SPICEJET - Edelweiss Research

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SpiceJet’s (SJ) Q2FY20 EBITDAR (adjusted for forex loss) of INR1.4bn 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: 1) 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); 2) 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 4) non-fuel CASK (adjusted for forex loss) at INR2.5/km is flat QoQ—in line with estimate. We, however, cut Q4FY20E yield growth to 2% YoY (INR173 earlier) leading to 4.9% cut in TP to INR160 (8.0x FY21E EV/EBITDAR). Maintain ‘BUY’ with SJ as our top pick in the aviation space.

Stellar top-line growth to continue in near term

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 environment worsens; non-fuel CASK to decline

Yield expansion has slowed down with flattish yields expected in Q3FY20. Pricing

pressure due to flash sales by a rival airline depressed yield growth in a traditionally

strong quarter. 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 INR10bn in H1FY20.

Outlook & valuation: 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’.

RESULT UPDATE

SPICEJET Scorching growth

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Value

MARKET DATA (R: SPJT.BO, B: SJET IN)

CMP : INR 114

Target Price : INR 160

52-week range (INR) : 157 / 72

Share in issue (mn) : 599.7

M cap (INR bn/USD mn) : 68 / 948

Avg. Daily Vol. BSE/NSE (‘000) : 3,098.7

SHARE HOLDING PATTERN (%)

Current Q1FY20 Q4FY19

Promoters *

60.0 60.0 60.0

MF's, FI's & BKs 8.0 8.2 7.7

FII's 5.2 4.8 4.3

Others 26.9 27.0 28.0

* Promoters pledged shares (% of share in issue)

: NIL

PRICE PERFORMANCE (%)

BSE Midcap Index

Stock Stock over

Index

1 month 7.7 (5.1) (12.8)

3 months 8.6 (16.7) (25.3)

12 months (0.8) 39.3 40.1

Jal Irani +91 22 6620 3087

[email protected]

Vijayant Gupta +91 22 4040 7402

[email protected]

Financials (INR mn)

Year to March Q2FY20 Q2FY19 % Chg Q1FY20 % Chg FY19 FY20E FY21E

Total op. Income 28,480 18,809 51.4 30,021 (5.1) 91,347 135,696 215,217

EBITDAR (530) (438) NA 6,563 NA 12,869 19,546 40,468

Adj Profit (4,607) (3,894) NA 2,621 NA (2,526) 2,653 10,433

Adj Dil. EPS (7.7) (6.5) NA 4.4 NA (4.2) 4.4 17.4

Diluted P/E (x) 26.2 6.7

EV/EBITDAR (x) 13.3 8.7 4.2

In

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India Equity Research| Aviation

November 13, 2019

Aviation

2 Edelweiss Securities Limited

Table 1: Key operational drivers---EBITDAR missed estimates due to lower yields than expected

Source: Edelweiss research

Table 2: SOTP valuation


Q2FY20 Q2FY19 YoY (%) Q1FY20 QoQ (%) Edel estimates vs. estimates

ASKM (bn) 7.7 5.1 51.3 6.8 14.0 7.8 (0.5)

RPK (bn) 6.9 4.7 45.1 6.3 9.4 6.9 (0.8)

Load factor (%) 88.8 92.6 (3.8) 92.6 (3.8) 89.1 (0.3)

Yield (INR) 3.55 3.5 1.9 4.2 (15.5) 3.6 (1.6)

RASK (INR) 4.0 3.7 6.4 4.7 (14.8) 3.7 7.0

Operating CASK (INR) 3.7 3.8 (0.4) 3.5 8.5 3.3 12.5

Fuel CASK (INR) 1.5 1.7 (9.1) 1.5 (0.9) 1.5 2.3

CASK ex-fuel (INR) 2.2 2.1 6.4 1.9 15.8 1.9 20.4

EBITDAR/ASKM (INR) 0.2 (0.0) (904.1) 1.2 (81.3) 0.4 (40.8)

Lease/ASKM (INR) 0.7 0.5 29.1 0.7 1.0 0.7 2.6

Depreciation/ASKM (INR) 0.1 0.1 (34.6) 0.1 (16.4) 0.1 (6.7)

Interest/ASKM (INR) 0.0 0.1 (40.3) 0.0 23.7 0.0 52.4

CASK (INR) 4.6 4.5 1.6 4.3 6.8 4.1 10.7

CASK ex-fuel (INR) 3.1 2.8 7.9 2.8 11.0 2.7 15.2

RASK - CASK (INR) (0.6) (0.8) (21.8) 0.4 (254.2) (0.4) 43.6

Ancillary revenue 2,898 1,972 47.0 2,643 9.6 2,501 15.9

Ancillary revenue (%) 10.2 10.5 (2.9) 8.8 15.6 8.8 15.6

INR mn INR/share

Standalone FY21E EBITDAR 40,468 67

EV/EBITDAR (x) 8.0

EV 3,23,746 540

Less: Aircraft lease rentals capitalised at 7x 2,17,189 362

Less: Net debt (cash) 10,319 17

Equity value 96,238 160

Market Cap / CMP 69,536 116

% upside 38%

SpiceJet


Table 3: Key operational summary of the industry


Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 YoY (%)PAX (Mn)Indigo 13.5 14.3 15.1 15.5 16.9 17.1 18.7 18.8 21.0Spicejet 4.6 4.8 4.8 4.7 5.0 5.4 5.7 6.1 29.0Jet 7.0 7.1 6.8 6.9 6.6 NAYield (INR/km)Indigo 3.7 3.3 3.6 3.2 3.8 3.7 4.1 3.5 8.5Spicejet 4.0 3.7 4.1 3.5 4.1 4.0 4.2 3.5 1.9Jet 4.4 4.1 4.4 4.2 4.5 NARPKM (bn km)Indigo 14.4 15.2 15.9 16.3 18.4 19.0 20.7 20.2 23.9Spicejet 4.6 4.9 4.9 4.7 5.2 5.7 6.3 6.9 45.1Jet 12.0 12.5 11.8 12.4 11.8 NAPLF (%)Indigo 88.5 88.9 89.3 84.5 85.3 86.0 88.9 83.5 (1.3)Spicejet 94.0 95.4 94.5 92.6 90.4 91.1 92.6 88.8 (4.1)Jet 83.9 86.8 80.8 84.1 83.7 NARASK (INR/km)Indigo 3.8 3.4 3.6 3.2 3.7 3.6 4.0 3.4 4.4Spicejet 4.2 3.9 4.3 3.7 4.3 4.1 4.4 3.7 0.1Jet 4.3 4.1 4.1 4.2 4.4 NAFuel CASK (INR/km)Indigo 1.3 1.4 1.5 1.6 1.6 1.3 1.3 1.3 (18.2)Spicejet 1.3 1.4 1.6 1.7 1.7 1.3 1.5 1.5 (9.1)Jet 1.3 1.4 1.6 1.6 1.7 NACASK ex fuel (INR/km)

Indigo 2.0 2.1 2.3 2.3 2.1 2.2 2.5 2.9 26.9Spicejet 2.5 2.6 2.8 2.8 2.6 2.7 2.8 3.1 7.9Jet 3.0 3.1 3.4 3.4 3.1 NARASK-CASK (INR/km)Indigo 0.5 (0.1) (0.2) (0.7) (0.1) 0.1 0.2 (0.9) NASpicejet 0.4 (0.0) (0.0) (0.8) 0.0 0.0 0.1 (0.9) NA

Jet 0.0 (0.4) (0.9) (0.9) (0.4) NARASK-CASK (ex fuel)Indigo 1.8 1.3 1.4 0.9 1.5 1.4 1.6 0.4 (53.9)Spicejet 1.7 1.4 1.5 0.8 1.7 1.3 1.7 0.6 (26.6)

Jet 1.3 1.0 0.7 0.8 1.3 NA

Aviation


Financial snapshot (INR mn) Year to March Q2FY20 Q2FY19 % change Q1FY20 % change YTD20 FY20E FY21E

Total operating Income 28,480 18,809 51.4 30,021 (5.1) 58,501 135,696 215,217 Aircraft Fuel Expenses 11,621 8,451 37.5 10,284 13.0 21,905 50,232 81,285

Employee expenses 3,961 2,526 56.8 3,536 12.0 7,497 16,402 22,321

Selling and Dist. Exp. - - - - 2,489 2,987

Other expenses 13,429 8,270 62.4 9,638 39.3 23,067 47,026 68,155

EBITDAR (530) (438) NA 6,563 NA 6,032 19,546 40,468

Aircraft Lease Rentals 5,424 2,777 4,713 10,137 21,724 31,027

Depreciation 641 648 (1.1) 673 (4.7) 1,314 2,646 2,865

EBIT (6,596) (3,863) NA 1,178 NA (5,418) (4,824) 6,577

Interest 294 325 (9.6) 208 41.0 502 1,023 800

Other income 2,283 294 675.3 1,652 38.2 3,934 8,499 4,656

Add: Exceptional items

Profit before tax (4,607) (3,894) NA 2,621 NA (1,986) 2,653 10,433

Total Tax

Reported net profit (4,607) (3,894) NA 2,621 NA (1,986) 2,653 10,433

Adjusted Profit (4,607) (3,894) NA 2,621 NA (1,986) 2,653 10,433

No. of shares (mn) 600 599 600 600 600 600

Adjusted Diluted EPS (7.7) (6.5) NA 4.4 NA (3.3) 4.4 17.4

Diluted P/E (x) - - - - 26.2 6.7

As % of net revenues

Aircraft fuel expenses 41 45 34 37.4 37 38

Employee cost 13.9 13.4 11.8 12.8 12.1 10.4

Selling and Dist. Exp. - - - 0.0 1.8 1.4

Other operating expenses 47.2 44.0 32.1 39.4 34.7 31.7

EBITDAR (1.9) (2.3) 21.9 10.3 14.4 18.8

Depreciation 2.3 3.4 2.2 17.3 1.9 1.3

Aircraft lease rentals 19.0 14.8 15.7 2.2 16.0 14.4

Interest expenditure 1.0 1.7 0.7 0.9 0.8 0.4

Reported net profit (16.2) (20.7) 8.7 (3.4) 2.0 4.8

SpiceJet


Company Description

Spice Jet is one of India's leading domestic low-cost carriers. Whilst the company is amongst

the most efficient operators in the domestic airspace, Spice Jet has undergone financial

restructuring. It currently operates 76 fleet (62 leased B737-800) in FY19 commanding

~12.6% domestic market share.

Investment Theme

Revenue maximisation an appropriate strategy at current scale

SJ’s revenue maximisation strategy has been backed by tactical pricing and dynamic revenue

management which has successfully propped occupancy (industry best PLF of >90% plus for

30 consecutive months). The company’s yield is almost similar to IndiGO, but superior asset

utilisation ensures that it earns 10% higher revenue per seat flown (as of FY18). Unlike

competition, SJ’s current scale (smaller fleet) prevents cannibalisation, thereby maximising

revenue. This, coupled with obsessive focus on ancillary revenue generation, has paid rich

dividends.

Next big focus on industry leading cost structure

Shirking legacy issues and to ensure structural cost advantages, management is

restructuring its long-term contracts. Towards this, it is working with lessors and other

service providers to rationalise its cost base. Moreover, SJ has sealed a 205-aircraft order to

lower ownership costs and avail structural advantages.

Key Risks

Sharp uptick in ATF prices (accounted for 40% of revenue in past) and INR depreciation (bulk

of cost is USD denominated) will impact profitability given high price sensitivity of the Indian

consumer leaving limited ability to pass on costs.

Economic slowdown exerting pressure on demand for corporate / leisure travel will impact

load factor and hence profitability given the high operating leverage structure of the airline

business. Failure to maintain occupancy levels at 90% plus any demand weakness will

pressurise RASK and hence pose a risk to earnings/valuations.

Uncertainty and unpredictability in policy/regulatory framework remains a concern. Adverse

taxation structure will drive up cost of doing business, hurting profitability.

Existing airports at Indian metros like Mumbai, Chennai and Kolkata running at peak

capacity could prove to be bottlenecks for growth.

Aviation


Financial Statements

Income statement (INR mn)

Year to March FY18 FY19 FY20E FY21E

Net revenue 77,951 91,347 135,696 215,217

Aircraft fuel expenses 24,326 34,453 50,232 81,285

Employees Costs 8,626 10,570 16,402 22,321

Selling and Dist. Exp. 1,891 2,074 2,489 2,987

Operating expenses 25,180 31,382 47,026 68,155

Total operating expenses 60,022 78,479 116,150 174,748

EBITDAR 17,929 12,869 19,546 40,468

Aircraft Lease Rentals 10,369 13,010 21,724 31,027

Depreciation 2,312 2,562 2,646 2,865

EBIT 5,248 (2,704) (4,824) 6,577

Less: Interest Expense 922 1,313 1,023 800

Add: Other income 1,340.8 1,490.4 8,499.18 4,656.32

Profit Before Tax 5,667 (3,161) 2,653 10,433

Extraordinary item - (635) - -

Reported Profit 5,667 (3,161) 2,653 10,433

Exceptional Items - (635) - -

Adjusted Profit 5,667 (2,526) 2,653 10,433

Shares o /s (mn) 599 600 600 600

Diluted shares o/s (mn) 599 600 600 600

Adj. Diluted EPS (INR) 9.5 (4.2) 4.4 17.4

Adjusted Cash EPS 13.3 (1.0) 8.8 22.2

Common size metrics


Aircraft fuel expenses 31 38 37 38

Non-fuel expenses 45.8 48.2 48.6 43.4

EBITDAR margins 23.0 14.1 14.4 18.8

EBIT margins 6.7 (3.0) (3.6) 3.1

Net Profit margins 7.3 (2.8) 2.0 4.8

Growth ratios (%)


Revenues 25.9 17.2 48.5 58.6

EBITDAR Growth 19 (28) 52 107

Adjusted Profit 44.5 - - 293.3

EPS 44.5 - - 293.3

Key Assumptions


Macro

GDP(Y-o-Y %) 6.5 7.1 7.6 7.6

Inflation (Avg) 3.8 4.0 4.5 4.5

Repo rate (exit rate) 6.0 6.5 6.8 6.8

USD/INR (Avg) 64.5 69.9 72.0 72.0

Sector

Domestic pax growth(%) 21.3 10.0 32.6 51.1

Domestic ASKM growth(%) 18.7 14.4 43.5 55.5

Domestic oil price(INR/Ltr) 55.3 68.2 67.2 69.8

Company

Average fleet size(No) 56.3 66.9 99.4 137.9

Avg. flying hours (Hrs) 9.6 9.5 9.0 9.5

Employee Exp. Growth(%) 28.1 22.5 55.2 36.1

S&D Exp/pax (INR) 250 250 250 250

Airport chg/dep (INR) 47,759 48,153 54,153 53,000

Maint. Cost/B Hr (USD) 932 926 904 911

Lease rent/Aircrart (USDmn) 3.9 3.0 2.5 3.4

Pax growth (%) 21.3 10.0 32.6 51.1

Pax yield/RPKM 3.8 3.9 4.0 4.1

Cargo rev as % of pax 11.3 13.2 15.3 15.8

SpiceJet


Peer comparison valuation

Market cap Diluted P/E (X) EV/EBIDTAR ROAE (%)

Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E

SpiceJet 948 25.7 6.5 8.7 4.2 (121.6) 239.2

InterGlobe Aviation (IndiGo) 7,887 39.4 17.5 10.2 6.5 18.8 32.5

Median - 25.7 6.5 9.3 6.5 3.1 32.5

AVERAGE - 21.2 8.4 9.4 5.9 (33.3) 88.9


Cash flow metrics


Operating cash flow 10,458 3,426 14,382 25,787

Financing cash flow (1,404) (2,094) (4,023) (3,400)

Investing cash flow 333 (1,861) 499 (3,344)

Net cash Flow 9,388 (529) 10,858 19,043

Capex (5,568) (2,412) (8,000) (8,000)

Profitability and efficiency ratios


ROAE (%) (173.8) 160.6 (121.6) 239.2

ROACE (%) 63.8 (9.4) 33.2 67.4

Inventory Days 5 5 5 4

Debtors Days 3 16 12 4

Payable Days 31 35 35 33

Cash Conversion Cycle (22) (14) (19) (25)

Net Debt/Equity (17.7) (2.9) 4.1 (2.6)

Operating ratios


Total Asset Turnover 11.7 11.0 19.2 19.9

Fixed Asset Turnover 4.8 5.7 7.3 9.0

Equity Turnover (23.9) (46.4) (62.2) 49.3

Valuation parameters


Adj. Diluted EPS (INR) 9.5 (4.2) 4.4 17.4

Y-o-Y growth (%) 44.5 - - 293.3

Adjusted Cash EPS (INR) 13.3 (1.0) 8.8 22.2

Diluted P/E (x) 12.3 - 26.2 6.7

P/B (x) - - - 7.3

EV / Sales (x) 1.9 1.9 1.3 0.8

EV/EBIDTAR 8.4 13.3 8.7 4.2

EV 78,162 79,886 79,886 79,886

Balance sheet (INR mn)

As on 31st March FY18 FY19 FY20E FY21E

Share capital 5,995 5,997 5,997 5,997

Reserves & Surplus (6,424) (9,504) (6,851) 3,581

Shareholders' funds (430) (3,507) (854) 9,578

Long term borrowings 6,510 5,566 3,566 1,566

Short term borrowings 3,574 5,531 4,531 3,931

Total Borrowings 10,084 11,098 8,098 5,498

Def. Tax Liability (net) (291) (343) (343) (343)

Sources of funds 9,364 7,247 6,900 14,733

Tangible assets 15,937 15,908 21,262 26,398

Intangible Assets 40 129 129 129

Total net fixed assets 15,978 16,037 21,391 26,527

Current Investments 1,013 4 4 4

Cash and Equivalents 1,458 779 11,637 30,680

Inventories 1,244 1,373 2,032 3,058

Sundry Debtors 852 7,144 1,859 2,948

Loans & Advances 11,806 333 333 333

Other Current Assets 8,580 21,937 21,938 21,939

Current Assets (ex cash) 22,481 30,788 26,163 28,278

Trade payable 7,033 10,590 15,676 23,584

Other Current Liab 24,533 29,769 36,619 47,171

Total Current Liab 31,565 40,360 52,295 70,756

Net Curr Assets-ex cash (9,084) (9,572) (26,132) (42,477)

Uses of funds 9,364 7,247 6,900 14,733

BVPS (INR) (0.7) (5.8) (1.4) 16.0

Free cash flow (INR mn)


Reported Profit 5,667 (2,526) 2,653 10,433

Add: Depreciation 2,312 2,562 2,646 2,865

Others 13,499 6,815 (7,477) (3,856)

Gross cash flow 21,477 6,851 (2,178) 9,441

Less: Changes in WC 11,019 3,426 (16,560) (16,346)

Operating cash flow 10,458 3,426 14,382 25,787

Less: Capex 5,568 2,412 8,000 8,000

Free Cash Flow 4,890 1,014 6,382 17,787

Aviation


Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available


Holding – Top10 Perc. Holding Perc. Holding

Singh ajay 59.6 Franklin resources 3.38

Bhargava meenakshi 2.45 Reliance capital tru 1.92

Jhunjhunwala rakesh 1.67 Bhargava vijay 1.66

National westminster 1.61 Sbi funds management 0.94

Hdfc asset managemen 0.84 Aditya birla sun lif 0.45


Additional Data

Directors Data Mr. Ajay Singh Chairman and Managing Director Mr. R Sasiprabhu Independent & Non-Executive director

Mrs. Shiwani Singh Promoter Director (Non-Executive) Mr. Anurag Bhargava Independent director

Dr. Harsha Vardhana Singh Independent director

Auditors - M/s S. R. Batliboi & Associates LLP


SpiceJet


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Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research

[email protected]

Coverage group(s) of stocks by primary analyst(s): Aviation

InterGlobe Aviation (IndiGo), Jet Airways (India), SpiceJet

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 161 67 11 240 * 1stocks under review

Market Cap (INR) 156 62 11

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

Recent Research

24-Oct-19 Interglobe Aviation (INDIGO)

Seasonal weakness dampens earnings; Result Update

1,665 Hold

09-Oct-19 Aviation Seasonal weakness to take a toll ; Result Preview

13-Sep-19 Aviation Flight recorder: Leaders defy slowdown; Sector Update

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

One year price chart

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SpiceJet

Aviation


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Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No

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SPICEJET - Edelweiss Research

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