SpiceJet PL Jan28-2016

8/17/2019 SpiceJet PL Jan28-2016

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Company ReporIndustry: Aviatio

Rohan Korde ([email protected])

+91-22-66322235

SpiceJet

On an upswing; initiate with a BUY


2/28

January 27, 2016 2

SpiceJe

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that

the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Contents

Page No.

Indian aviation sector, in a sweet spot ....................................................................... 4

Increasing Passenger traffic ............................................................................................................... 4

Increasing middle class, graduating to travel by flight ...................................................................... 4

Higher GDP growth can drive air travel ............................................................................................. 6

7th Pay Commission, another booster .............................................................................................. 7

PLFs to remain healthy despite capacity addition ............................................................................. 7

Draft aviation policy highlights growth potential ............................................................................ 10

Spicejet, outperforming the industry ....................................................................... 12

Highest PLF in the domestic carriers ............................................................................................... 12

Ancillary revenues to grow faster .................................................................................................... 13 In a strong road to recovery ............................................................................................................ 14

Serendipity at play .................................................................................................... 17

Fall in crude price ............................................................................................................................ 17

Cost reduction measures ................................................................................................................. 18

Financials .................................................................................................................. 19

3QFY16 results were impressive ..................................................................................................... 21

Valuations ................................................................................................................. 24

Risks ................................................................................................................................................. 24


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SpiceJet

Company ReportJanuary 27, 2016

Rating BUY

Price Rs90

Target Price Rs128

Implied Upside 42.2%

Sensex 24,492

Nifty 7,438

(Prices as on January 27, 2016)

Trading data

Market Cap. (Rs m) 53,950.5

Shares o/s (m) 599.5

3M Avg. Daily value (Rs m) 1135.4

Major shareholders

Promoters 52.70%

Foreign 3.28%

Domestic Inst. 9.02%

Public & Other 35.00%

Stock Performance

(%) 1M 6M 12M

Absolute 30.1 258.6 299.1

Relative 35.3 271.5 315.5

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2017 10.2 11.6 -12.0

2018 14.1 14.9 -5.5

Price Performance (RIC: SPJT.BO, BB: SJET IN)

Source: Bloomberg

0

20

40

60

80

100

J a n - 1

5

M a r - 1 5

M a y - 1

5

J u l - 1 5

S e p - 1

5

N o v - 1

5

J a n - 1

6

(Rs)

The Indian aviation sector is in a sustained growth phase on the back of multiple

levers like increasing load factor, sustained growth in passenger traffic and fall in

jet fuel prices. Lower industry fleet size and the continued propensity of Indian

travelers to gravitate towards Low Cost Airline Carriers (as against preferringalternative modes or Full Service Carriers) have led to higher Passenger Load

Factor (PLF) for the airline companies. Our positive stance on the sector is

further reinforced by the sharp fall in crude oil price which leads to not only

higher profitability, but eases up the working capital requirement.

In tune with the above, SpiceJet (SJ) offers the highest PLF in the industry after a

striking return to profitability in FY16 post four years of being in the red. In

addition to the aforementioned triggers, with its strategy to increase non

passenger related revenues, SJ is focusing on cargo services and other ancillary

services like food and beverage and this foray is expected to result in increasing

the share of cargo services revenues from 2.9% of sales in FY15 to 5.3% in

FY18E. Similarly, with its fleet size expected to increase on a steady basis from

43 in FY16 to 56 by FY18-end, there is ample scope to take advantage of the

growing passenger traffic.

With aviation companies performing better on parameters related to both

revenues and profitability we place an Overweight stance on the sector. As a

turnaround story, we believe Spicejet is in a strong position to provide the best

profitability growth in the sector, coupled with cheaper valuations as compared

to the industry leader Interglobe Aviation. We expect revenue CAGR of 11.3%

over FY15-18E and an EBITDAR CAGR of 79.3% over the same period.

We initiate coverage on SJ as our top pick in the sector with a ‘BUY’ rating. Ou

price target for SJ is Rs128 (based upon 12.5x FY17e EPS); at CMP it trades at

8.8x FY17e. At our price target, SJ trades at EV/EBITDAR of 4.5x FY17e.

Key financials (Y/e March) 2015 2016E 2017E 201

Revenues (Rs m) 52,448 48,431 58,581 72,2

Growth (%) (17.5) (7.7) 21.0 23

EBITDA (Rs m) (6,149) 5,552 8,024 10,6

PAT (Rs m) (7,300) 4,829 6,120 8,4

EPS (Rs) (12.2) 8.1 10.2 14

Growth (%) (35.0) (166.1) 26.7 37

Net DPS (Rs) — — —

Profitability & Valuation 2015 2016E 2017E 201

EBITDA margin (%) (11.7) 11.5 13.7 14

RoE (%) 64.6 NM NM N

RoCE (%) NM 183.9 166.7 167

EV / sales (x) 1.3 1.3 1.1 0

EV / EBITDA (x) (11.1) 11.6 7.7 5

PE (x) (7.4) 11.2 8.8 6

P / BV (x) (4.3) (7.4) (10.4) 16

Net dividend yield (%) — — —

Source: Company Data; PL Research


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SpiceJet

January 27, 2016 4

Indian aviation sector in a sweet spot

Increasing Passenger traffic

With an increased propensity of Indian travellers to gravitate towards airlines, the

domestic passenger traffic in India has increased at a CAGR of 9% over FY10-15 from

45.4m in FY10 to 69.8m in FY15. In comparison, Railway passenger traffic in India has

increased at a CAGR of just 4.3% over FY11-15 (6.6% for domestic aviation sector

over the same period). On a long-term basis, the passengers carried domestically by

airlines in India have grown at a CAGR of 8% over FY1989-FY2015.

Exhibit 1:

Domestic Passengers Carried by airlines (Nos)

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,00070,000,000

80,000,000

- - -

1 9 9 4

- 9 5

- - - - - - - - - -

Source: DGCA

Exhibit 2:

Passenger Load Factor

50%

55%

60%

65%

70%

75%80%

85%

- - - - - - - - - - - - - -

Source: DGCA

Increasing middle class, graduating to travel by flight

The non-suburban railway passenger traffic increased at a CAGR of 5.9% over FY01

13, while the passengers travelling in the non-ordinary or other than genera

category grew at a 10% CAGR over the same period. This category constitutes a high

potential catchment population for airlines.

Moreover, the increasing number of middle class as well as the ever increasing ticke

prices for Tier II and Tier III AC travel and other non-general categories by Railways

will help bolster aviation passenger traffic ahead.

Railway fares have also increased over a period of time and the average AC 1st class

earnings per passenger journey were Rs1661 in FY13, while those for AC 3-tier were

Rs744. These fares trend even higher on some of the high density routes, and on

premium category train (like Rajdhani), thereby, blurring the lines between fares for

Railways and for Low Cost Airlines. The average rate charged per passenger

kilometre by Railways was Rs2.69 in FY13, which was just 19% lower than SJ’s

passenger RASK (Revenue per available seat kilometre) during FY13.


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SpiceJet

January 27, 2016 5

Exhibit 3:

Non-suburban railway passenger traffic

Mn pass. 1st AC Executive class AC sleeper AC 3-tier Mail 1st class Ordy 1st class AC chair car Total pass.

FY01 0.84 - 12.63 10.79 2.24 5.89 7.57 1971.86

FY02 1.06 - 12.68 12.85 1.69 4.89 7.63 2093.83

FY03 1.07 - 12.13 15.84 1.32 3.95 7.69 2036.74

FY04 1.08 - 10.9 16.15 1.37 4.01 8.61 2126.15

FY05 1.07 - 11.35 17.36 1.25 3.65 8.93 2200.38

FY06 1.14 - 11.43 21.14 1.46 4.83 9.35 2395.28

FY07 1.33 - 13.3 26.51 1.15 4.49 11.14 2705.11

FY08 1.58 - 14.01 31.31 1.1 4.59 12.96 2834.96

FY09 1.53 0.39 16.21 38.61 1.02 5.12 13.54 3118.2

FY10 1.66 0.64 17.37 45.03 1.62 5.47 14.56 3370.37

FY11 1.92 0.7 19.56 53.25 1.44 6.28 16.69 3590.14

FY12 2.34 0.87 21.68 60.35 0.99 6.77 19.44 3846.94

FY13 2.39 0.93 22.39 70.08 0.88 6.88 22.13 3944.15

Source: Indian Railways

Exhibit 4:

Non-suburban passenger traffic – Average Per passenger earnings

Rs per pass. 1st AC Executive class AC sleeper AC 3-tier Mail 1st class Ordy 1st class AC chair car Total

FY06 1459 - 861 581 799 37 341 57

FY07 1470 - 860 606 750 39 336 58

FY08 1464 - 970 695 914 41 326 64

FY09 1601 1121 914 751 821 47 354 65

FY10 1478 907 891 707 461 42 368 64

FY11 1475 974 887 703 846 40 390 67

FY12 1495 975 923 749 829 36 404 69

FY13 1661 1103 1048 744 907 38 408 74

Source: Indian Railways

This increased preference for air travel has been driven by a growing middle class

population which has felt the benefits of a decade of economic growth in the

country and an increase in purchasing power. Low Cost Carriers (LCCs) promoted the

conversion of the railway traveller from Tier III and Tier II AC coaches to airlines

thereby, increasing the catchment population significantly. Similarly, measures such

as providing a booking option well in advance of the date of travel also helped to

stimulate demand.

Over FY01-13, airline passengers have grown at a CAGR of 12.7%, while railway

passengers travelling in non-general category have increased at a lower CAGR of

10%. In absolute terms, these constituted 57.9m air travellers and 125.7m rai

travellers (i.e. more than 2x or air travellers, and 3.2% of all rail travellers).


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SpiceJet

January 27, 2016 6

Exhibit 5:

Growth in domestic airline passenger traffic

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

-

20

40

60

80

100

120

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Domestic Passengers carried (m nos) YoY gr. (%) (RHS)

Source: DGCA, CAPA, PL Research

The total fleet size in India was 362 air planes in FY15, catering to 69.7m passengers

For every 1% of the non-general railway passengers in FY13 shifting to air travel,

assuming a constant PLF of 79%, there would be a requirement of 6.5 more air

planes to be added to the existing fleet in FY15. Similarly, based upon the projection

by CAPA, for a 14% CAGR in domestic passenger traffic, we estimate the fleet size

would need to be increased from 362 in FY15 to 499 by FY18E, implying a CAGR of

11.3% (after factoring in PLF to increase from 79% in FY15 to 84.6% in FY18E). This

again serves to highlight the high potential for growth that the aviation sector in

India possesses.

Higher GDP growth can drive air travel

Exhibit 6:

Domestic RPKM growth v/s Real GDP growth (x)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

( x )

Source: Indigo RHP

The trend in increased usage of airlines as a mode of transportation can be

correlated to GDP growth in India and in other countries. Domestic RPKM has grown


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SpiceJet

January 27, 2016 7

at an average ~2.3x real GDP growth in India in the past decade, with only three

intermittent years when it was lower than 1x.

Exhibit 7:

Domestic passenger traffic growth compared to India’s GDP growth

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Dom. Pax Traffic Gr. GDP Growth YoY (%)

Source: CAPA, IMF

7th Pay Commission, another booster

With the 7th

Pay Commission recommendations likely to be implemented in FY17

discretionary spend by Govt. employees can increase. The 7th

Pay Commission has

recommended ~23% increase in emoluments of Central government employees. This

would in all probability be followed by an increase in State government employee

salaries. Post revision in their salaries, the purchasing power and borrowing

capacities of the government workforce are likely to increase, brightening the

prospects for sectors like consumer discretionary and for leisure travel. It can also

increase the propensity of travel via air as opposed to other modes.

PLFs to remain healthy despite capacity addition

The growth ahead is expected to be stronger – CAPA (Centre for Aviation) projects a

12.7% CAGR for ASKMs (Available Seat kilometre) on domestic scheduled services,

which is nearly 2x that of the 6.8% CAGR recorded over FY10-15. Domestic RPKM,

which recorded CAGR of 8.7% over FY10-15, would mirror the growth in ASKM, given

the increased pipeline for new aircrafts by all Indian aviation companies.


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SpiceJet

January 27, 2016 8

Exhibit 8:

Fleet addition pipeline for major domestic airlines in India as of March 2015

As of Mar'15 Launch year Fleet family Fleet size Aircraft order book of which narrow body of which re-engined

IndiGo 2006 A320 94 430 430 430

Jet Airways 1993

Total 104 104 19 14

B737 75

ATR72 18

A330 7

B777-300 4

Air India 1932

Total 126 29 19 14

B747-400 5

B777 15

B787-8 18

A320 61

B737-800 17

ATR42 4

ATR72 2

CRJ700 4

SpiceJet 2005

Total 30 42 42 42

B737 16

DHC-8Q-402(NG)-14 14

GoAir 2005 A320 19 72 72 72

Air Costa 2013

Total 4 50 0 0

ERJ170-100LR-2 2

ERJ190-100STD-2 2

AirAsia India 2014 A320 4 0 0 0

Vistara 2015 6 14 14 7

Total 362 727 582 572

Source: Indigo RHP

Note 1: As of Mar'15, Air Pegasus had received its Air Operator permit, but had not commenced operations.

Note 2: Air Carnival, Air One, Premier Airways, TruJet, Zav Airways, and Zexus had received NOC from AAI as of Mar'15, but had not received AOP


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SpiceJet

January 27, 2016 9

Exhibit 9:

Available seat kilometres of domestic scheduled services

(5.0)

-

5.0

10.0

15.0

20.0

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0160.0

180.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Dom ASKs (bn) YoY gr. (%) (RHS)

Source: CAPA, PL Research

As a consequence of the faster than ASKM growth of the passenger traffic in India,

PLF has increased significantly in India’s domestic travel from just 71.9% in FY10 to

79.1% in FY15 and stands at 81.9% in YTD FY16.

Exhibit 10:

Trend in PLF

66.0

68.0

70.0

72.0

74.0

76.0

78.0

80.0

82.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

( % )

Source: DGCA, PL Research

Lower aircraft penetration in India v/s other countries provides ample scope for a

further increase in passenger traffic growth, even while maintaining a high PLF.


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SpiceJet

January 27, 2016 10

Exhibit 11:

Low aircraft penetration in India - CY14

GDP Per Capita Based Upon PPP Annual Domestic Seats Per Capita

India 5,777 0.1

Malaysia 24,521 1.0

Brazil 15,153 0.7

Turkey 19,556 0.6

Colombia 13,459 0.5

Thailand 14,443 0.5

Indonesia 10,157 0.4

Russia 24,764 0.4

Mexico 17,925 0.4

China 12,893 0.4

Philippines 6,986 0.3

Norway 65,896 4.8

Australia 46,631 3.3

USA 54,678 2.6

Canada 44,519 1.6

Japan 37,683 1.1

Spain 32,975 0.8

Italy 34,455 0.7

France 40,445 0.5

Germany 44,741 0.4

Source: Indigo RHP

Draft aviation policy highlights growth potential

The Draft National Civil Aviation Policy 2015 highlights India’s potential to be among

the top 3 nations in terms of global and international passenger traffic, whereas the

current position is tenth. Factors that support this growth include an idea

geographic location, a middle class population of ~300m (against 70m domestic

tickets sold in FY15) and a growing economy.

NCAP Vision: The vision of the NCAP is to create an eco-system that would enable

300m domestic ticketing by 2022 and 500m by 2027. This implies a CAGR of ~23%

over FY15-22 and ~18% CAGR over FY15-27. Steps to make this possible would

include enhanced regional connectivity, ease of doing business and deregulation,safety through use of technology and effective monitoring and promoting the entire

aviation value chain (cargo, general aviation, aerospace manufacturing, etc).


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SpiceJet

January 27, 2016 11

RCS: The regional connectivity scheme has been proposed to come in effect from

April 1, 2016. The target under this scheme would be have an all-inclusive airfare not

exceeding Rs2500 per passenger indexed to inflation for a one hour flight on RCS

routes. RCS will be implemented by: (1) revival of un-served or under-served

aerodromes and airstrips, (2) concessions by different stakeholders, (3) viability gapfunding for scheduled commuter airlines and (4) cost-effective security solutions by

BCAS and State Governments. A Regional Connectivity Fund would be funded by a

levy of 2% on all domestic and international tickets on all routes other than Cat IIA

routes and RCS routes.

Air cargo: Promotion of air cargo is important from an e-commerce, exports

employment of semi-skilled labour and ‘Make in India’ perspective. Currently ai

cargo volumes in India are extremely low as compared to other leading countries

due to high charges and high turnaround time. The NCAP looks to put in place a

framework to ensure growth of air cargo business.

Ground handling: The Ground Handling Policy of 2010 will be replaced by a new

framework wherein the airport operator will ensure that there will be at least three

Ground Handling Agencies (GHA) including Air India’s subsidiary/JV at an airport

with no upper limit. Domestic airlines and charter operators would have an option to

carry out self-handling themselves or through their subsidiaries or to outsource the

same to other airlines or to a GHA.

Ancillary revenues: With a need to facilitate higher ancillary revenue for airlines in

order to reduce the base airfare, airlines would be free to charge any amount for

additional services, except for check-in luggage and assistance to differently-abled

passengers, as long as such charges are communicated clearly to the passenger.


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SpiceJet

January 27, 2016 12

Spicejet - outperforming the industry

Highest PLF among the domestic carriers

After bottoming out in FY15, SJ’s market share has witnessed a rapid recovery

indicating the strong brand recall in India. With the industry outlook now

significantly improved, SJ is in a position to capture market share from its

competitors over a period of time yet again.

The pipeline of aircraft being ordered by various airlines is ideal for the growing

market needs, and is unlikely to cause overcapacity since the net additions per

annum would be just 10% of the order size. SJ’s fleet addition is unlikely to witness a

significant net addition in FY17, with several aircraft on wet leases being replaced

with those on dry leases, but should see a major improvement in FY18. However, ifdemand remains consistently higher, then a faster capacity increase by the industry

can occur.

SJ has the highest PLF at ~90% in the industry in YTD FY16, much higher than

industry peers. The benefits of the high PLF are two-fold: maximising passenger

revenue and driving higher ancillary revenues for the company, as well as helping in

keeping the planes well maintained. Average flying time for SJ is 13.5 hours /day,

which is the highest in the industry. SJ is currently flying 250 flights per day, with the

focus ahead likely to be more on domestic flights.

Exhibit 12:

Comparative PLF – SJ and industry for domestic routes

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

r -

J u n - 1

2

u g - 1

2

c t - 1

2

e c -

F e - -

J

- - c t - - - -

J

- - c t -

e c - - -

J

- - c t -

Spicejet Indigo Jet Air India Go

Source: DGCA

While there were constraints during 1HFY16, due to which SJ was not getting

aircrafts on dry leases, they took five planes on wet lease in Q3FY16. While these

have lower margins (5% additional cost on aircraft related costs), they were able to

meet passenger demand, thereby, justifying this decision.


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SpiceJet

January 27, 2016 13

SJ currently has 27 Boeing aircrafts, with two more possibly being added before the

end of FY16. Additionally, they have 14 Bombardier, thereby, taking the total fleet

size to 43 by Mar 2016. The strategy would be to maintain this fleet size in the near-

term; the five planes on short-term lease will be replaced in May 2016 by planes on a

long-term lease. Net aircraft addition would be 2-3 in CY16 and ~8 in CY17. In thenext 2-3 months, SJ will place a long-term order for which delivery would start 2018

onwards. SJ is also open to taking planes on wet lease, so any short-term demand-

supply gaps can be met through this route.

Ancillary revenues to grow faster

We expect SJ’s ancillary revenues to move up from 8% of total in FY11 to ~11% in

FY17, recording a CAGR of ~60% over the next two years. A major improvement for

this will accrue from cargo services, both on the aircraft, as well as from the

company’s plan to provide door-to-door delivery by maintaining a fleet of trucks. The

growth in cargo services is being accentuated by increased e-commerce portals

which require immediate/overnight delivery, thereby, making air transport the

optimal alternative.

Exhibit 13:

Growth (%) in cargo revenues and total revenues for SJ

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

50.0

FY13 FY14 FY15 FY16E FY17E FY18E

Cargo Services Total Revenues

Source: Company Data, PL Research

Moreover, contrary to Railways, where passenger revenues constitute just 28% of

their total earnings and 67% contribution accruing from goods, airline companies are

heavily dependant upon the passengers for generating revenues (~90% of revenues)

Hence, there remains an immense potential to wean away some of the high priority

cargo from Railways, particularly on the non-metro routes which will be covered by

airlines under the NCAP.


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SpiceJet

January 27, 2016 14

Exhibit 14:

Share of Revenues – Railways

Passenger28.0

Other

Coaching

3.0Goods

67.0

Sundry

2.0YTD FY16

Source: Indian Railways, PL Research

Exhibit 15:

Share of Revenues - Spicejet

Passenger

89.7

Ancillary

revenues

10.3

H1 FY16


Exhibit 16:

Share of Revenues - Jet Airways

Passenger

91.4

Ancillary

revenues

8.6

FY15


Exhibit 17:

Share of Revenues - Indigo

Passenger

88.5

Ancillary

revenues

11.5

FY15


In a strong road to recovery

With the Indian aviation industry housing 360-400 planes (over FY15-16), an annua

growth rate of 10% means that the industry size can increase by 38 planes annually.

Since a number of aircrafts also need to be replaced due to expiry of leases, the net

addition is not expected to be high. In this environment, SJ with its higher PLF is in a

position to improve its market share consistently on a YoY basis. The management

also has a view that aircraft have to fly as much as possible. This mindset also helped

in increasing ASKMs by ~15% on the same assets.


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SpiceJet

January 27, 2016 15

Exhibit 18:

Domestic market share of Indian carriers based upon passenger volume (%)

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 1QFY16 2QFY16

Indigo Jet Airways Air India SpiceJet GoAir Kingfisher Others

Source: DGCA, PL Research

Exhibit 19:

Growth in SJ’s ASKMs

0

5,000

10,000

15,000

20,000

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

( A S K s ( m ) )

International Domestic

13,730

16,106

18,494

14,541

12,560

14,766

18,052


Exhibit 20: Growth in SJ’s RPKMs

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


( R P K s ( m ) )

International Domestic

10,224

12,03413,367

11,83311,336

13,561

16,297



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SpiceJet

January 27, 2016 16

Exhibit 21:

PLF for SJ

75

79

73

79

85

8990

74 7472

82

92 9390

7475

72

81

9092

90

65

70

75

80

85

90

95


International Domestic Passenger Load Factor


International operations are expected to grow further with the launch of non-metro

flights into the Middle East. These are highly profitable routes for SJ and in some

instances constitute the most profitable routes for the company. SJ is currently flying

to 5-6 International routes which they are further planning to increase.

Exhibit 22:

Comparative PLF – SJ and industry for international routes

60.0%

65.0%

70.0%

75.0%

80.0%85.0%

90.0%

95.0%

J

- r - y -

J l -

S e

-

o v - 1

2

J

- r - y -

J u l - 1 3

S e

- -

J

- - y -

J l -

S e

- -

J

- r - y -

J l - - v

-

Spicejet Indigo Jet Air India

Source: DGCA


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SpiceJet

January 27, 2016 17

Serendipity at play

Fall in crude price

The correction in crude price has been a big factor in the turnaround of the financiaperformance of aviation companies in FY16. In addition to the turnaround in

fortunes thanks to the lower cost of fuel, SJ has also taken efforts on its part to

introduce methods that lower the fuel burn on its flights and has also invested in a

fuel management software etc, thereby, increasing efficiency of operations leading

to improvement in profitability.

Exhibit 23:

Correction in crude price

-

20.0

40.0

60.0

80.0

100.0

120.0

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

2 Q F Y 1 5

3 Q F Y 1 5

4 Q F Y 1 5

1 Q F Y 1 6

2 Q F Y 1 6

3 Q F Y 1 6

( U S $ / b b l )

Source: Bloomberg

Despite the decrease in fuel costs, adjusted for the same, the average realisation pepassenger has increased. This has been done by reducing the ticket bucket options

available for customers. For SJ, while fuel costs were lower ~36% YoY in 9MFY16, the

average fare per passenger declined just ~8% YoY over the same period. Moreover,

this also coincided with the increase in PLF.

Exhibit 24:

Decrease in fuel cost per ASKM

-

0.2

0.4

0.6

0.8

1.01.2

1.4

1.6

1.8

2.0

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r - 1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r - 1 3

J u n - 1

3

S e p - 1

3

D e c - 1

3

M a r - 1 4

J u n - 1

4

S e p - 1

4

D e c - 1

4

M a r - 1 5

J u n - 1

5

S e p - 1

5

D e c - 1

5

M a r - 1 6

Source: : Company Data, PL Research


18/28

SpiceJet

January 27, 2016 18

Exhibit 25:

Fuel cost / km

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-10.0

20.0

-

50.0

100.0

150.0

200.0

250.0300.0

350.0

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r - 1 3

J u n - 1

3

S e p - 1

3

D e c - 1

3

M a r - 1 4

J u n - 1

4

S e p - 1

4

D e c - 1

4

M a r - 1 5

J u n - 1

5

S e p - 1

5

D e c - 1

5

M a r - 1 6

Fuel cost / km (Rs) YoY gr. (%) (RHS)


Cost reduction measures

In addition to the benefits visible due to lower crude price, SJ has also taken

initiatives to reduce cost optimisation. At the same time, manpower was not

escalated and focus was to work more efficiently and effectively. Some old contract

were restructured. Long-term related costs helped to get a better rate on contracts.

Even after the improved financial performance, there is further potential to reduce

SJ’s non-fuel operating cost by further 10%. In addition to this, there can be a 0.5-1%

increase in fuel efficiency annually.

Exhibit 26: Decrease in non-fuel costs per ASKM

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

J u n - 1

1

S e p - 1

1

D e c - 1

1

M a r - 1 2

J u n - 1

2

S e p - 1

2

D e c - 1

2

M a r - 1 3

J u n - 1

3

S e p - 1

3

D e c - 1

3

M a r - 1 4

J u n - 1

4

S e p - 1

4

D e c - 1

4

M a r - 1 5

J u n - 1

5

S e p - 1

5

D e c - 1

5

M a r - 1 6



19/28

SpiceJet

January 27, 2016 19

Financials

In the past 6-7 months, the industry growth has been ~20%; this trend should

continue for a further 6-10 months due to latent demand. On a long-term basis, the

airline companies have recorded a historical domestic CAGR of 8%, while on a

medium-term basis, this has been ~12-15%. The latter rate should continue in the

future as well. A growth at this rate would also justify the fleet addition planned by

the industry. Based upon the projections by CAPA, for a 14% CAGR in domestic

passenger traffic, the fleet size would need to be increased from 362 in FY15 to 499

by FY18E, implying a CAGR of 11.3% (after factoring in PLF to increase from 79% in

FY15 to 84.6% in FY18E).

Exhibit 27: Revenue growth for SJ

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

50.0

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


( R s m )

Sales YoY gr. (%) (RHS)


SJ intends to maintain an asset-light model. SJ has been able to lower its working

capital debt as well. Payables were also lowered. A further 10% reduction is possible

as the cash flow generation continues. We expect the company to have a positive

net worth by FY18.


20/28

SpiceJet

January 27, 2016 20

Exhibit 28:

Trend in EBITDAR

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

5,000

10,000

15,000

20,000

25,000


( R s m )

EBITDAR (incl OI) % of sales (RHS)


Lower costs have led to a strong improvement in financial performance for SJ and a

complete turnaround from the dismal performance of the past four years.

Exhibit 29:

Trend in EBITDA

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

(10,000)

(5,000)

-

5,000

10,000

15,000


( R s m )

EBITDA % of sales (RHS)


The better financial performance also has an additional effect of improving SJ’s

bargaining power with their vendors and financiers. This will also in turn help to

lower costs. A long-term order also helps in lowering the Lease Rental Factor onasset value per month. Currently SJ operated at 0.9% LRF (similar to Go), while

Indigo is at 0.65%. A long-term order with improved financial position can help SJ

catch up with the industry leader on this ratio.


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SpiceJet

January 27, 2016 21

Exhibit 30:

Trend in RASK – CASK for SJ

(0.80)

(0.60)

(0.40)

(0.20)

-

0.20

0.40

0.60



Exhibit 31:

Turnaround to Profits

(20.0)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

(15,000)

(10,000)

(5,000)

-

5,000

10,000


( R s m )

Adjusted Net Profit % of sales (RHS)


Q3FY16 results were impressive

SJ reported a strong performance in Q3FY16, recording its higher ever quarterly

profits, driven by lower fuel costs and a high passenger load factor.

SJ’s sales growth was 12.2% YoY to Rs14.6bn. ASK was lower by 3% YoY at

~3.4bn km. RASK increased ~15 % YoY to Rs4.3. SJ’s PLF was 91.6% in Q 3, whichwas the highest in the industry.

Fuel cost was 25.1% of sales (v/s 43.2% YoY and 32.5% QoQ). Led by decline in

fuel costs, the EBITDAR grew from Rs201m in Q3FY15 to Rs5.2bn in Q3FY16

EBITDAR margin was 35.6% (v/s 1.5% YoY and 23.5% QoQ), which was anothe

peak for SJ.


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SpiceJet

January 27, 2016 22

CASK (Cost per available seat kilometre) declined ~21% YoY to Rs3.6. Of this fuel

CASK was lower 32.8% YoY and other CASK was lower ~15% YoY. There was also

higher aircraft redelivery cost of Rs301m during the quarter.

Lease rentals increased 5.9% YoY to Rs2.3bn to 15.6% of sales (v/s 16.5% YoYand 16.3% QoQ). EBITDA (ex-other income) was Rs2.8bn; margin at 19.2% YoY.

With lower YoY interest costs and other income and stable depreciation, the

profit for Q3 was Rs2.38bn (v/s loss of Rs2.75bn YoY and a profit of Rs238m in

Q2FY16).

Management has stated that despite the progress, margins were slightly

impacted due to wet lease operations, Chennai floods and exchange losses. The

company intends to work on reducing legacy cost and increasing efficiency.


23/28

SpiceJet

January 27, 2016 23

Exhibit 32:

Q3FY16 Result Overview (Rs m)

Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%)

Net Revenues 14,600 13,008 12.2 10,401 36,064 44,293 (18.6)

Fuel Cost 3,666 5,624 (34.8) 3,378 10,633 21,234 (49.9)

% of Net Sales 25.1 43.2 32.5 29.5 47.9

Other Operational Expenses 3,457 4,720 (26.7) 3,057 9,237 12,534 (26.3)

% of Net Sales 23.7 36.3 29.4 25.6 28.3

Personnel 1,280 1,434 (10.7) 1,157 3,596 4,300 (16.4)

% of Net Sales 8.8 11.0 11.1 10.0 9.7

Other Exp 1,121 1,455 (22.9) 1,090 3,196 4,506 (29.1)

% of Net Sales 7.7 11.2 10.5 8.9 10.2

Total Expenditure 9,525 13,232 (28.0) 8,682 26,662 42,573 (37.4)

EBITDAR 5,200 201 NA 2,447 10,522 2,716 287.3

EBITDA Margin (%) 35.6 1.5 23.5 29.2 6.1

Aircraft Rentals 2,277 2,151 5.9 1,695 5,580 7,490 (25.5)

% of Net Sales 15.6 16.5 16.3 15.5 16.9

EBITDA 2,797 (2,376) NA 24 3,821 (5,770) NA

EBITDA Margin (%) 19.2 (18.3) 0.2 10.6 (13.0)

Depreciation 305 327 (6.6) 304 902 967 (6.8)

EBIT 2,492 (2,703) NA (279) 2,920 (6,737) NA

Interest Expenses 233 474 (50.8) 211 700 1,355 (48.4)

Non-operating income 125 426 (70.6) 727 1,120 997 12.4

PBT 2,384 (2,750) NA 238 3,340 (7,096) NA

Tax-Total 0 0 NA 0 0 0 NA

Tax Rate (%) - Total 0.0 0.0 NA 0.0 0.0 0.0 NA

Reported PAT 2,384 (2,750) NA 238 3,340 (7,096) NA

Adj. PAT 2,384 (2,750) NA 238 3,340 (7,096) NA


Exhibit 33: Operating Metrics

Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%)

ASK (m) 302 307 (1.8) 256 804 1,051 (23.5)

Passenger RASK 3.69 3.39 8.8 3.16 3.47 3.32 4.3

Ancillary RASK 0.59 0.36 63.9 0.70 0.58 0.40 45.0

Total RASK 4.28 3.75 14.1 3.86 4.05 3.72 8.7

Fuel CASK 1.07 1.59 (32.7) 1.17 1.17 1.74 (32.8)Other CASK 2.52 2.93 (14.0) 2.61 2.54 2.57 (1.4)

Total CASK 3.59 4.53 (20.8) 3.78 3.71 4.31 (14.1)

RASK - CASK 0.69 -0.78 (188.5) 0.08 0.34 -0.59 (157.6)



24/28

SpiceJet

January 27, 2016 24

Valuations

With aviation companies performing better on parameters related to both revenues

and profitability we place an Overweight stance on the sector. As a turnaround story

we believe that SJ is in a strong position to provide the best profitability growth in

the sector, along with relative cheaper valuations as compared to the industry leade

Interglobe Aviation.

We initiate coverage on SJ as our top pick in the sector with a ‘BUY’ rating. Our price

target for SJ is Rs128 (based upon 12.5x FY17e EPS). At the current price, SJ trades at

a PE of 8.8x FY17E, which is at a substantial discount to the PE for Interglobe Aviation

(~11.7x). At our price target, SJ trades at EV/EBITDAR of 4.5x FY17e.

Risks

A sharp spike in crude price would lead to lower profitability for airline

companies, especially if they are unable to pass on the price increase to

customers.

In particular, overcapacity if built up by the competition would lower the

possibility of thus passing on the higher costs to customers.

A global recession would lower air traffic and can lead to lower PLFs.

Depreciation of the Indian currency would increase costs related to rentals and

fuel costs.

As per our calculations, the international routes to the Middle East are among

the most profitable for SJ. These routes are also subject to greater geopolitical

risks and also bear the burden of potentially an oil-led recession in these regions

lowering load factors.


25/28

SpiceJet

January 27, 2016 25

Income Statement (Rs m)

Y/e March 2015 2016E 2017E 2018E

Net Revenue 52,448 48,431 58,581 72,257

Raw Material Expenses 39,414 26,111 30,842 38,210

Gross Profit 13,035 22,320 27,740 34,047

Employee Cost 5,375 4,837 5,563 6,536

Other Expenses 13,809 11,931 14,153 16,859EBITDA (6,149) 5,552 8,024 10,652

Depr. & Amortization 1,266 1,235 1,296 1,361

Net Interest 1,635 899 630 409

Other Income 2,180 1,410 1,551 1,668

Profit before Tax (6,871) 4,829 7,649 10,549

Total Tax — — 1,530 2,110

Profit after Tax (6,871) 4,829 6,120 8,439

Ex-Od items / Min. Int. 429 — — —

Adj. PAT (7,300) 4,829 6,120 8,439

Avg. Shares O/S (m) 599.5 599.5 599.5 599.5

EPS (Rs.) (12.2) 8.1 10.2 14.1

Cash Flow Abstract (Rs m)

Y/e March 2015 2016E 2017E 2018E

C/F from Operations (1,741) 5,929 9,081 9,658

C/F from Investing 370 (2,000) (2,000) (3,000)

C/F from Financing 1,557 (2,899) (7,635) (5,409)

Inc. / Dec. in Cash 185 1,030 (553) 1,249

Opening Cash 51 236 1,265 712

Closing Cash 236 1,265 712 1,961

FCFF (3,218) 3,030 6,452 6,249

FCFE (4,196) 530 3,452 1,249

Key Financial Metrics

Y/e March 2015 2016E 2017E 2018EGrowth

Revenue (%) (17.5) (7.7) 21.0 23.3

EBITDA (%) (23.1) (190.3) 44.5 32.7

PAT (%) (27.2) (166.1) 26.7 37.9

EPS (%) (35.0) (166.1) 26.7 37.9

Profitability

EBITDA Margin (%) (11.7) 11.5 13.7 14.7

PAT Margin (%) (13.9) 10.0 10.4 11.7

RoCE (%) NM 183.9 166.7 167.5

RoE (%) 64.6 NM NM NM

Balance Sheet

Net Debt : Equity NM NM NM 0.5

Net Wrkng Cap. (days) (97) (134) (127) (98)Valuation

PER (x) NM 11.2 8.8 6.4

P / B (x) NM NM NM 16.7

EV / EBITDA (x) NM 11.6 7.7 5.2

EV / Sales (x) 1.3 1.3 1.1 0.8

Earnings Quality

Eff. Tax Rate — — 20.0 20.0

Other Inc / PBT (20.9) 29.2 20.3 15.8

Eff. Depr. Rate (%) 6.0 5.3 5.2 4.8

FCFE / PAT 57.5 11.0 56.4 14.8

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2015 2016E 2017E 2018E

Shareholder's Funds (12,645) (7,317) (5,202) 3,237

Total Debt 14,185 11,685 8,685 3,685

Other Liabilities — — — —

Total Liabilities 1,539 4,368 3,482 6,922

Net Fixed Assets 17,138 17,904 18,607 20,246Goodwill — — — —

Investments — — — —

Net Current Assets (15,599) (13,536) (15,125) (13,324

Cash & Equivalents 236 1,265 712 1,961

Other Current Assets 8,692 8,676 9,087 9,612

Current Liabilities 24,527 23,477 24,924 24,897

Other Assets — — — —

Total Assets 1,539 4,368 3,482 6,922

Quarterly Financials (Rs m)

Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16

Net Revenue 7,927 11,063 10,401 14,600

EBITDA (663) 1,000 24 2,797

% of revenue (8.4) 9.0 0.2 19.2

Depr. & Amortization 299 293 304 305

Net Interest 280 256 211 233

Other Income 854 267 727 125

Profit before Tax 225 718 238 2,384

Total Tax — — — —

Profit after Tax (388) 718 238 2,384

Adj. PAT 225 718 238 2,384

Key Operating Metrics

Y/e March 2015 2016E 2017E 2018EASKM (m) 14,541 12,560 14,766 18,052

RPKM (m) 11,833 11,336 13,561 16,297

RASK 3.7 3.9 4.0 4.1

CASK 4.2 3.6 3.6 3.5

RASK-CASK (0.5) 0.3 0.5 0.5

PLF (%) 81.4 90.3 91.8 90.3

Avg aircraft in operation 41.6 39.6 44.0 50.5

Source: Company Data, PL Research.


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January 27, 2016 26

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SpiceJet

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

48.6%

40.2%

11.2%

0.0%0%

10%

20%

30%

40%

50%60%

BUY Accumulate Reduce Sell

% o f T o t a l C o v e r a g e

BUY : Over 15% Outperformance to Sensex over 12-months

Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months

Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month

Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

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SpiceJet PL Jan28-2016