Spicejet - Diwali 2012 Pick - Angel Broking

SpiceJet has the lowest debt amongst all listed players at Rs.1,009cr, compared to Kingfisher Airlines (Rs.8,719cr) and Jet Airways (Rs.13,157cr) as of FY2012. Presence in the high-growth, low-cost segment and having the lowest debt compared to peers makes FDI investment in SpiceJet more lucrative than others.

We believe the industry is witnessing a structural change, where airline companies have increased their ticket prices and competition has reduced to a certain extent post the capacity cutback by Kingfisher. SpiceJet is one of the few airlines that have been expanding capacity and hence can take full advantage of the mismatch between lack of supply, strong demand growth as well as increased ticket pricing, leading to better profitability in the future. We expect SpiceJet to witness high load factor going ahead and report full year profits for FY2013-14E.

Jet fuel constitutes 30-50% of the operating cost of an airline. SpiceJet would be the first airline to start importing fuel and has already signed agreements for transportation and storage of ATF with private oil companies. We believe even though the savings from direct import of ATF might be on the lower end in absolute terms, they gain significance considering the entire industry is struggling to make profits.

On the valuation front, SpiceJet is trading at EV/sales of just 0.3x FY2014E, lower than its peers. Hence we recommend a Buy rating on the stock.

Source : Equity Bulls

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