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Research
SpiceJet - Industry dynamics to remain favourable - IIFL
Posted On : 2013-03-18 21:10:15( TIMEZONE : IST )
We initiate coverage on SpiceJet with BUY and TP of Rs55 (60% upside). We expect air traffic volume to rebound in FY14 after a 5% decline in FY13, as airfares stabilize after the steep jump seen last year. The favourable demand-supply equation and the new found pricing discipline in the industry are likely to continue, in our view. Air Asia would pose a formidable threat to pricing only in FY16. With an 18% market share and higher focus on smaller towns, SpiceJet is well placed to benefit from favourable industry dynamics. We forecast SpiceJet's Ebitda to grow at 33% Cagr over FY13-15.
Demand-supply to remain favourable; pricing discipline to stay:
We expect the new found pricing discipline in the industry to stay. Although airlines gave discounts for the lean Feb-Apr season, yields recovered sharply post the limited period offers. The demand-supply scenario would remain favourable in FY14/FY15 due to limited capacity expansion by airlines. Post the Kingfisher debacle and the Air-India bail-out, Government of India (GoI) is playing an active role in ensuring pricing discipline and monitoring capacity expansion in the industry. Although Air Asia's entry has raised concerns, we expect it emerge big enough to impact industry pricing only in FY16.
Demand likely to rebound in FY14 post 5% decline in FY13:
We expect domestic air traffic to rebound in FY14. This is predicated on airfare inflation dropping below income growth after a first-in-a-decade reversal in FY13. Over the medium-term, we expect traffic growth to revert to 12-14%, closer to the 10-year CAGR of 15%. SpiceJet is relatively insulated from competition, with the highest exposure to smaller towns vs. all other airlines.
Initiate with BUY, TP of Rs55:
We forecast Ebitda to grow at 33% Cagr over FY13-15, driven by 13% volume CAGR and better pricing/load factors. We expect SpiceJet to become FCFF-positive in FY14 after 3 years of negative cash-flows. Our TP of Rs55 is based on 8x FY15 EV/Ebitdar. If and after the Jet-Etihad deal goes through, SpiceJet is best placed to attract FDI, in our view.
