SpiceJet troubles a boon for Jet Airways; shares zoom 77% in 13 days

Shares of Naresh Goyal’s Jet Airways have soared about 77 percent in 13 trading sessions, from a low of Rs 253 to Rs 447 currently, amid expectations it would be a likely beneficiary if troubled rival SpiceJet were to collapse.

Low-cost carrier SpiceJet, controlled by Kalanithi Maran, has increasingly teetered on the edge, notching up losses of about Rs 1,000 crore last fiscal, and following it up with another Rs 310 crore loss in the second quarter of this fiscal.

Among several indications that the airline is grappling for survival are reports of delay in paying staff salaries, mounting dues to oil companies and airport operators among others, and scaling down massively on operations. A slew of massive discounts the airline has offered this has also been seen as an indication that the company may not even have working capital funds and was resorting to such a tactic to keep operations going.

Following Kingfisher’s grounding in 2012, if SpiceJet were to go belly up, the field would narrow down to only four major players – IndiGo, Jet, Air India and GoAir - theoretically giving them greater pricing power at least until new entrants Air Asia and Vistara roll-out operations in a big way.

Moreover, Jet Airways, which too reported a massive Rs 4,000 crore loss last fiscal year, has reported steady improvement in business. After Abu Dhabi-based Etihad infused Rs 2,600 crore in the company in lieu of a 26 percent stake last year, the carrier rolled out a three-year blueprint to return to profitability – in which it outlined several steps such as shutting down loss-making low-cost operations, something it has already proceeded to do.

In the September quarter, Jet’s quarterly loss narrowed 96 percent year-on-year, from Rs 999 crore to Rs 43 crore.

While, in another piece of good news for the firm , oil prices tanked 35 percent from their peak this year, resulting in jet fuel prices being slashed five times. Fuel costs account for one-third to half of an airliner’s typical operational costs.

There are other incremental positive developments for the sector as well. Reports say the government may give in to the long-standing demand to provide “infrastructure” status to the aviation industry, something that should significantly ease borrowing pressures on such firms.

Legendary trader and investor Rakesh Jhunjhunwala, who picked up SpiceJet shares recently, in what has until now turned out to be a mistake, too said at a CNBC-TV18 summit that he originally wanted to buy Jet shares but passed on it on a whim - while maintaining Spice was but merely a trading punt for him.

But on a more fundamental basis, investors may find better plays elsewhere, according to Mayuresh Joshi of Angel Broking.

In a recent interview with CNBC-TV18, Joshi said while falling oil prices were a positive for Jet, its high interest cost (Rs 212 crore as of September quarter on a debt of Rs 9,800 crore) may weigh on profitability.

Load factors (percentage of seats occupied, on average) will also need to rise significantly from the 70s they have hovered at recently, he said.

“All that plus valuations around 0.6 times enterprise value-to-sales, I think Jet is trading at fair value at the current levels,” Joshi said in the interview last month when shares were still trading close to Rs 300 levels.

“My belief is that the cash flows to get reflected on the financial statements will take some amount of time to come and probably long-term investors have got much better plays.”