Jet Airways: Aggressive flight path

Jet Airways' financials look good, but its public issue is priced aggressively

The first thing that stands out in the Jet Airways IPO is that its price band of Rs 950 - Rs 1125 discounts FY04 earnings by 49 to 58 times.

To be fair to Jet, FY04 earnings may not be the right benchmark since that was the year it had just returned into the black after two years of losses.

Based on rough estimates for FY05 earnings, the price band implies a valuation ranging from 21 to 25 times, which again is not cheap.

Analysts point out that it makes more sense to look at the EV/EBITDAR ratio for airline companies, which is the enterprise value as a multiple of earnings before interest, tax, depreciation, amortisation and aircraft rentals.

Based on its FY04 EBITDAR, Jet is valued between 9 and 10 times. Using FY05 estimates, the valuation is lower at between 7 and 8 times.

There isn't any strict comparison for Jet, which has a dominant position in a fast growing market. But on a stand-alone basis, the pricing does look aggressive.

What will work in Jet's favour is the fact that the upward momentum in the stock market continues. Besides, it's the best available play on the fast growing Indian airlines market.

Jet has a strong market share, upwards of 42 per cent in the domestic market. Jet's early mover advantage will come in handy when competition gets more severe in the domestic market.

Apart from an advantage in areas like parking slots for its aircraft, its popularity with the business community means that it may not be affected to a great degree because of the entry of low-cost carriers (LCC).

Further, the cost base of a low-cost carrier in India is not expected to be much lower than that of full-service provider, unlike the west where the cost is about 50-55 per cent lower because of much higher utilisation, besides the benefits of high internet penetration and secondary airports which lower costs.

Jet currently enjoys a healthy utilisation rate (load factor) of around 68-70 per cent (low cost carriers operate at around 85 per cent), which can be expected to continue despite low-price competition for two reasons.

Much of air travel in India is business-related, and this set of customers is not expected to shift loyalty just because of lower fares.

Further, Jet has its own low-price offers such as Apex (accounts for 15-20 per cent of its passengers), check fares and night savers. It can afford to do this since roughly 30 per cent of its flights still go empty.

But that's not to say that Jet will not be affected by the low-price competition that's set to hit India - it's just that its better off relative to full-service providers abroad.

In fact, Jet's EBITDAR margin of around 30 per cent is amongst the highest globally. Singapore Airlines had an EBITDAR margin of 25 per cent in the nine months till December 2004.

In some cases, Jet enjoys higher margins than even low cost carriers - Southwest Airlines, an LCC that operates in the US has margins of just 18 per cent.

(Ryanair, one of the most successful LCC stories, enjoys EBITDAR margins as high as 41 per cent.) But what's important is that Jet's margins are amongst the highest among comparable companies.

What's more, operating efficiencies and economies of scale are now kicking in and have resulted in high earnings growth.

In FY04, operating profit more than doubled, while the net profit (according to news reports) in the nine months till December 2004 is already 60 per cent higher than the profit in the whole of FY04.

This is significant since FY05 results had the adverse impact of higher prices for fuel (25 per cent of sales).

Siemens

Siemens India plans to invest $500 million ( approximately Rs 2,200 crore ) in the country over the next 3-4 years for expanding its production capacities, as well as augmenting its R&D capabilities and hiring more software professionals.

This move is expected to help Siemens leverage the upturn in the domestic capex cycle, as well as expand the role of Siemens India in the global operations of its parent.

Siemens India's foreign exchange earnings for the year ended September 04 amounted to Rs 153.75 crore, a year-on-year growth of 72 per cent.

These investments are planned to be financed by internal accruals. Investor interest for capital good stocks has led this MNC stock gain about 20 per cent over the last five weeks.

Earlier, the company had declared a 89.7 per cent growth in its net profit after tax to Rs 31.3 crore in the December quarter, despite higher raw material and personnel costs.

Raw material costs have grown 71 cent to Rs 389.17 crore in the last quarter, largely due to higher steel prices.

However, its key divisions have performed better "" segment revenues of the power division have improved 107 per cent to Rs 143 crore, while that of the information and communication division has expanded 47 per cent.

A larger turnover base has helped its operating profit grow 68.8 per cent to Rs 44.9 crore in the last quarter and operating profit margins have improved 33 basis points to 8.46 per cent.

Going forward, the UPA government's emphasis on expanding the rural electricity network, should help the company's power division maintain its growth. Also, enhanced outsourcing work for the parent's operations should provide a momentum to earnings.

With contributions by Mobis Philipose and Amriteshwar Mathur