SpiceJet’s (SJ) Q2FY20 EBITDAR (adjusted for forex loss) of Rs. 1.4bn came below estimate due to lower yield.
SpiceJet’s (SJ) Q2FY20 EBITDAR (adjusted for forex loss) of Rs. 1.4bn came below estimate due to lower yield. Yield growth of 1.9% YoY belied our 3.5% YoY growth estimate on account of rising competitive intensity induced pricing pressure. Key highlights: fuel CASK fell 0.9% QoQ (estimate 3.3% QoQ) due to on-boarding of smaller B-737 NGs (168 seats) versus SJ’s larger aircraft (189 seats); we expect yields to remain flat YoY in Q3FY20; 3) capacity growth/ PLF at 51%/89% in line with estimate.
Return of 737 Max is expected from Q1FY21, which will boost growth; and non-fuel CASK (adjusted for forex loss) at Rs. 2.5/km is flat QoQ— in line with estimate. We, however, cut Q4FY20E yield growth to 2% YoY (Rs. 173 earlier) leading to 4.9% cut in TP to Rs. 160 (8.0x FY21E EV/EBITDAR). Maintain ‘Buy’ with SJ as our top pick in the aviation space.
While FY20E RPKM growth at 44% has been boosted by addition of 30 B-737 NGs taken from Jet, FY21 growth will be buttressed by addition of 737 Max. Several slots, currently lying idle due to 737 Max grounding, will be serviced through these aircraft. Higher capacity (220 seats versus 180 in 737 NG) along with greater fuel efficiency (20% lower than 737 NG) will also boost profitability. While PLF has declined QoQ to 88.8%, this is primarily driven by lower international PLF (78%) due to payload restrictions on 737 NG.
We believe, as the 737 Max is on-boarded for international flights, PLF will increase.
Yield expansion has slowed down with flattish yields expected in Q3FY20. Oil prices are, however, expected to remain muted in Q3 (ATF price flat QTD), which will aid profitability. We expect SJ to continue to make savings on non-fuel costs, which will accelerate as higher capacity 737 Max aircraft are on-boarded. The company also generated significant FCF of Rs. 10bn in H1FY20.
Valuation comfort versus Indigo; retain ‘BUY’.SJ will overtake Indigo in terms of 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 a 35% discount to Indigo, at 4.2x FY21E EV/EBITDAR. We maintain ‘Buy/SO’.