SpiceJet. De-risking initiatives bearing fruit; best placed to attract FDI

Transcription

1 BSE SENSEX S&P CNX 19,487 5,931 CMP: INR49 6 December 2012 Update Sector: Aviation SpiceJet Not Rated Bloomberg SJET IN Equity Shares (m) Week Range (INR) 50/15 1,6,12 Rel. Perf. (%) 34/38/104 M.Cap. (INR b) 23.7 M.Cap. (USD b) 0.4 Valuation summary (INR b) Y/E March Net Sales EBITDAR EBITDA NP EPS (INR) EPS Gr. (%) P/E (X) P/BV (X) EV/EBITDAR (x) EV/Sales (x) RoE (%) RoCE (%) Prices as on 6 December 2012 Shareholding pattern (%) As on Sep-12 Jun-12 Sep-11 Promoter Dom. Inst Foreign Others Stock performance (1 year) Investors are advised to refer through disclosures made at the end of the Research Report. De-risking initiatives bearing fruit; best placed to attract FDI Industry outlook positive; fares up ~20% YTD We met the management of SpiceJet (SJET), India's second largest low cost carrier (LCC), having a market share of ~18.5%. Our key takeaways: Outlook for the Indian Aviation industry is positive, given (1) sharp moderation in industry capacity, (2) rational pricing by key players, and (3) recent regulatory measures. SJET's de-risking initiatives are bearing fruit, which is reflected in the 31% drop in net losses in 2QFY13. SJET is poised for a turnaround by FY14. Given SJET's industry positioning and strong balance sheet, it would be a prime target for any international airlines looking to gain a strategic foothold in India, one of the fastest growing aviation markets in the world. SJET trades at an EV of 15x/ 8.5x its consensus FY13E/FY14E EBITDAR. Not Rated. Industry outlook positive The medium term outlook for the Indian Aviation industry is positive, given (1) sharp moderation in industry capacity, (2) rational pricing by key players, and (3) recent regulatory measures. Since FY11, the operational domestic fleet size has shrunk from 252 aircraft to 237 aircraft, primarily due to withdrawal of the Kingfisher fleet (~56 aircraft). Also, Indigo and SpiceJet have deployed ~15 aircraft for international operations. Consequently, the domestic carriers have gained significant pricing power (industry fares up ~20% YTD). Recent government measures such as (a) approval of FDI, and (2) flexibility to import ATF / hedge ATF purchases are key positives. De-risking initiatives bearing fruit SJET has taken de-risking initiatives such as: (a) focusing on under-served tier-2/3 routes to reduce dependence on key metro routes, (b) foraying into international market to boost aircraft utilization, and (c) starting pilot import of ATF to lower cost, which is now bearing fruit and is reflected in the 31% YoY drop in net losses in 2QFY13. Currently, it has a fleet of 37 B-737s and 12 Q-400s and has an extensive network in India and few international destinations in South Asia. SJET introduced 12 Bombardier Q-400, smaller aircraft with 78 seats, allowing it to increase its domestic network from 22 stations to 34 stations in FY12. Addition of under-served routes has allowed SJET to not only lower its dependence on the highly competitive trunk routes, but also gain synergistic advantages. Introduction of international routes has helped SJET to increase its aircraft utilization rates and gain synergistic traffic benefits in its domestic operations. In FY13, SJET also started pilot import of ATF, which accounted for ~53% of its sales in 2QFY13. Partial transition to imports for ATF requirement could be a key positive. In the domestic market, there is lack of transparency in the pricing of ATF, which is controlled by the three leading oil PSUs. Also, ATF is subjected to very high taxes at the state level. Siddharth Bothra (Siddharth.Bothra@MotilalOswal.com);

2 Best placed to attract FDI In September 2012, the government allowed 49% FDI in Aviation. Despite the fact that the domestic aviation industry suffers from adverse cost dynamics, which makes it difficult for any operator to earn reasonable returns on capital, India remains one of the fastest growing aviation markets. Given SJET's industry positioning and strong balance sheet, it would be a prime target for any international airlines looking to gain a strategic foothold in India. Any such strategic partnership will (1) lower financial cost, (2) provide scale advantages, and (3) give access to international alliances. FDI investment could lead to several key benefits for SJET such as 1) recapitalization of balance sheet and lowering of financial cost, 2) benefits of scale across key operating costs and 3) Possible increase in load factors due to strategic agreements. SJET working towards lowering key costs - FDI could aid significantly % of sales Comments Fuel 53 Post regulatory easing by Government for direct ATF imports, SJET has started pilot import of ATF. Currently state and other taxes account of ~22-30% is levied on ATF apart from the high profit margins by oil PSU's. Start of international operations to neighboring countries could provide added flexibility. Aircraft Lease 17 Tie-up with international major could allow SJET to save cost by getting more favorable and attractive leasing rates from key global leasing companies Airport Charges 7 Industry has been in talks with Government and other related parties for rationalization of airport charges SG&A 11 Higher load factor and strategic partnership could lower costs Others 3 Higher load factor and strategic partnership could lower costs SJET expenses as % of sales Aircraft Fuel Expenses Employee Cost Selling and Adm Exp Aircraft Lease Rentals Other Expenses Interest Depreciation Valuation and view We believe, given positive industry outlook and successful de-risking initiatives, SJET is well poised to turnaround in the near term. SJET is one of the most cost efficient LCC carrier in India with relatively strong balance sheet (net debt of ~INR10.5b in FY13). Recent equity infusion by the promoters is positive and will strengthen its financials. SJET is in talks with major international airlines for a strategic stake sale, any such successful deal could be a key positive and re-rate the company. SJET trades at an EV of 1.6x/1.3x its consensus FY13E/ FY14E sales and an EV of 15x/ 8.5x its consensus FY13E/FY14E EBITDAR. Not Rated. 6 December

3 SJET Valuations (INR m) FY12 FY13E FY14E Market Capitalization 23,731 23,731 23,731 Add: Net Debt 7,727 10,200 11,500 Add: Annualized Rentals (7x Rentals) 59,448 59,640 60,200 EV 90,905 93,571 95,431 EV/ Sales (x) EV/ EBITDAR (x) Source: Bloomberg, MOSL Historical trading bands EV/EBITDAR (x) Historical trading bands EV/Sales (x) Source: Bloomberg, MOSL Comparative valuation Currency Mcap Net Sales (m) EBITDA (m) PAT (m) Net Debt (m) (M) FY11 FY12 FY13E FY11 FY12 FY13E FY11 FY12 FY13E FY11 FY12 FY13E Spicejet INR Jet Airways INR Airasia Bhd USD Easyjet Plc USD Gol Linhas Aereas Intel-Adr USD Cebu Air Inc USD Ryanair Holdings Plc USD Tiger Airways Holdings Ltd USD CMP M Cap P/E EV/ EBITDAR (x) EV/ Sales (x) (INR) (INR b) FY12 FY13 FY14E FY12 FY13 FY14E FY12 FY13 FY14E SpiceJet Jet Airways Source: Bloomberg, MOSL 6 December

4 Background SpiceJet was promoted by Mr SK Modi in FY93 as an air taxi operator. In FY00, a group of NRIs acquired ~50% stake in the company. Mr Kalanithi Maran along with KAL Airways Private Limited acquired 38.66% stake and took over management control in FY11. Subsequently, Mr Maran increased his stake to 43.6% in October 2011 and to 48.6% in April Has emerged as a key low cost carrier SJET is India's second largest low cost carrier (LCC). It began its services in May Currently, it has a fleet of 37 B-737s and 12 Q-400s and has an extensive network in India and few international destinations in South Asia. To de-risk its operations, SJET inducted Bombardier Q-400s to serve tier-2/3 cities in FY12, which not only allowed it to lower its dependence on the highly competitive trunk routes, but also gain synergistic advantages from the expanded network. SJET has aggressively expanded its average fleet strength from 20.3 aircraft in 1QFY11 to 42.9 aircraft. This has allowed it to expand its domestic network from ~22 stations in FY11 to ~34 stations in FY12. Consequently, its market share has also increased from 12.4% in FY10 to 18.5% in 2QFY13. SJET has one of the lowest cost structures in the industry, with Cost/ASK at INR3.5. In 2QFY13, its net spread improved from a negative INR0.8/ASK to INR0.4/ASK. Aggressive fleet expansion (Average No. of aircraft) ASKM, RPKM and PLF Revenue/ ASK and Cost/ ASK (INR) Net Spread improving (INR/ASK) 6 December

5 2QFY13 performance points towards turnaround Revenue grew 55% YoY to INR11.7b while net loss declined 31% YoY to INR1.6b. Average realization per passenger increased 37% YoY in 2QFY13. However, load factor dropped 90bp YoY to 66.3%. Despite the strident rise in yields, SJET reported a loss of INR1.6b. High fuel prices along with a volatile INR continued to negatively impact profits. Fuel cost as a proportion of sales stood at 53%. SJET started offering five new domestic destinations (Chandigarh, Amritsar, Hubli, Dehradun and Jabalpur) and one international destination (Kabul). Operational quarterly performance 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Average No of Aircraft ASKM's 2,367 2,474 2,731 2,894 3,235 3,217 3,606 3,650 3,776 3,869 RPKM's 2,083 1,821 2,398 2,344 2,553 2,168 2,888 2,716 3,032 2,565 PLF (%) Block Hours (Hrs) 23,007 23,511 24,744 26,076 29,440 29,998 37,821 38,789 39,690 42,116 Departures 12,181 12,638 14,184 14,960 17,094 17,649 22,712 23,585 24,604 26,267 Aircraft Utilization/ Day Average Seat Revenue Revenue Per Flight 581, , , , , , , , , ,891 Source: Company Operational yearly performance FY09 FY10 FY11 FY12 ASKM 7,227 8,770 10,467 13,702 RPKM 4,819 6,807 8,639 10,322 Passenger Carried 4,593 6,633 8,608 10,983 Flights Operated 36,773 44,609 53,963 81,040 Load Factors (%) Average Aircraft Operated Yield Fuel Cost Source: Company Quarterly Performance (Standalone) (INR million) Y/E March FY12 FY13 FY12 1Q 2Q 3Q 4Q 1Q 2Q Net Sales 9,308 7,580 11,531 11,021 14,067 11,784 39,440 YoY Change (%) Total Expenditure 10,094 9,959 11,949 13,388 13,838 13,376 45,389 EBITDA , , ,592-5,950 Margins (%) Depreciation Interest Other Income PBT before EO Item , , ,698-6,005 Extraordinary Inc/(Exp) PBT after EO Exp/(Inc) , , ,698-5,752 Tax Rate (%) Reported Profit , , ,635-5,752 Adj PAT , , ,635-6,005 YoY Change (%) , December

6 Industry overview The Indian Aviation industry has witnessed ~14% CAGR in passenger traffic over FY04-12, after 4.6% CAGR over FY The industry has benefited significantly from the entry of low cost carriers (LCCs) and improvement in airport infrastructure. The market share of LCCs stood at ~54% in FY12. India has one of the least explored aviation markets in the world, with low penetration of air services. Given the huge infrastructure constraints with regard to railways, domestic air travel will continue to grow. Industry market share has witnessed major shift Spicejet has increased its market share from 13.5% in FY11 to 18.5% in 2QFY13 Industry passengers growth rates (%) Industry Capacity v/s Demand Industry capacity has moderated (No's.) Yields at all time high (INR/ passenger) December

7 While the growth potential is huge, the industry suffers from adverse cost structure due to (1) high duties and lack of transparency on pricing of ATF, which is entirely controlled by the leading oil PSU's, and (2) high airport charges. This in turn leads to high air fares and adversely impacts demand. Key cost break up as % of sales (2QFY13) Fuel cost / ASKM has been trending up (Nos) High Yields have adversely impacted growth Industry PLF under pressure (%) 6 December

8 Key concerns Supply side surprises: The lack of entry barriers is the key risk faced by aviation companies. Capacity additions can take place within a short time. Once the industry starts to enjoy reasonable profits, it attracts new players and prompts existing players to aggressively expand to maintain market share. Adverse cost dynamics: The domestic Aviation industry suffers from adverse cost structure due to (1) high duties and lack of transparency on pricing of ATF, which is entirely controlled by the leading oil PSUs, and (2) high airport charges. Irrational pricing by competitors: Given that a significant portion of the operational cost for an airline is fixed (including fuel), the operating leverage is huge. As a result, the industry is prone to irrational pricing by players striving to gain/maintain market share. Plans and prospects SJET plans to add 5/5 aircraft in FY14/FY15. Going forward, capacity additions will not be as aggressive as in the last few years. It intends to introduce six new international routes by December International expansion plans are limited to routes within Asia and the Middle East. The company has issued warrants convertible into a maximum of 52m shares to the promoters, which on conversion would be worth INR2b. SJET is in talks with few international airlines for strategic stake sale. This will not only help to lower long-term debt significantly, but also allow for considerable cost and operational synergies. 6 December

9 Financials and Valuation Income Statement - Consolidated (INR Million) Y/E March Net Sales 16,895 21,811 28,770 39,433 Change (%) Total Expenditure 21,395 21,553 28,178 45,398 % of Sales EBITDAR ,156 6,564 2,527 Margin (%) EBITDA -4, ,966 Margin (%) Depreciation EBIT -4, ,276 Margin (%) Int. and Finance Charges Other Income - Rec. 1, PBT -3, ,259-6,058 Current Tax Tax Rate (%) Reported PAT -3, ,012-6,058 PAT Adj for EO items -3, ,012-6,058 Change (%) Margin (%) Balance Sheet (INR Million) Y/E March Equity Share Capital 2,410 2,419 4,054 4,415 Total Reserves -6,705-5, ,945 Net Worth -4,295-3,441 3,211-1,531 Other Liabilities Total Loans 4,888 4, ,086 Capital Employed ,313 9,552 Gross Block 958 1,027 1,276 9,196 Less: Accum. Deprn Net Fixed Assets ,502 Capital WIP 1,853 3, Other Assets 0 0 7,409 6,858 Curr. Assets, Loans&Adv. 4,991 5,951 2,818 4,343 Inventory Account Receivables Cash and Bank Balance 3,080 4, ,359 Loans and Advances 1,651 1,095 2,303 1,463 Curr. Liability & Prov. 6,926 8,928 6,783 10,151 Current Liabilities 5,657 7,441 6,756 10,086 Provisions 1,269 1, Net Current Assets -1,935-2,977-3,965-5,808 Appl. of Funds ,313 9,552 E: MOSL Estimates; * Adjusted for treasury stocks Ratios Y/E March Basic (INR) * EPS EPS Change (%) Cash EPS BV/Share DPS Payout (%) Valuation (x) * P/E Cash P/E P/BV EV/Sales EV/EBITDA EV EBITDAR Dividend Yield (%) FCF per share Return Ratios (%) RoCE Working Capital Ratios Accum. Dep/Gross Block (x) Fixed Asset Turnover (x) Asset Turnover (x) Inventory (Days) Debtor (Days) Creditor (Days) Wkg. Capital T/O (Days) Leverage Ratio (x) Debt/Equity Cash Flow Statement (INR Million) Y/E March EBIT -4, ,276 Depreciation Direct Taxes Paid (Inc)/Dec in WC -1,028 2,469-10,536 5,359 CF from Operations -5,562 2,664-10, CF from Operating incl EO -5,562 2,664-10, (inc)/dec in FA 3,039-1,467 2,961-7,944 (Pur)/Sale of Investments Investment Income 1, CF from investments 4, ,830-7,185 Issue of Shares -1, ,640 1,316 (Inc)/Dec in Debt ,533 9,236 Interest Paid CF from Fin. Activity -1, ,994 10,011 Inc/Dec of Cash -2,915 1,427-4,367 2,219 Add: Beginning Bal 5,995 3,080 4, Closing Balance 3,080 4, ,359 6 December

10 Disclosures This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement SpiceJet 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. For U.K. This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons. For U.S. MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Any business interaction pursuant to this report will have to be executed within the provisions of this Chaperoning agreement. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account. Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai Phone: reports@motilaloswal.com