The empowered group of ministers' move to approve direct import of aviation turbine fuel or ATF has provided a lifeline to the loss-making airline industry. The move is expected to help aviation firms, including SpiceJet, save a significant chunk of taxes and levies paid to states, with the highest rate at 33 per cent. This announcement has seen airline stocks jump 11-15 per cent, wherein SpiceJet spiked 11 per cent, on Tuesday.
While the policy decision is positive, the Street seems to be ignoring the auditors’ comment in the notes to the December quarter results, that the net worth of the company had been substantially eroded. This, along with a weak set of numbers for the quarter, had seen the stock fall 13 per cent intraday on Monday. Three consecutive quarters of losses have meant accumulated losses of Rs 356 crore for the nine months ended December 2011. Rising losses had also led to an erosion in net worth of Kingfisher, finally leading it to seek debt restructuring. The airline is still to emerge out of the woods. In this context, it is imperative for SpiceJet to cut costs and improve revenues if it has to turn the corner.
At Rs 27, the stock is trading at an enterprise value to sales of one, below its historical average (2.9 times). While it appears attractive, the recent spurt in prices has meant the upsides are likely to be limited.
Policy boost
Currently, the average taxes on fuel paid by airline companies are 24 per cent and this is likely to come down to about 12-15 per cent, say analysts. This should help the company improve its performance, which has been hit by high fuel costs. For 2012-13, if SpiceJet’s fuel bill is Rs 2,500 crore, it will be able to save between Rs 250-300 crore, leading to a three to five per cent increase in operating profit. However, this does not include the cost of logistics (storage and transportation) from the port to various terminals. If the gains come through, instead of Rs 50 crore loss estimates at the operating profit level for FY13, the company could post an operating profit of about Rs 150 crore.
Analysts say the move is positive and could offer aviation companies a breather from rising fuel costs, though a lot depends on availability and cost of infrastructure for importing ATF. The second area which could help companies such as SpiceJet is the foreign direct investment move, to allow foreign carriers to buy up to 49 per cent stake in Indian carriers. While the creditworthiness of Indian carriers will improve, Jamshed Dadabhoy & Arvind Sharma of Citi in a recent report say foreign airlines might not be too keen, as they already have significant market share on international routes into India, share codes with domestic carriers and a fund infusion might not reduce debt to a meaningful extent.
| RISING LOSSES… | ||||
| In Rs crore | FY11 | % chg y-o-y | YTD FY12 | % chg y-o-y |
| Net sales | 2,879.0 | 32.0 | 2,845.0 | 33.6 |
| Fuel | 1,226.0 | 50.6 | 1,575.0 | 89.5 |
| Ebitda | 116.0 | 141.7 | -323.0 | PTL |
| Profit/loss | 101.0 | 65.6 | -356.0 | PTL |
| PTL is Profit to loss E: Estimates Source: Company | ||||
| …HAVE NEARLY WIPED OFF ENTIRE EQUITY | |||
| In Rs crore | FY10 | FY11 | YTD FY12 |
| Net loss/profit | 61 | 101 | -356 |
| Accumulated losses * | -822 | -721 | -1,077 |
| Shareholders’ funds (equity) | 478 | 1,042 | 1,173 |
| Equity-post accum. losses | -344 | 321 | 96 |
| * as at the end of the respective fiscal year E: Estimates YTD includes equity infusion Source: Company | |||
Fuel costs
A 90 per cent jump in fuel costs and a steep depreciation in the rupee led to the Rs 39-crore loss for SpiceJet. Fuel was 50 per cent of operating costs, as compared to 37 per cent in the year-ago quarter. Load factors, too, declined 790 basis po-ints year-on-year to 80.1 per cent as compared to a record 88 per cent in the year-ago quarter, partly due to higher capacity. Revenues, ho-wever, jumped 41 per cent year-on-year on a 29.5 per cent rise in passenger traffic and a 9.5 per cent increase in average realisations. Supply cuts/problems at rivals such as Kingfisher Airlines and Air India helped the company increase market share by 250 basis points year-on-year, to 16.8 per cent. Vikram Suryavanshi of Antique Stock Broking, in a recent report, says this is a significant achievement, considering a 32 per cent increase in capacity on a year-on-year and 12.1 per cent sequential basis. Interest costs and depreciation were higher, as the average fleet size increased from 23 in the year-ago quarter to 36.7 in the third quarter.
Outlook
Mark Webb and Rajani Khetan of HSBC, in a recent report, say the airline will struggle amidst high fuel costs, weak load factors and rising debt levels. Further, given that it leases most aircraft and does not have any asset support, continued losses are fast eroding book value. The management, however, says it is implementing fare and route rationalisation, improving operational efficiencies and other cost control measures to enhance operating results and cash flows.
The company is also looking at raising funds to meet short-term and long-term obligations—an equity offer, though, could help shore up net worth.
While analysts and the SpiceJet management are bullish about demand, the key will be fuel costs and the ability to improve load factors, given the expanded fleet.
