Jet Airways: Global headwinds

The carrier could post losses for the next couple of years.

What was thought would be the Rs 7058 crore Jet Airways' strength is now turning out to be a weakness, at least temporarily.

India's biggest private sector carrier has been growing its overseas business aggressively""it should account for about 35 per cent of total revenues in FY08 and is expected to contribute over 40 per cent in FY10-11 when revenues are tipped to cross Rs 11,000 crore.

However, the deteriorating global environment could result in the airline posting losses for the next couple of years.

For the current year, losses are estimated at around Rs 500 crore on revenues of about Rs 8,700 crore. Some part of this will be due to the hit on account of foreign exchange translation losses thanks to the depreciating rupee in the March 2008 quarter.

Besides, oil prices remain over $100 a barrel and therefore, costs on aviation fuel which have risen about 7 per cent in the March quarter, over the December 2007 quarter, will put pressure on the bottom line.

Unless the global environment improves significantly, the airline will see load factors on international routes, which had been improving , falling once again.

What is especially worrying is the high level of debt on the airline's balance sheet. Jet's debt-equity ratio for the current year is estimated at over 6 times and the carrier badly needs a big dose of equity.

Moreover, it needs money to fund its expansion plans, but has been unable to push through its rights issue which has been in the works for over a year now.

The silver lining is the carrier's performance in the home market: with capacity addition slowing down, Jet has been doing well and its passenger loads for January and February 2008 have been at 75 per cent plus, way above the levels of the previous year.

However,the home market too could see a period of turbulence if there is a slowdown in the economy. Jet could lose market share. being a full service carrier and its yields would fall further as it would be forced to drop fares. The stock fell 5 per cent to Rs 508 on Tuesday, even as the market recovered. The stock is likely to be an underperformer.

Infrastructure index: Low voltage

The loss of momentum is disappointing but may not mean a full-fledged slowdown

The slower growth of the infrastructure index, comprising six core industries, for January 2008 at 4.2 per cent compared with 8.3 per cent for January 2007 is certainly disappointing.

But it may be too soon to suggest that this is a harbinger of a full-fledged slowdown or that there is any any significant weakness on the demand side.

Analysts believe it is still essentially a supply side problem though a serious one because the growth between April-January 2008 is now just 5.5 per cent compared with 8.9 per cent in the corresponding period of the previous year.

The slower rise of the index clearly indicates that there are capacity constraints, which may have already impacted industrial growth and threaten to do so in the months to come.

Analysts feel that the disruption in the supply of coking coal could have led to lower amounts of steel being manufactured.

Steel production showed arise of just 5.5 per cent in January 2008 compared with 8.5 per cent in January 2007. They do not feel that the demand for commercial vehicles and two wheelers, which has been rather sluggish over the past six to eight months and has resulted in a de-growth of the sector, has been responsible for the lower growth in the production of steel.

The disruption in supplies of coal could have played a role even in the lower generation of electricity, which has the highest weightage in the index.

Electricity production has grown at just 3.3 per cent compared with 8.3 per cent in January 2007. That is cause for concern because less generation of electricity will hurt industrial production, as will the lower production of crude, another segment that has seen disappointing growth.

Crude production showed a de-growth in January 2008.In the past, there have been some inconsistencies in the data and it is possible that some omissions might have been made this time too.