Stock corner: Maintain ‘buy’ on Spicejet with target price of Rs 160

December 07, 2019 5:14 AM

We recently met Mr Ajay Singh, CMD of Spicejet (SJ) and were enthused by his plans to leverage the near-term weakness in the industry to improve the airline’s profitability.

SpiceJet continues to use forward ticket sales to boost cash collection and anticipates adequate liquidity without raising further capital.

By Edelweiss Finance

We recently met Mr Ajay Singh, CMD of Spicejet (SJ) and were enthused by his plans to leverage the near-term weakness in the industry to improve the airline’s profitability. His key perspectives: B-737 Max: A renegotiation of Max orders with Boeing for higher discount is on the anvil, which will boost sale and lease-back gains. Being the largest 737 Max customer globally with 200 plus plane orders, we believe, imparts SJ significant leverage in potential renegotiation; Liquidity: With robust cash collection from advance ticket sales, especially during the peak December quarter, SJ does not anticipate near-term liquidity constraints; and Yields: SJ’s yields improved in November as fare hikes did notimpact demand. We expect significant boost to profitability as SJ replaces older 737 NG with 15% higher fuel efficient and lower maintenance costMax planes in Q4FY20.

Mr Singh expects 737 Max deliveries to commence during Q4FY20, which should boost profitability due to their higher fuel efficiency (15%), seat capacity and lower maintenance costs.

SJ continues to use forward ticket sales to boost cash collection and anticipates adequate liquidity without raising further capital. The company also expects to recover profits foregone/costs incurred due to 737 Max grounding from Boeing, which will add to liquidity. With yield environment improving in November, it expects to turn profitable in Q3FY20 aided by lower fuel prices. We expect yields to remain flat YoY in Q3FY20.

We expect SJ to overtake Indigo in passenger growth (FY20: 44% versus 26%) with take- over of Jet’s aircraft. Non-fuel CASK gap versus Indigo has narrowed to 5% in Q2FY20, which is ahead of our estimate. Despite this, SJ trades at 35% discount to Indigo, at 4.1x FY21E EV/EBITDAR. We maintain ‘Buy/SO’ with TP of Rs. 160/share.

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