SpiceJet may see 15% upside in near term: Angel Broking

Sharan Lillaney of Angel Broking, says that the SpiceJet management was always eyeing to sell stake to private equity (PE) or an airline at around Rs 75-80 per share. If the deal go through this will help SpiceJet to get into the international market and have a strong partner. 

Also read: Etihad deal to change market dynamics: ex director, Jet Below is the edited transcript of his interview to CNBC-TV18. Q: What is your view on SpiceJet and if indeed there is a stake buy that comes through from Qatar Airways. How would you approach the stock?
A: The management was always eyeing to sell stake to private equity (PE) or an airline at around Rs 75-80 per share. If the deal go through this will help SpiceJet to get into the international market and have a strong partner. The airline is expected to post profit in this quarter after a loss in the last quarter plus loss in the last year similar quarter. This stock can see an up side of 15 percent.   Q: We could see two strong contenders join up with SpiceJet and Jet. What does that do to the field itself? Will you see more undercutting of rates or better expansion and volume growth? How will this field look assuming both these players come in and both the deals are signed. How will this field look a year from now?
A: India has around 380 aircrafts and post Kingfisher shut down India has only around 320 aircrafts. So, the capacity needs to be added to cater to the demand growth that we will see in next 3-5 years from now. So, this will not result in high competition or undercutting of rates. It will help these airlines to grow in a sustainable manner over a period of time, which is very important for the aviation sector right now and I expect these airlines to continue making profits for the next one or two years at least. Q: In last couple of days we have seen these frenzied undercutting or attractive offers anywhere in India for around Rs 2000 and the response has been excellent. With such discount offers do you suspect that they will be able to be profitable in Q3 and Q4?
A: Generally in Q3, the load factor increases to 80-90 percent levels and it dips in Q4. So, to keep the load factors more than 80 percent this marketing gimmick is adopted. So, basically instead of having 70 percent load factors at a high yields they are expecting it to increase the load factors to around 80 percent by selling off the extra 10 or 50 percent seats at cost. Q: The entire industry is worried that once Etihad comes on board with the Jet-Etihad deal then the dynamics of the entire industry could change with Etihad bringing in its money muscle, exploiting the bilateral rights etc. On Jet itself, how much do you think it could go up in terms of both capacities, load factors once Etihad comes on board and even with respect to the stock price what is your approach. Would you advice investing into the stock now?
A: Since the last two years Jet’s management has been very clear that they are not interested in increasing their market share or adding on capacity to increase market share. They are more interested towards making sustainable profits over a long period of time and even if Etihad comes in – they don’t want to come in and invest money so that airline can do undercutting and result in losses for the all aviation companies.
So, I think this investment will be a sustainable and solid investment rather than putting in money power and undercutting the airline. I think if the deal happens it should happen around Rs 800 odd levels given it a 0.3-0.4 times market cap to sales valuation. Q: Do you have a buy or sell on any of these stocks? What kind of price levels are you looking at?
A: We had a buy call on SpiceJet at around Rs 21 with a target of Rs 46, which it is trading around. We still have a hold on it and expect it - if any deal happens we expect the stock to at least give you a 30-40 percent upside from the current levels.