IndiGo IPO: Higher valuations can lift sector

Operational improvement must for Jet and SpiceJet to bridge valuation gap with market leader

The prospect of successful listing and higher valuations of InterGlobe Aviation, which operates IndiGo airline, can rub off positively on the listed entities - Jet Airways and SpiceJet. InterGlobe is expected to command an enterprise value to sales valuation of 1.6 versus Jet Airways’ 0.58. The valuation gap is due to IndiGo’s consistent net profit track-record, whereas that of Jet has been patchy. While IndiGo has a net debt of Rs 2,463 crore despite being the bigger player, Jet’s number is twice that. For SpiceJet is still in the midst of a restructuring exercise undertaken by the new management to turn around the business, after the airline was at the verge of closing.

  Analysts say while both SpiceJet and Jet Airways have made money in the past, they have been inconsistent. On the other hand, cost efficiencies including a quick turnaround time have helped IndiGo maximise benefits from its low-cost, no-frills business model.

Aggressive pricing and network expansion helped IndiGo improve market share from 12.5 per cent in FY09 to 33.8 per cent in FY15, even as the sector contracted. It is No. 1 in seat capacity in all metros except Mumbai, even as its cost per available seat kilometre is the lowest in India at 5.95 cents (FY14) - sector average is 7.98 cents. Indigo thus posted earnings before interest, taxes, depreciation and amortisation margins of 19.8 per cent (Jet’s was six per cent) for FY14.

Experts add IndiGo’s listing is only sentimentally positive and any re-rating for the existing listed companies will happen if there is operational improvement. While SpiceJet was up 3.5 per cent, Jet Airways closed flat on Wednesday. The evidence, so far, is not encouraging as investors in the sector have seen wealth erosion rather than appreciation. The two stocks have shed two-thirds of their market value from their respective highs.

Lack of pricing discipline has been the key reason for the sector’s mounting losses (pegged at $10 billion over the last five years). The key impediment to higher fares or rational pricing seems to be increased competition.

Though India is an under-served market and long-term prospects are good, analysts are sceptical about the sector’s near-term prospects, as entities such as Jet continue to post losses despite fall in fuel costs and higher load factors in the fourth quarter of FY15 and competition is only rising, with new players joining.