Airline stocks emerged as the star performers in on Tuesday’s trade, as a Group of Ministers cleared a proposal to allow domestic carriers to import fuel directly. The shares of the sector’s three listed entities — Jet Airways, Kingfisher Airlines and SpiceJet — made smart gains and rose between 11 and 15 per cent.
The Naresh Goyal-promoted Jet Airways was the top gainer, as its shares galloped 14.5 per cent to close the day at Rs 341.20 on the Bombay Stock Exchange.
Market participants termed the GoM decision a good move for the loss-making airliners, but questioned the longevity of the steep rally on the counter. The rally was unlikely to sustain and gains made might get washed away in the immediate future, they said.
Ambareesh Baliga, chief operating officer at Way2Wealth, noted aviation had seldom been an investment story. “Though today’s is a positive development, this alone cannot sustain the rally for long,” he said. “There are issues in importing fuel directly. Airline companies cannot build their transporting network and storage is another hurdle. We are not advising investors to get into the sector now.”
Fuel makes up around 50 per cent of the airliners’ costs. If the Cabinet clears the proposal, it will help companies save around one-fourth of their overall fuel bill.
Sadanand Shetty, equity head at Taurus Asset Management, chose to dub this rally as “speculative”, given that there was “no significant change fundamentally”. Aviation has not delivered in the long run, he noted. “Traders can make hay of these movements as counters provide short-term opportunistic buys, but these are not stocks for investors.”
Last year, when benchmark indices had lost one-fourth of their values, aviation stocks were among the most hard hit. For instance, shares of the listed entities lost between 70 and 80 per cent of their worth in the calendar year 2011. However, in 2012, they continued to outperform the broader markets as hopes revived due to talks on foreign direct investment (FDI).
Interestingly, irrespective of the consistent losses in the current financial year so far, stocks gained between 40 and 100 per cent this year since this January 1. Once again, Jet Airways topped the list as its share prices doubled during this period. But market experts remain cautious on the sector. “FDI can only be a firm trigger for the sector to perform,” says Way2Wealth’s Baliga. Else, they doubt the strength of the current take off in the share prices. According to them, crude remains a bigger factor for the industry. “There is no substitute for oil. If oil remains uncertain, how can we have certainty in the aviation stocks?”
According to them, December quarter is traditionally the strongest quarter for the airliners. “But things have not improved,” says Baliga. In Q3, Jet Airways continued to post net losses of Rs 101 crore, while SpiceJet took a hit of around Rs 40 crore as losses in the quarter. It’s not only that the profitability is in the negative zone; revenues of the companies too have declined. Operating profit margins continued to be in the negative zone for the companies.
In the quarter ended December, 2011, foreign institutional investors as well as domestic institutional investors cut their holding in the airliners.
According to experts, unless there is consolidation in the industry, improvement in passenger traffic, strong pricing power in companies’ hands and stable crude the outlook for the sector remains bleak. “It is to be seen which foreign players come when FDI comes into being given the high debt of the local airliners,” one of them said.
