe Aviation (IndiGo) fell 11 per cent on Wednesday after one of its founder-promoters, Rakesh Gangwal, wrote a letter to the regulators, citing issues of excessive control and corporate governance. 
 

Gangwal, who owns 36.68 per cent stake in the listed airline, had raised issues on related party transactions between InterGlobe and companies controlled by co-promoter Rahul Bhatia. He had indicated that significant powers with Bhatia, who is the single-largest shareholder with 38.2 per cent share, had led to corporate governance failures within the company. 

While analysts have cut their price-to-earnings multiple for the airline somewhat, they have not made significant revisions to the net profit estimates for the current financial year. 

Analysts at Citi indicate that the uncertainty related to the resolution of the dispute between the two promoters could cause weakness in the stock price. 

Credit Suisse believes that the promoter dispute is likely to be a significant headwind and could impact operational performance. The management bandwidth may be divided over the promoter dispute hampering key decisions such as leasing versus owning planes, international expansion, aircraft acquisition, and other strategic decisions. 

Most analysts, however, believe there is minimal impact from the related party transactions on the company. At just over Rs 300 crore, related party transactions account for just over a per cent of revenues and will not move the needle much in terms of impact on financials.

The troubles at IndiGo, however, are expected to help SpiceJet, as it remains the only listed stock for investors looking to play the growth of the airline sector, says an analyst at a domestic brokerage. 

The Indian aviation market, according to Goldman Sachs, is expected to nearly double from 2017-18 levels of $18 billion to over $34 billion in 2022-23, posting a compound annual growth rate of 13 per cent. 

The Street’s preference for SpiceJet stems from the fact that most of the incremental growth is expected to come from non-Metro airports and regional routes, which have been the key focus area of SpiceJet. 

With 59 per cent of its routes outside the top six cities which have lower competition, yields are expected to be higher for the airline, helping its revenues grow by 31 per cent annually over the FY19-22 period. 

The other investment argument in favour of SpiceJet is the gains from the shutdown of Jet Airways. 

As Jet vacates its slots at various airports, SpiceJet is expected to get a healthy share of the same and has already added 130 new slots. In addition, the Boeing aircraft of Jet Airways, too, will increase from its fleet size of 76, as it remains one of the only two carriers to use Boeing fleet for its operations. Given the higher growth in revenue and profitability, analysts expect the premium between InterGlobe Aviation and SpiceJet to shrink. 

While InterGlobe trades at about 7.1x its 2019-20 enterprise value to operating profit, excluding rentals, SpiceJet’s is at 4.8x on the same metric. Analysts expect the 30 per cent-plus premium to come down if the promoter dispute takes a turn for the worse.