>SPEICEJET LIMITED: Lacks earnings and asset support

■ 3Q12 results as expected at the operational level: SpiceJet reported a net loss of INR393m in 3Q12 (October-December 2011) vs. a profit of INR944m in 3Q11, 21% below our forecast loss of INR498m and significantly below consensus of INR1.1bn. On a y-o-y basis, the significantly weaker performance was caused by a 7ppt decline in the load factor and a 28% increase in unit costs, only partially offset by a 16% rise in unit revenue. The result was in line with our forecast at the EBIT level. However, a rise in other income above our forecast and slightly lower-than-expected net interest costs helped to narrow losses for SpiceJet and rendered losses 21% below our forecast at the reported level.


■ Lacks earnings and asset support: The better-than-expected yield performance drives the slight increase in our revenue and EBITDAR forecasts, but we increase our FY12-13 net loss forecasts for SpiceJet mainly to account of higher depreciation, lease and staff costs. Further, SpiceJet’s fleet is largely leased, so it does not have any assets to support its rapidly eroding book value.


■ Reiterate UW(V), maintain target at INR15: We continue to value SpiceJet on its average one-year forward EV/EBITDAR multiple of 9x (the average that it traded at in September 2008-March 2010). Applying this to our new estimates gives us an unchanged target price of INR15 (rounded). The slight increases in our EBIDTAR forecasts are offset by increased net debt level forecasts (including capitalised leases). We maintain our UW(V) rating on the stock.


■ Upside risks: Policy risk is key. The proposal to allow foreign airlines to own up to a 49% stake in Indian airlines was agreed upon by key ministers in January 2012 and is now waiting for cabinet approval. If and when this approval is granted, we believe it will likely be a potential positive catalyst for the stock. The other upside risks are a fall in fuel prices, appreciation of the INR versus the USD, and pricing and capacity discipline in the market.


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