SpiceJet world's best performing airline stock

The Indian airline's market valuation is of $1.2 bn

Two and a half years after SpiceJet Ltd. was forced to ground its entire fleet on its inability to pay a mere $2.2 million in fuel bills, the budget airline has become the world’s best-performing airline stock — with $26 billion in plane orders to boot.

The company’s co-founder and Chairman Ajay Singh has played the white knight, injecting capital, cutting loss-making routes and aggressively adding capacity in one of the world’s fastest growing markets. To top it all off, crude prices are staying low.

For investors, that’s been a winning formula: SpiceJet shares are the best performers on a Bloomberg Intelligence index of airline stocks this year. The stock is up 124 per cent in 2017 and has gained more than 800 per cent since the company’s near-demise in December 2014, giving SpiceJet a market value of $1.2 billion.’

The outlook for aviation stocks looks good “as long as oil prices are under control,” said Mahesh Patil, co-chief investment officer of Birla Sun Life Asset Management, which has $30 billion in assets. Birla held a stake of about 1.2 per cent in SpiceJet as of May 31, according to Bloomberg data.

More people will prefer to travel by plane as ticket prices fall, Patil said, declining to comment specifically on the carrier. SpiceJet rose 0.2 per cent to 128.30 rupees as of 9:30 am in Mumbai on Tuesday while the broader S&P BSE Sensex index was up 0.3 per cent.  

SpiceJet’s stock is “greatly undervalued” even at these levels, Chairman Singh said in an interview to Bloomberg Television on Monday in Washington, ruling out any plan to sell a stake. Only 3 percent of Indians fly today, offering a huge room for growth, he said. 

“There’s no reason for us to sell any stake at this valuation,” he said. “We think there’s tremendous potential in India’s aviation market.”

India, which was the world’s fastest growing aviation market last year, is crucial for planemakers like Boeing Co. and Airbus SE, as airlines see increased demand from the rising middle class. Demand has pushed Singapore Airlines Ltd. and AirAsia Bhd. to set up local units that are grappling with poor infrastructure, stiff competition resulting in below-cost fares and taxes that make jet fuel the costliest in Asia.

SpiceJet’s majority shareholder and Singh announced an order for the latest variant of Boeing’s workhorse 737 model worth $4.7 billion on June 19. A day later, he followed up with an order for as many as 50 Bombardier Q400 turboprops worth $1.7 billion.

Profits, funding SpiceJet is “doing extremely well” and expects profit to rise this year, spokesman Tushar Srivastava said separately in an email. Funding arrangements for the plane orders are coming together and Srivastava sees “no great challenge” to financing the aircraft, he said.

None of the analysts covering SpiceJet recommends selling the stock, according to Bloomberg data. HDFC Securities, the only firm recommending the equivalent of a hold rating, still predicts profitability will increase “sharply” on a stronger rupee and weak oil prices.

Enterprenuer Ajay Singh and London-based Indian businessman Bhulo Kansagra started SpiceJet by reviving Royal Airways in 2005 and they both left the company in 2010. SpiceJet’s fortune hit a bottom in December 2014 when lessors took away some aircraft, the carrier missed salary payments and canceled more than 2,000 flights that month. State oil companies added to the airline’s troubles by refusing to fuel the jets unless dues were cleared.

Singh came back to rescue SpiceJet — which names each of its aircraft after a spice like mint, coriander and pepper -- with an initial investment of 5 billion rupees in February 2015. The government then permitted the carrier to accept forward bookings, which brought money into the airline’s accounts and giving it a new lease of life. Singh cut costs, renegotiated contracts with vendors and piggy-backed on a surge in domestic aviation traffic to help turn around the fledging airline.

SpiceJet share price on BSE