High prospect of Jet- Etihad deal happening: ICICI Direct

For an industry that has been bogged down by controversies, aviation sector is doing well now. There are all sorts of deal talks doing the rounds. Jet Airways and SpiceJet seem to be in talks to sell minority stakes to foreign investors.

Rashesh Shah, aviation analyst, ICICI Direct told CNBC-TV18 that there is higher probability of the Jet Airways deal going through. "If any foreign carriers are interested in India, then they would look for a carrier, which has domestic as well as international presence. Considering the overall global presence and promoters stake, we are betting more on Jet Airways," he added. Jet Airways, which has been in talks with Etihad Airways to offload 24 percent stake, also plans to have a marketing alliance with the premier Gulf carrier, according to sources. Also Read: Jet Airways scrip hits air pocket after rise Below is the edited script of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee Q: What is your sense? Is it going to be SpiceJet or Jet Airways which is going to be the bigger beneficiary of any such large stake purchase by a global airline? A: As far as the deal is concerned, we are betting more on Jet Airways because Jet Airways is one of the second largest doestic player in India. Apart from domestic presence they are also generating 65 percent of revenue from international operations. So, if any foreign carriers are interested in India, then obviously they would look for carrier which has domestic as well as international presence. The talk in the market is that, Jet is in talks with Etihad Airways and other foreign carriers for a possible stake sale. As far as promoter stake is concerned, promoters are also having more than 80 percent stake and it is likely to get reduced to 75 percent. Considering their overall global presence and the stake the promoters are having, we are betting more on Jet Airways. Q: Given their operating performance though do you think something like a Rs 700 to Rs 800 per share could actually be struck in terms of a valuation? A: The valuation is basically derived from the operating environment and synergy. Suppose a foreign carrier comes in then they would look for more synergy in terms of their passenger travel. As far as Jet Airways is concerned, suppose a foreign carrier like Etihad or any other Gulf carrier comes in, then they would look to focus more on taking outbound travel from India. So, if foreign carriers are likely to buy stake in a company then they would be willing to pay a premium compared to what the other investor had bid. Q: Aside from helping Jet Airways on their debt issues though, operationally do you see any big improvement with the entry of a player like Etihad? A: Operationally, if a foreign carrier comes in then more synergistic opportunities are available in terms of fleet management and route network. The talks are on and if the deal happens, it will be a first deal to happen in India. It is not possible to quantify much, but if foreign carrier comes in the benefits are likely, for Jet. Q: Jet has run up quite a bit, do you think the price of Rs 545-Rs 550 captures some degree of capital or equity infusion, which pares down some part of the debt? If there is no major open offer, do you still see a lot of upside in Jet Airways post this deal? A: Apart from operational improvement, the regulatory environment is also turning a bit favourable for the aviation sector. Two years back, we had a restrictive regulatory environment. Right now, the players are enjoying free pricing and they are also have more options for raising funds. The ministry is also trying hard to bring down the overall taxes on aviation turbine fuel (ATF). All this improvement in regulatory environment hasn't been captured in the price yet. We are betting majorly on the deal front and on the improvement in regulatory enviornment.