Downgrade Jet Airways to ‘add’; FY19 loss to stand at Rs 1,500 crore

By: | Published: May 26, 2018 1:10 AM

Domestic Revenue per passenger (pax) declined by 9.4% Y-Y while International revenue per pax increased by 5.6% Y-Y in Q4FY18. Overall consolidated fares declined by 1.1% Y-Y to Rs 6,849 per pax. While increase in fuel costs were expected, the negative surprise came in repair and maintenance (up 58% Y-Y) and other expense (up 43% Y-Y).

Jet Airways (Jet) reported consolidated loss of Rs 1,040 crore, sharply impacted by domestic fare pressure and higher costs. Domestic Revenue per passenger (pax) declined by 9.4% Y-Y while International revenue per pax increased by 5.6% Y-Y in Q4FY18. Overall consolidated fares declined by 1.1% Y-Y to Rs 6,849 per pax. While increase in fuel costs were expected, the negative surprise came in repair and maintenance (up 58% Y-Y) and other expense (up 43% Y-Y).

The management alluded it to the impact of foreign exchange (Rs 160 crore) and one time maintenance charge (Rs 250 crore). The higher maintenance cost was largely due to engine shop visits of wide bodies outside the third party maintenance contracts. Though the cost print remains disappointing in Q4FY18, the annual cost reduction targets remain unchanged. As such, the thesis of cost improvement continues to be valid for Jet, more so considering that the major reductions are supposed to start from 1QCY19.

However, the competitive pressure in domestic market along with adverse crude/currency effects could more than nullify all cost improvements in FY19. We estimate a loss of Rs 1,500 crore in FY19 under present crude/currency/fare scenario. This will also lead to higher debt (also indicated by management).

Net debt increased by Rs 230 crore to Rs 8,150 crore in Q4FY18. High operating leverage poses a veritable chance of a sharp swing in profits in FY20 if macro conditions do not worsen. As such, the FY20E EBITDA/PAT stands at Rs 1960 crore/Rs 800 crore. Jet plans to induct 11 B 737 Max by end of FY19. We continue to build 9% capacity/pax growth per annum over FY19/20E. Downgrade the stock to ADD from Buy.

The cost improvement measures, gradual increase in domestic fares (higher in the corporate segment where Jet has highest presence) and improvement in international segment from a low fare base along with benefits of international tie ups are available levers to the company. Yet, the cost perils remain challenging, more so as it can deteriorate the balance sheet drastically.

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