Fly High In The Investment Sky With Spicejet

Country’s aviation sector has witnessed a healthy growth 12.47 per cent when it comes to passenger traffic at 19.01 crore in FY15. The increment in income and low cost flying has reflected into the passenger growth at CAGR of 11.6 per cent over a decade. India aims to become the third largest aviation market in the world by 2020 and the largest by 2030. SpiceJet, the fourth largest domestic airliner by market share has now come into the focus and the share price of the no-frill airline witnessed a boost in the markets. We, here at Dalal Street Invetment Journal, have analysed SpiceJet as an interesting scrip for our readers.

SpiceJet, the no-frill airline has made flying more affordable for more countrymen than ever before. It operates 291 daily flights to 40 various destinations, including 34 domestic and six international locations. Its network is armed with a fleet of 25 Boeing 737NG and two Airbus A320 family aircrafts, along with 14 Bombardier Q-400s. SpiceJet Cargo, a division of SpiceJet airlines, offers air freight transportation across India.  The company offers the capability to ferry between 2 to 3.5 tons of cargo per flight with around 264 scheduled daily flights, which amounts to a total capacity of approximately 300 tons on a daily basis. SpiceJet Cargo offers products and services, such as general cargo services that cater to all types of general cargo, the exceptions being valuable cargo and goods classified under dangerous goods. The Company offers domestic and international charter services too.

Successful business model

Globally, successful low cost carriers such as Southwest Airlines, Ryanair and JetBlue have followed the one-aircraft model. SpiceJet is also having similar strategy. Meanwhile, the company has Bombardier Q400s planes catering its regional strategy. Single aircraft operation model ensures lower operational cost. Airliners does not need to have different sets of cockpit crews, engineers, varied contracts and additional cost of maintenance, repair and overhauling expenses. Additionally, SpiceJet regularly offers flash sales to increase its market share. Recently the company revealed its new brand look with tagline of ‘Red. Hot. Spicy’ on occasion of its 10^th anniversary. 

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Recently, Government of India introduced an optional Aviation Proposal to cap fare at Rs 2500 for every one-hour flight. Responding to the development, Kiran Koteshwar, Chief Financial Officer of Spicejet said that the company is comfortable for such a low fare option for short flights as being an affordable airline service. The proposal also states that the government will charge two per cent of viability gap funding (VGF) to support connectivity between small towns across the country. As far VGF is a concern, SpiceJet is expecting increase in demand for its regional services in future. The VGF will enable infrastructural growth across the regional areas. The sector is expected to witness better growth when infrastructure and smaller airports become world class. In the month of December, government is expected to finalise the proposed aviation policy.

Favorable crude oil price these days has been making the airliners smile. Companies in this sector have been able to witness turnaround in their financials. The crude oil prices are lowered to around USD 50 per barrel since last nine months. We expect the crude price to remain low at least for next one year considering current global scenario and developments in the OPEC. On the crude oil front, the CFO is also confident that low fuel cost environment will stay in pact with one to two years from now onwards.

Steady and focused Expansion Plan

Discussing about expansion plans, Koteshwar shared SpiceJet’s vision towards its expansion plans in near future. The company is going to order 100 to 150 new aircrafts and is in talks with both Boeing and Airbus. Its 26 aircrafts are going to be discarded during 2018-19. The company is aiming the current expansion at a steady manner with a clear focus in mind as the CFO claimed. The entire order for new set of aircrafts will be spread over a period of 8 to 9 years, he added. When asked about the funding for the expansion plans for the airline, Koteshwar said that the company is not thinking of any equity dilution via the Follow Up Offer (FPO) at this point of time. The company is not going to utilise internal accruals for the forthcoming new order. The management also clarified that the company is in talks with the both Boeing and Airbus for the airplane orders. Once the deal gets finalised, the management will take decision over funding.

Recently, Competition Commission of India (CCI) imposed penalty on various airlines, including SpiceJet for alleged concerted action in relation to cargo fuel surcharge (FSC). The fine amount is Rs 42.48 crore. Though the company clarified that the matter is in the court, it is not involved in such type of practices.

Spicejet has exposure of around 14 to 15 per cent towards ancillary segment of the total revenue and rest is passenger revenue, according to the management of company. The company has Bombardier aircrafts for its regional routes.

SpiceJet witnessed net profit of Rs 22.52 crore in Q4FY15 against net loss of Rs 322 crore in Q4FY14. However, the company's bottomline stood positive mainly due to exceptional gain of Rs 61.36 crore because of insurance claim on one of the Bombardier Q-400 aircraft during the Q4FY15. SpiceJet’s achieved actual turnaround in financials reflected during the Q1FY16 as an effect of lower crude oil prices. The company witnessed net profit of Rs 71.85 crore in Q1FY16 while it had posted net loss of Rs 124 crore in Q1FY15. However, its topline remained under pressure as SpiceJet revived its fleet size to tackle losses and has cut its fleet size during the last financial year. The company now has total 41 fleet size as of Q2FY16.

On latest quarter result, SpiceJet's topline declined 28.26 per cent to Rs 1040 crore in Q2FY16 on yearly basis due to seasonally weak quarter. The company's total expenditure decreased by 39.57 per cent to Rs 1038 crore in Q2FY16 on yearly basis. Its total expenditure decreased predominantly due to a 57.12 per cent reduction in power & fuel expense and 25.26 per cent reduction in other expense during the quarter.
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Spicejet reported operating profit of Rs 2.46 crore in Q2FY16 against operating loss of Rs 267 crore in Q2FY15. The reduction in crude oil prices globally helped company to register positive operational profit during the quarter. The company's other income increased by 158.99 per cent to Rs 72.75 crore in Q2FY16 as compared to same period in previous financial year. Its interest cost decreased by 46.56 per cent to Rs 21 crore in Q2FY16 on yearly basis. Spicejet reported net profit of Rs 23.79 crore in Q2FY16 against net loss of Rs 310.45 crore in Q2FY15. The company is witnessing positive bottom line consecutive three quarters.

Considering full year result, Spicejet revenue increased about 12.13 per cent CGAR in last five years and stood at Rs 5202 crore in FY15. Though the company has been witnessing operating loss since last four consecutive years, it may witness a complete turnaround and post operating profit in current fiscal year as H1FY16 was good for Spicejet.

Aviation sector witnessed pretty much increase in passenger traffic and cargo handling. The growth is also backed by strong economic growth as manufacturing, service, hotel and tourism sectors are buzzing. As we expect crude oil will not move upwards suddenly as it has settled down to around USD 50 per barrel since last nine months, even if crude reaches up to USD 75 to 80 per barrel, SpiceJet will function operationally well and will show positive bottom line. Therefore, SpiceJet scrip will show good financial performance till the crude oil prices remain at low over next one year. On the backing of demand and lower crude oil, we recommend to buy SpiceJet stock.

Happy investing this new year!