In a response to the appeal filed by Sahara India challenging its earlier single-bench order which had held that Jet Airways was liable to pay R14.5billion for the purchase of Sahara Airlines (now Jetlite) in 2007, the Bombay High Court admitted Sahara?s claim recently and fixed the matter for hearing on July 19. Sahara said that the court had earlier erred in holding that Jet Airways was liable to pay only the renegotiated amount of R14.5 billion. Although at this stage, Jet seems confident of a favourable verdict, the actual outcome remains to be seen.
IndiGo is all set to begin international flights from September 1 targeting high-density traffic international routes. Media reports that IndiGo will start with Dubai, Singapore and Bangkok at initial return fares of R9,999 intensifying competition with other Indian and overseas airlines on these lucrative short-haul routes.
Clearly this is a threat to Jet?s international business. At present, including Jet, 5 airlines fly the Delhi-Dubai route, 7 fly the Delhi-Bangkok route, 3 fly the Delhi-Singapore route, 6 fly the Mumbai-Bangkok route and 5 airlines fly the Mumbai-Dubai route Evidently, all these routes are already highly competitive and currently only one low cost carrier?namely Thai AirAsia flies the Delhi-Bangkok route.
Renewed competition from IndiGo on these high density traffic international routes could lead to a fresh price war, at least initially. With irrational pricing by Air India pressurising domestic yields for Jet, similar threats from IndiGo on international routes is clearly no good news.
As per media reports, Jet has put its plans to raise funds from the market on hold on rising fuel price and low investment appetite in the sector. We had highlighted this risk earlier arguing that large debt repayments for Jet seemed a remote possibility in FY12.Fund-raising options like QIP might not be possible post the FIPB?s directives on promoter dilution; given current prices, Jet would be unwilling to come to the market for a rights issue.
We continue to value Jet using relative valuation metrics with a target price of R500. At our target, Jet would trade at 7x EV/Ebitdar, 2.5x book and 22x EPS on our FY13 estimates. Since our target price implies 12% potential return , we maintain our Neutral(V) rating on the stock.
?HSBC