For SpiceJet, an equity tangle looms

While the operational turnaround continues, stock dilution is an important concern

The SpiceJet turnaround story could hit air pockets if the equity dilution after the warrant conversion by the erstwhile promoters (the Marans) takes place. Not only will the Marans get a hefty 23.9 per cent of the expanded equity base, it will also mean that two former and current promoters having a substantial stake could be detrimental to the company’s fortunes. Mayur Milak of Anand Rathi Research says the warrant conversion and the outcomes would complicate the situation.

Analysts say any increase in stake would not only be strategic; it will give the erstwhile promoters a say in all special resolutions. While both parties are approaching the Securities and Exchange Board of India (Sebi), analysts are refraining from making changes to their outlook.

Read more from our special coverage on "SPICEJET"

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• Former SpiceJet executive Sanjiv Kapoor joins Vistara
• SpiceJet commences three-day pre-summer sales

But Edelweiss Securities has revised its target price to Rs 100 from Rs 127 on the assumption that the Marans will be issued 189 million shares in FY17.

The issue of share warrants to the Marans was approved in September 2014 with the option to apply and get allotted equal number of equity shares of Rs 10 each at a premium of Rs 6.30, totalling Rs 310 crore. The Marans had paid Rs 230 crore against the warrants.

The stock has recovered a bit after falling 13 per cent over the past week. While this is a negative, the risk related to conversion of warrants had been highlighted (but not incorporated in earnings estimates) and was not a surprise for the Street.

Operationally, things are better. Record low crude oil prices have enabled aggressive pricing, leading to strong passenger growth. Analysts at JM Financial indicated they prefer SpiceJet over IndiGo as the latter’s market leadership, fleet advantage, and operational excellence were captured in the current valuation (20 per cent premium to sector).

SpiceJet, they say, is narrowing its spread difference with IndiGo and remains a compelling turnaround story trading at 10 per cent discount to IndiGo.

The other key risk for SpiceJet is fuel prices. A 10 per cent change leads to a 20 per cent change in earnings outlook.

While there is an investment case, investors should await clarity on the warrants issue or further moves by existing promoters, before considering an investment in SpiceJet.