>SPICEJET LIMITED: Fare hikes will mitigate some cost pressures

Recent fare hikes positive but could impact passenger demand

■  Fare hikes will mitigate some cost pressures... After hiking fares during 3QFY12 (yields up 19% YoY), SJET has taken another round of fare hikes in March (Source: Indian Express, CNBC). Rising ATF prices (+30% YoY YTD) and weaker rupee (-14% since Mar-11) have put significant pressure on margins. Despite steep fare hikes, we do not expect SJET to completely pass through cost increases.


■  …but could impact passenger demand. During 3QFY12, SJET witnessed 29% YoY growth in passenger traffic driven by launch of Q400 operations across Tier II and Tier III cities. Load factors, however declined to 80% (vs.88% in 3QFY12). We suspect that rising fares are adversely impacting the price-sensitive Indian passenger demand. The addition of a further 8 Q400 aircraft in CY2012 should help sustain passenger growth for SJET, but more price hikes could put pressure on load factors, in our view.


■  Equity infusion from promoter to strengthen balance sheet, recent sops from government to aid earnings. SJET’s promoters recently infused equity of Rs1B raising their stakes by 5% to 48.6% to strengthen the balance sheet. Further, Indian government recently approved sops to help the aviation sector which includes 1) Direct import of ATF fuel resulting in savings of sales tax (~5%-32% applicable across various Indian states), a difficult to implement proportion in our view 2) ECB loans up to US$1B permitted for working capital requirements for period of 1 year (Interest differential of 6%-8% between domestic loans and ECBs), 3) Aircraft parts/tires exempted from imports duties/excise duties. In addition, proposal to allow foreign airlines to buy up to 49% of equity in Indian carriers is under active consideration. We believe that any potential announcement on permitting FDI in aviation could be a significant stock price trigger.


■  Valuations. Our Mar-13 PT of Rs35 is based on 9x FY14E EV/EBITDAR, a 13% premium to our target multiple for JETIN. We believe that SJET is better positioned than JETIN, given its low gearing on its balance sheet (net debt to equity of 0.7x in FY13E). In addition, SJET is looking to enhance its international operations in FY13 (once it gets government approval) to
short-haul destinations mainly in South Asia and the ME, which should enhance its asset utilization and should aid profitability.


To read report in detail: SPICEJET
RISH TRADER