SpiceJet has been in the middle of action, shooting up by nearly 30% over the last seven trading days. Apart from the fact that Kingfisher’s rising financial woes will be beneficial for SpiceJet, there are two other bits of news that have resulted in the sharp rise.
First, the company allotted 42.9 million shares to its promoter at a price of Rs 23.18, raising around Rs 100 crore. Second, the news that the government is close to allowing foreign airlines to pick up stakes in Indian carriers resulted in airlines' stocks shooting up. Reports say that the cabinet is likely to decide on the proposal to allow investments by foreign carriers into Indian ones this week.
Though the price has moved up sharply helped by these news, both the events are not exactly positive as far as the shareholders are concerned.
Allocation of shares to the promoters will be the second such increase in a span of two years. While this reflects the optimism and confidence of the promoters in the business, it bloats the equity capital. Further, though SpiceJet has one of the lowest debts in the industry pumping in equity indicates the lack of fund raising capability through banks. Over the last three quarters the company has piled up losses to the tune of Rs 351 crore. The Rs 100 crore raised will be going in for funding the losses. Using promoter equity to fund losses will not only bloat the company’s equity base but it will also hamper future fund raising.
The second point is of government clearing 49% FDI in airline companies. In an interview with CNBC the company’s CEO, Neil Mills said that they are open to collaborations with foreign players. The fact that five of the six players are making losses in this space, would be a dampener for investment as this indicates a structural flaw in the sector.
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SpiceJet no doubt is one of the most cost efficient plays in the listed space, but for an investor who is willing to put in 49% stake would like to have control of operations. This could be a big hurdle for Kalanithi Maran and his team. Losing control after pumping in such high capital is very difficult for an Indian promoter.
Given the current rate of losses and the fact that airline losses have now started affecting airports, with GMR managed Delhi airport hinting that it might have to close down due to rising dues from airline, something has to give away. The sector is in for a major shakeout over the next few months if things remain as they are.
It is better to book profit on the share price rise rather than wait in anticipation of events working out in favour of the airline.