Aviation majors InterGlobe, the operator of IndiGo and SpiceJet fell for the third consecutive session on April 23 after a consistent rise in crude oil prices, but brokerages maintained buy call on both stocks and raised price targets.
SpiceJet shares dropped 3.7 percent intraday and InterGlobe Aviation declined 1.7 percent, taking the total loss to 7-8 percent in three straight sessions after Brent crude futures climbed over five-month high.
Fuel constitutes a major part of the operating expenses of aviation companies.
Currently, Brent trades around $74.50 a barrel, up more than 50 percent from December lows of around $50 a barrel.
But despite that Prabhudas Lilladher upgraded its assigned multiples (FY21 EV/EBITDAR) for IndiGo and SpiceJet to 8.8x (previously 8.5x) & 8.3x (previously 8x) respectively, given that the favourable yield environment led by capacity constraints is expected to continue in near term especially after Jet Airways fiasco.
After March passenger traffic data, the brokerage also maintained its buy call on IndiGo and SpiceJet with a revised target price of Rs 1,623 and Rs 135, implying 9 percent and 8 percent potential upside from current levels, respectively.
Elara Securities also reiterated its buy rating on SpiceJet and IndiGo and raised target price to Rs 211 (from Rs 144 earlier) and to Rs 1,945 (from Rs 1,471 earlier), respectively, based on market share gains and higher FY20-21 RASK-CASK margin at Rs 0.4 (from Rs 0.1-0.2).
RASK is revenue per Available seat-kilometer and CASK is cost per available seat-kilometer.
March domestic passenger (pax) traffic grew just 0.1 percent YoY, the lowest in last five years as the industry reels from ticket cancellations caused by Jet Airway's ongoing financial plight and grounding of Boeing 737 Max leading to capacity constraints.
Taking advantage from the grounding of Jet Airways and Boeing 737 Max, market leader IndiGo further consolidated its leadership position in the domestic market (pax carried) as its market share expanded by around 350bps sequentially to 47 percent, Prabhudas Lilladher said, adding the company reported pax/ASK growth of 19/26 percent YoY.
Elara Securities said IndiGo would be able to add more than 40 Airbus A320 during FY20E based on its strong orderbook. Hence, the brokerage expects IndiGo would gain market share by around 6 percent in FY20.
Impacted by the grounding of Boeing 737 max, SpiceJet's growth momentum slowed with Pax/ASK growing by 7/13 percent as its market share declined marginally by around 10bps MoM to 13.7 percent.
But Elara expects SpiceJet would potentially gain around a 5 percent market share in FY20.
"Given SpiceJet and Jet fly similar Boeing-737 narrow body aircraft for domestic operations, SpiceJet could acquire most of Jet's 79 grounded Boeing-737 (excluding 737-Max) on an operating lease even on lower rentals, as lessors would save around two months of non-utilisation instead if they lease to carriers outside India. SpiceJet would need merely a week for Jet's pilots training instead of around six months by other carriers using Airbus A320 (IndiGo, GoAir, Vistara & AirAsia)," it reasoned.
Cash-strapped Jet Airways (including Jet lite), which decided to stop all its operations last week, saw a 65 percent YoY decline in pax traffic to 0.7 million in March.Disclaimer
: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.