Dec 07, 2012, 06.43 PM IST | Source: Moneycontrol.com

SpiceJet well poised to turnaround in near term: MOST

Motilal Oswal has come out with its report on SpiceJet (SJET). The research firm believes, given positive industry outlook and successful de-risking initiatives, SJET is well poised to turnaround in the near term.

Motilal Oswal has come out with its report on SpiceJet (SJET). The research firm believes, given positive industry outlook and successful de-risking initiatives, SJET is well poised to turnaround in the near term.

  • De-risking initiatives bearing fruit; best placed to attract FDI
  • Industry outlook positive; fares up ~20% YTD
Outlook for the Indian Aviation industry is positive, given (1) sharp moderation in industry capacity, (2) rational pricing by key players, and (3) recent  regulatory measures.

SJET's de-risking initiatives are bearing fruit, which is reflected in the 31% drop in net losses in 2QFY13. SJET is poised for a turnaround by FY14.

Given SJET's industry positioning and strong balance sheet, it would be a prime target for any international airlines looking to gain a strategic foothold in India, one of the fastest growing aviation markets in the world.

Industry outlook positive

The medium term outlook for the Indian Aviation industry is positive, given (1) sharp moderation in industry capacity, (2) rational pricing by key players, and (3) recent regulatory measures.

Since FY11, the operational domestic fleet size has shrunk from 252 aircraft to 237 aircraft, primarily due to withdrawal of the Kingfisher fleet (~56 aircraft). Also, Indigo and SpiceJet have deployed ~15 aircraft for international operations. Consequently, the domestic carriers have gained significant pricing power (industry fares up ~20% YTD).

Recent government measures such as (a) approval of FDI, and (2) flexibility to import ATF / hedge ATF purchases are key positives.

Valuation and view: We believe, given positive industry outlook and successful de-risking initiatives, SJET is well poised to turnaround in the near term. SJET is one of the most cost efficient LCC carrier in India with relatively strong balance sheet (net debt of ~INR10.5b in FY13). Recent equity infusion by the promoters is positive and will strengthen its financials. SJET is in talks with major international airlines for a strategic stake sale, any such successful deal could be a key positive and re-rate the company. SJET trades at an EV of 1.6x/1.3x its consensus FY13E/ FY14E sales and an EV of 15x/ 8.5x its consensus FY13E/FY14E EBITDAR. Not Rated.

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