Lazy Analysts: Finally Citi wakes up and downgrades Jet

It took a 70 percent erosion in Jet Airways value for a Citi analyst to revise his target price downwards from Rs 696 to Rs 230 on Monday. The stock price has crashed from a high of Rs 517 in July 2011 to the current level of Rs 250. The analyst had a ‘Sell’ call on the company in January with a target price of Rs 696 when it was trading at Rs 771. Since then, the price of the stock has tanked to Rs 250, but the target price remains unchanged during the fall.

Analysts arrive at a target price of a company as they feel the stock is fairly valued at those levels. If the stock trades below that level, the general impression is it will come back and hover at the original position.

So, why no downward revision despite the dismal show? The logic provided by the broker for the price downgrade on Monday is the second quarter numbers of the company will reflect its strategy to counter Air India’s aggressive pricing model. The report says the yield compression will be the norm as there are six main airlines and the low cost carriers are gradually gaining market share. This has been the case for a number of years now.

Citi expects Jet Airways to run up a loss of Rs 940 crore in the current financial year, excluding benefits of asset sale or sale and leaseback of its existing aircraft. Sale and leaseback reduce the interest component of an airline as the aircraft is not financed through its loans but is leased out by the manufacturer. Citi, however, expects the company to post a cash profit in the current year.

For the first quarter of the current year, the company has logged a sales figure of Rs 3,320 crore while its net loss has swelled from Rs 40 crore to Rs 123 crore. Despite this spike in losses, the target price was left untouched. The company came out with its results on July 22, 2011 when the stock was trading at Rs 499. Since then, the stock has moved sharply down to Rs 253 by August end.

This is not an isolated case of analyst lethargy in revising price targets andrecommendations. Most of the foreign institutional investors (FIIs) have been carrying their ‘Buy’ recommendation on real estate stocks, despite a meltdown in the stocks. Media companies too are on the ‘Buy’ list, though a number of them are suffering losses.

FIIs have maintained a Buy report on companies like Reliance Power, even when the company was not generating a unit of power, though on the same parameters they accorded a Sell rating to other power sector stocks.