Aviation - Results Preview - Higher Fuel Charges Erode Profitability; Fare Increase to Continue

After being impacted by Covid third wave in Jan'22 (down 43% MoM), aviation industry witnessed a decent traffic recovery in Feb-Mar'22. We expect the domestic pax traffic to decline by ~23% QoQ to 24mn in 4QFY22. The pace of recovery moderated in Jan'22, with few cancellations amid rising Covid cases. Incremental opening-up of travel, pent-up demand and an improving sentiment across the country resulted in better sales towards mid-quarter. The Ukraine Russia war again impacted sales towards the end of the quarter. Removal of domestic capacity cap by the government provided a big relief to the industry, while ban on international commercial flights had an adverse impact on industry during the quarter, though it resumed towards quarter-end. The DGCA's recent decision on resumption of scheduled international commercial flights would boost the international demand in coming quarters. While companies hiked ticket prices across segments to mitigate the higher fuel prices, the quantum of hike was not commensurate with cost escalation. A sharp run-up in the fuel cost due to Russia-Ukraine tussle would impact the overall margin of aviation industry significantly, as it is key challenge to pass on such a sharp cost increase at one go. Cargo business is likely to improve further for both companies, driven by strong demand and better pricing. Utilization for cargo has improved recently.

Result Expectations

Aviation companies under our coverage universe are expected to witness 25% YoY growth (down 12% QoQ) in revenue, while a higher fuel cost and other cost pressure would impact their profitability. Aggregate EBITDAR margin is expected to decrease by 484bps YoY (down 1,513bps QoQ) to 3.3%. We expect our coverage universe to report a quarterly loss of Rs18.5bn, as against a loss of Rs13.9bn and Rs905mn reported in 4QFY21 and 3QFY22, respectively.

Both the companies within our aviation coverage are expected to report a loss in 4QFY22. We expect SpiceJet (SPJET) to report Rs5.2bn net loss during the quarter (vs. Rs2.4bn net loss in 4QFY21) due to the sharp rise in ATF prices and traffic decline. On the other hand, IndiGo (INDIGO) is expected to report a net loss of Rs13.3bn (vs. Rs11.6bn net loss in 4QFY21) led by higher fuel costs.

Our View

Though Aviation industry witnessed the negative impact of Covid third wave at the beginning of 4QFY22, it recovered swiftly in the second half of 4QFY22. Moreover, higher vaccination coverage coupled with diminishing impact of Covid have been fuelling increasing travel across the country. We would be monitoring the situation closely on global geopolitical issues, fuel prices and impact of lifting of restrictions on the travel and tourism industry as these parameters have severe bearings on the aviation industry. However, we expect the aviation industry to witness a strong uptick and travellers to return, once the ongoing issue settles down. We expect fuel prices to remain high for some time, while a gradual fare hike would help margins, going forward. Notably, air ticket fare is firm and steadily rising, which has limited impact on demand at this juncture, which may prove to be the new normal going ahead. We believe that Metro to non-Metro and tier-II/tier-III traffic would increase rapidly over the next 2-3 years. This would play a key catalyst for the industry over FY22-FY24E. Thus, we remain constructive on the aviation sector and maintain a positive stance on the segment, despite near-term hiccups. Due to the valuation comfort, we have a BUY rating on IndiGo as well as SpiceJet, while we prefer IndiGo over SpiceJet due to better financials and a strong balance sheet.

Top Picks: IndiGo

Source : Equity Bulls

Keywords

Aviation Q4FY22 ResultPreview RelianceSecurities