Buy Spicejet - BP Wealth Diwali Picks 2012

Spicejet is one of the fastest growing low cost carrier (LCC) in the Indian Aviation sector. Its business model exploits the changing preference of price sensitive Indian flyers and operates more than 120 flights daily.

Investment Rationale

Increasing ticket prices to benefit

The domestic flight capacity has reduced by ~20% YoY as Kingfisher Airlines closed down its operation after DGCA suspended its license. The overall competition scenario has been improved in the favor of Spicejet and we believe airfare prices to increase further due to capacity constraints as well as due to busy winter season.

Load factor to increase due to reduction in intensity of competition

Almost all airline companies have increased their ticket prices in the recent past mainly to take advantage of busy winter season. In addition, Spicejet has shown an increase in load factor as DGCA suspended the license of Kingfisher Airline. We believe Spicejet's market share to increase gradually as it would be a major beneficiary of increasing passenger traffic and demand-supply scenario as its operates as one of the most preferred LCC.

Most attractive FDI candidate among its peers

On the back of low cost business model and lower debt among its peers, Spicejet has managed perform well among its peers in terms of aircraft utilization as well as capacity addition plans and therefore, we expect Spicejet would remain an attractive investment for foreign airlines.

Valuation & Outlook

We believe improving yield in the domestic market and rationalization of international routes to support Spicejet to post lower loss in FY13 and robust profits in FY14. We have valued this stock on the basis of EV/EBITAR and applied a multiple of 8x to value this stock. So we recommend BUY on the stock with a price target of Rs 45 per share which provides the potential upside of 29% from current level.

Technical Outlook

Stock has started reversing after forming a five wave decline on weekly chart and is now expected to retrace this wave. 38.20% retracement of its downmove from 97 to 15 comes @46.70. RSI has formed positive divergence with price which is a positive signal and supports the bullish view of the stock. The 200 day moving average is placed at 30 which should act as strong support.

Source : Equity Bulls

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