Overseas investors have increased their exposure to Jet Airways, Kingfisher Airlines and SpiceJet during April-June.
According to the data available with stock exchanges, the holding of foreign institutional investors (FIIs) increased in all the three listed aviation firms during the quarter.
“Aviation stocks are now turning around. Spicejet and Jet Airways are back in black. Also hopes of foreign investment in the sector are driving FIIs to increase their exposure in these stocks,” CNI Research CMD Kishore Ostwal said.
Bank of America-Merrill Lynch upgraded Jet Airways and SpiceJet to “buy” from “underperform”, saying improving industry trends such as signs of ticket price hikes and reduced capacity will improve profitability. “This should see these carriers substantially lower their losses in FY13 and return to profit in FY14,” Bank of America-Merrill Lynch said in a report dated on Monday.
The FII holding in Jet Airways rose from 6.70 percent to 7.12 percent as of June-end. During the same period, the FII shareholding in SpiceJet moved up from 2.61 per cent to 3.59 percent.
Besides, FIIs stake in Kingfisher Airlines rose from 0.34 percent to 0.98 per cent in the period under review. Higher yields have led to Jet Airways and Spicejet posting profits in the quarter ended June.
According to Sharan Lillaney, aviation analyst at Angel Broking, “The increase in FIIs could be because of the structural changes the aviation industry is witnessing….Airlines are moving from the era of cut-throat competition to high ticket prices and increasing load factors.”
Even Rajat Rajgharia, head of research at Motilal Oswal Securities pointed out that the aviation sector is getting structurally favourable for stronger players like Jet Airways and SpiceJet on the back anticipation of foreign funds flowing the sector anytime. He, however suggested that one can look at these stocks from a trading perspective, but they may not necessarily be suited for investment.
After hovering in losses for five consecutive quarters, budget carrier Spicejet reported a net profit of Rs 56 crore for the April-June period on the back of significant growth in sales and better yields.
Similarly, after being in the red for five quarters in a row, Jet Airways Group flew back into the positive terrain with a net income of Rs 36.4 crore in the June quarter on the back of higher yields and cost management.
The unexpected profits have raised hopes for a turnaround in India’s ailing airline industry after its carriers lost a combined $2 billion last year.
“The recent first-quarter results of SpiceJet and our own checking of ticket prices every two weeks suggests that pricing recovery has already started. Airlines appear to have achieved some ticket price hikes in the last three months,” Bank of America-Merrill Lynch said.
Vikram Suryavanshi of Antique Stock Broking told CNBC-TV18 that foreign direct investment in aviation will help the ailing aviation sector to boost its balance sheets. Moreover, the government’s role in introducing policies favouring the sector will have a positive impact on the ailing companies.
He added that the main reason for the two carriers leaping back in to the black was pricing disciple. Now that the industry is mainly run by four players and there has been a pricing discipline from a very sub-optimal level and with government support, if some taxes on fuel is reduced, they can maintain a huge margin at the bottom-line, said Suryavanshi.
“FIIs have been betting on aviation stocks amid expectations of FDI. Besides, good sales volume growth have also helped the stocks. Also, most of the negative news (weak rupee and high fuel cost) have been factored in,” Geojit BNP Paribas Research Head Alex Matthews said.
Shares of Jet Airways have gained 7.8 per cent since April 2 to July 31 this year, while Spicejet soared 32.85 percent. Kingfisher Airlines, however, slumped 37.74 percent during the same period.
However, challenges remain for an industry plagued by high fuel taxes and airport charges, stiff competition, subsidised losses at state-owned Air India and regulatory uncertainty.
With inputs from Agencies