Investment Argument
The company has posted strong Q3FY10 results with Rs.108 cr profits and earnings of Rs. 4.52 which is more than its peer Jet airways which is double its size and market cap. This shows that SpiceJet is better in terms of productivity, efficiency and
utilization levels though it is smaller in size. SpiceJet has a strongest position in domestic lowbudget air carrier with 125 flights to 19 destinations daily with a growing market share of ~12%. The company follows a 'Low Cost Carrier' model which is proving beneficial for them in the price sensitive Indian market. The recouping economy and therefore the improving passenger traffic, changing preferences will improve the cost efficiency and the bottom line of the company. SpiceJet will complete 5 years in domestic flying by May 2010 and hence would be eligible for international routes which will in turn contribute to the volumes and in
turn the top line. It plans to add 4 aircrafts each in CY10 and CY11 and 1 aircraft in CY12 which will be primarily used for the
international routes. Since it is a cyclical business the Q1 and Q3 quarter is expected to be better compared to other quarters as it is period of festivities and holidays where there is increase in volumes of passenger traffic. Expected turnaround in the bottom line due to better performance in the current year is attributable to lowest cost per ASKMs (available seat kilometer) coupled with high load factor. The expected balance sheet restructuring in terms of FCCB holdings by the WL Ross and Isthitmar will help to have a positive networth as well attain zero debt level.
Background
The company is first among the private companies that stepped in to the Indian aviation sector. It has 125 flights to 19 destinations daily and impeccable standards of hospitality. The airline is hugely popular and flies over 5,00,000 people in a
month. Currently, the company enjoys a market share of over 12%. SpiceJet follows the Low Cost Carrier (LCC) business model on the lines of the most successful LCCs globally and provides the lowest cost per unit amongst Indian LCCs in the
price sensitive Indian market. The on-time performance is amongst the best in India, at 82%, coupled with a technical dispatch
reliability of 99.6%, making it an airline with the least cancellations. The aircraft utilization of SpiceJet is amongst the highest in India. SpiceJet covers cities namely Ahmedabad, Bagdogra, Bangalore, Chennai, Coimbatore, Delhi, Goa, Guwahati, Hyderabad, Jaipur, Jammu, Kochi, Kolkata, Mumbai, Pune, Srinagar, Varanasi and Vizag. The other players in this LCC segment are
Jetlite, Go Air, Kingfisher Red etc. Due to the better performance in the current year SpiceJet is expected to post profits in its turnaround year of FY10 where it would be the first listed airlineto do the same in LCC segment.
Risks and concerns
The fuel cost consists of almost 40% of the total expenses and any spike in fuel prices can affect it. Similarly anything affecting domestic business or leisure travel can affect the profit projections.
Recommendation
Looking to latest performance plus the ongoing restructuring of the balance sheet, company will have a positive networth ahead of any other domestic Airlines. If everything goes normal on ATF and passenger traffic front, one can expect superb performance in FY '11. Buy with target of Rs 75 in 6 months.
