SpiceJet stock flies high on Boeing 737 MAX return, increasing air travel

Higher passenger traffic, load factors helped the stock gain 44 per cent in November

The US Federal Aviation Administration’s (US FAA’s) green flag to fly the Boeing 737 MAX aircraft couldn’t have come at a better time for SpiceJet. The low-cost airline has been steadily trying to turn around its fortunes by banking on the cargo business, cutting costs, and deferring aircraft lease payments.

The return of the 737 MAX, say analysts, will act as a game-changer. Once the 737 MAX takes to the skies, SpiceJet should start getting incentive for every aircraft as part of the sales and lease-back agreement of its aircraft order. Since the aircraft is high on fuel-efficiency, its return will positively impact the airline’s already stretched balance sheet.

“The US FAA’s approval of the Boeing 737 MAX is a positive development for SpiceJet since it has around 13 Boeing 737 aircraft in its fleet. Once flights start, it will be operationally positive for the airline since the aircraft is fuel-efficient and will contribute significantly towards the carrier’s profitability,” says Gaurav Garg, head of research, CapitalVia Global Research.

The 737 MAX commands a higher capacity of 220 seats versus 180 in the Boeing 737 Next Generation (NG), along with greater fuel efficiency – the aircraft is 20 per cent more efficient than the 737 NG.

Analysts at Edelweiss Securities, in a recent report, note that the budget carrier’s 2021-22 growth could be buttressed by the addition of the 737 MAX. If the company is able to deploy the same from the fourth quarter of 2020-21, it will enable long-term cost savings and manage liquidity issues.

At the bourses, the stock has been flying high on the back of positive news on the Covid-19 vaccine development, steady rise in domestic air travel, and unlocking of the domestic economy. 

Air passenger traffic for the sector increased 34 per cent in October, compared to September. Passenger load factor for SpiceJet also increased 100 basis points on a sequential basis to 74 per cent.  

So far in November, the stock has surged 44 per cent on the BSE, against 10 per cent rise in the S&P BSE Sensex till Thursday, shows the BSE data.

However, in the three months preceding the nationwide lockdown, the stock price plunged 66 per cent at the bourses, compared with 35.6 per cent decline in the benchmark Sensex.

Global brokerage HSBC, in a report dated November 17, raised the target price on the stock from Rs 26.5 apiece to Rs 80 as it felt the survival risk had started to abate.

“The company had a stretched balance sheet at the end of March, having gross cash of only Rs 41.8 crore and negative equity of Rs 1,600 crore. Given the fact that SpiceJet has such a stretched balance sheet, most of the investors were doubtful about the survival of the business… However, the company took a few right steps by strengthening its cargo business that helped it to increase its cash balance to Rs 54.5 crore at the end of the September quarter,” said HSBC.

BOB Capital and Edelweiss Securities, too, have target prices of Rs 85 and Rs 79, respectively, on the stock.

While the targets look aggressive, they justify the fundamental exuberance, says Garg of CapitalVia.

“Technically, the stock is facing resistance at the level of Rs 80. If it breaks out above that, we may see the price hitting the level of Rs 90. Fundamentally, too, local lockdowns in the US and Europe don’t pose a threat to the stock as the company doesn’t have many international routes,” adds Garg.

Existing investors, he says, could hold the stock, while new investors could wait since the stock may see mild profit booking at the level of Rs 85.