Expect Jet to open at Rs 680-685 on Thursday: Tulsian

Optimistic on the latest development in the Indian aviation sector, SP Tulsian of sptulsian.com expects the share price of Jet Airways to open at about Rs 680-685 on Thursday. He believes the balance sheet of the carrier will improve from hereon after the infusion of Rs 1500 crore by the Abu-Dhabi based carrier Etihad.

“I don’t think the company will be able to utilise that money to reduce the debt. Instead that money will be used by the company or by the Jet to expand their global operations," says Tulsian in an interview to CNBC-TV18.
Meanwhile, Tulsian recommends SpiceJet as the only stock for investors interested in aviation space and is not surprised to see it move up by about 50 percent in next couple of weeks or so. Jet Airways today finalised its deal with Etihad selling a minority for Rs 2060 crore. Jet will sell 27.3 million shares at Rs 754.74 each on a preferential basis to Etihad. Below is the verbatim transcript of SP Tulsian’s interview on CNBC-TV18 Q: What is your initial analysis of the valuations that have been given to this deal and how do you see the stock move tomorrow?
A: Excellent valuations given by Etihad, because earlier I was giving a price indication of about Rs 680 likely to be given to Etihad but it has come at Rs 754. If you take the enterprise value, the market cap works out to Rs 8500 crore. If you add the existing debt in the books of the company it is Rs 10500 crore and the liabilities on account of the supplier’s liability and trade payable, the total valuation works at Rs 26,000-27,000 crore which works out to USD 5 billion.
It is a very good valuation given by Etihad in spite of some the assets having hived off by the Jet Airways. However, that must have got utilised by them for retiring some of the debt. Even if you consider the situation prevailing as on December 31, the valuation or the enterprise value given USD 5 billion is very good. So, this will be seen very positive.
Since Etihad has come as a joint promoter or 24 percent stake of the expanded equities been given to them it will be followed by an open offer. Open offer because the float is very low, open offer will be for 26 percent, the entire float is going to get accepted under the open offer. So, under the existing or the ballpark figure or the thumb rule which we take that the prevailing market price minus 10 percent or minus 6-8 percent should be the market price. So, I presume the share will rule at about Rs 680-690 after this news immediately to be seen tomorrow. Q: In terms of exact debt reduction and impact on financials, how can it move for Jet Airways because it has been sitting on a huge debt of close to Rs 11,000 crore and has been trying to reduce its debt for many quarters now? With Etihad finally coming on board, how will the financials improve?
A: I don’t think the fresh infusion of Rs 1500 crore by Etihad into the company will be largely utilised for the debt reduction. This is because the supplier’s liability that has been hard press and if you see the current liability scenario which has been very precarious of about Rs 8000-8500 crore. So, the fresh infusion of Rs 1500 crore will largely get utilised by Jet Airways for retirement of that.
I don’t think that now the Rs 9000 crore debt will be seen too big for the company because the market cap is of Rs 8000-8500 crore and on that scenario or maybe on the net worth of Rs 2500 crore, I am not too optimistic on the debt reduction going forward. However, the balance sheets will improve from hereon because of this infusion of fresh Rs 1500 crore. Q: In terms of the entire aviation pack, how do you see the game change for the sector because we have seen SpiceJet improve its market share quite a bit? Even with respect to the overall performance, you are seeing a lot of improvement in the entire system, but as an investor where would you put your money now, in which stock?
A: There is only one stock available now and that is SpiceJet. The financial situation or valuation of SpiceJet is very good, debt of less than Rs 1000 crore, market cap of Rs 1000 crore, supplier’s liability of Rs 2000-2500 crore. So, when you make a comparative valuation call between Jet Airways and SpiceJet, SpiceJet has lot of potential to go up.
I won’t be surprised to see the stock go up by 100 percent. This is because earlier people were taking a call on Kingfisher, also seen as a suitor by the foreign airlines but that is not likely to happen now considering the debt situation taken by the bankers. Maybe the next airlines which will be looking to come into India has to open the dialogues with SpiceJet and that will give a big boost to the share price of SpiceJet.
I am very optimistic and I am expecting the share price of Jet to open at about Rs 680-685 tomorrow, similar run up will be seen in SpiceJet as well. I won’t be surprised to see even SpiceJet moving up by about 50 percent in next couple of weeks or so.
_PAGEBREAK_ Q: The global exposure for Jet Airways will now increase, in fact Jet was increasing its flights via Abu Dhabi, it already has a code-sharing agreement with Etihad but in terms of a market share dynamics how do you think things will change now that Etihad comes on board?
A: The infrastructure, the expertise and the network of Etihad will be complemented by Jet which will definitely increase its presence in the global arena. The domestic business and the international business both have been equal for Jet Airways in terms of profitability. So, the focus going forward hereon will be very much on the global turf and I don’t think the company will be able to utilise that money to reduce the debt. Instead that money will be used by the company or by the Jet to expand their global operations.
The kind of assurances which they must have got from the government was very important because Etihad had been fussy of their assurance from the Indian government with respect to their investment. They were worried that the fate of their investment should not happen on the line of the Etisalat.
For last couple of weeks people were speculating the deal is not going consummate in next three months. So, those assurances must have come from the government and that itself is very assuring for the other deals that are going to happen hereon. This is why I have taken a positive view on SpiceJet as well, increase in the global operations of Jet Airways is bound to happen. Q: You said the fair value of the stock stand at about Rs 680-690 because of this deal but overall, we are seeing the operating environment improve quite a bit in the entire sector. Crude prices have come down and that will help in terms of cutting down their fuel cost, the fleet supply has been lower, yields have improved as well. As a recommendation would you advice putting fresh money into this sector as a whole?
A: Due to very limited place available, Rs 680 is a fair price for Jet Airways. We will see that kind of price prevailing maybe for next couple of months because the entire procedure of obtaining the permissions will take two to three months. Share is going to rule within the range of Rs 675-700, so you won’t have much opportunity to play on Jet going forward. However, in SpiceJet I see a lot of potential.
If you see the price now at about Rs 32, I won’t be surprised to see the share price of SpiceJet moving to as high as Rs 50 maybe in next couple of weeks. You are only left with the other aviation stock that is SpiceJet. I don’t think that there is any point in playing on Kingfisher Airlines though we are going to see some sentimental impact coming on that stock. Also, people find it as a penny, traders find it interesting to play into the penny stocks and you can see that moving to double digits in the near-term. However, I will keep extremely positive stance on SpiceJet going forward which can give you a return of about 40-50 percent in next couple of weeks or so. Q: How would you sum-up the environment changing for the entire sector, now that this deal has come through?
A: Aviation sector will get vastly re-rated. None of the airlines in Asia are interested from Europe and the US, but there are many suitors who want to have some airlines as their partner in India. So, that will heat up from hereon. You only have one airline available in the form of SpiceJet.
Kingfisher may take about three to four months and even the process of coming back on the track of Kingfisher Airlines by Vijay Mallya will also start very soon. He will take proactive steps in bringing back the airlines on operational front. However, in the interim you will only have SpiceJet and we will hear the potential suitors coming in and talking, whether that happens on the Qatar Airways or other airlines as so many airlines are interested from the Asian region. So, very positive USD 5 billion deal for Jet is excellent valuation given for the aviation sector, aviation companies. Overall, positive bias will start building up for the aviation sector. There are very few suitors available but there will be many takers for these two airlines going forward. Q: Were you expecting the valuations to come in at Rs 754 a share? How much does this form in terms of the expanded equity, 24 percent, is this in-line with what the street was expecting or do you expect a big fillip on the stock tomorrow?
A: I was expecting this deal to happen at Rs 680 or so. Maybe a premium of 10 percent has been given by Etihad. However, in terms of the broader contours of the deal it was expected that 24 percent will be given by fresh issuance.
In the past, people have been talking because Naresh Goyal is holding 80 percent stake and to comply with the minimum public share holding norms, it was said that a part of stake will be given by Naresh Goyal from his personal holdings and will be made the fresh issue. However, since the fresh issue has been made of the entire quantity of 2.72 crore shares that will again be seen quite positive because the entire amount of Rs 2000 crore plus is getting infused into the company. Overall, the deal is on the expected line which the market has been expecting except for the valuation which I was taking at about Rs 680 or so.