Domestic aviation stocks have shown a sharp rebound in the last one-year period, jumping as much as 704 percent from their 52-week low levels. However, they are yet to hit their peak even as the market is trading at an all-time high level.
At present, shares of Jet Airways are down 92 percent from their all-time high of Rs 1,379, hit on April 26, 2005. Shares of IndiGo are 16 percent below their record of Rs 1,911, achieved on September 23, 2019, while those of SpiceJet is 44 percent down from their all-time rise of Rs 156.90, which took place on June 3, 2019.
Shares of Jet Airways hit their 52-week low of Rs 13 on March 27, 2020. As of February 16 closing, the stock is up 704 percent.
Shares of SpiceJet hit a 52-week low of Rs 30.80 on March 25, 2020, and the stock is up 184 percent from that level now.
InterGlobe Aviation (IndiGo) shares hit their 52-week low of Rs 765.05 on March 24, 2020. Now, the stock is up 111 percent from that level.
In early 2020, when the Black Swan event Covid-19 caught the world by surprise and forced a global lockdown, aviation players had little clue as to how their businesses would fare in the months ahead.
By the end of 2020, domestic air traffic in India was down 56.27 percent by passenger numbers. The capacity plummeted 48.02 percent by available seat kilometres (ASK) and 48.76 percent by departures.
The two months of complete shutdown of air traffic and the subsequent gradual restart that was controlled by the government, hit the aviation players hard. Keeping their widening losses and bleak outlook in mind, analysts strongly recommended keeping airline stocks at an arm’s length.
However, aviation stocks started to rise along with the market after the March 2020 lows, outperforming many other sectors. One of the most important factors that worked in their favour was cheap valuation.
As most aviation stocks touched their 52-week lows in March, investors added them to their kitty in the hope that they will rise with the corresponding easing of the ban on travel.
Cost-cutting measures of airline players underpinned the hopes of investors that they will sail through the tough times.
The way forwardThat is the way it seems to have turned out. Of late, aviation stocks have been rallying even as their earnings have been poor owing to the revision of the fair price band.
The government revised the fare price band on flights with 90 to 120 minutes of flight duration from Rs 3,500 to Rs 3,900, a growth of 11.4 percent. The cap on maximum chargeable fare has also been raised from Rs 10,000 to Rs 13,000, a growth of 30 percent.
Vinit Bolinjkar, Head of Research, Ventura Securities, believes the order will improve the finances of aviation players in Q4FY21.
"A further revision in fare price is expected in FY22, which resulted in a rally in aviation stocks," he explained.
"The demand is still tepid and the airlines are not fully operational. We suggest investing after reopening of the sector as well as after the demand sees some improvement. Investors can consider buying in stocks like IndiGo and SpiceJet on dips," suggested Ajit Mishra, VP Research, Religare Broking.
Vinod Nair, Head of Research at Geojit Financial Services, underscores the fact that increase in authorised air ticket base prices will help the aviation sector, but low capacity utilisation and rising ATF will continue to keep the sector under pressure.
"The increase in air ticket base prices is a proactive measure initiated by the aviation ministry to help the loss-making industry. The trend of losses will reduce in the future, but will still be weak due to low capacity utilisation and rising ATF prices. Capacity utilisation is expected to increase in the future," he added.
Jitesh Ranawat - Head – Institutional Sales at Marwadi Shares and Finance also believes that the demand recovery could be slow until March. Although the industry could boost some demand by offering lower fares, it may not support profitability, given that fuel prices have gone up.
"There could be a boost in demand from April onwards although some impact is possible due to the change in school season this year. Yet with lower fares, the positive impact from vaccine roll-out and seasonal strength should give a fillip to demand. However, the key question is whether demand will reach pre-COVID-19 levels," he queried.
The industry could face some challenges as the demand-supply equation could continue to be unfavourable, Ranawat believes, while the competitive landscape could also worsen from here.
"Any news flows regarding the disinvestment of Air India and restarting of Jet Airways will be keenly watched by investors and may create a positive view for the sector as the government intention is pretty clear on disinvestment," he said.
Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities predicted that "Demand recovery would strengthen in the absence of adverse news flows as COVID-19 vaccination programme gains momentum. Some of the demand shift from railways to airlines could sustain going forward as it is fairly distributed."
"Share of non-metro cities has increased in overall traffic and on new routes, making the growth profile of air travel more broad-based. From April 2021, the industry would be able to use dynamic pricing to increase load factors," he added.
Aviation stocks have been witnessing strong gains for the last one year. The road ahead will now depend on the magnitude of demand and also on crude oil prices.
The rise in crude oil price remains a major risk for the sector. On February 15, global crude oil prices rose to a 13-month high level.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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