Aviation stocks have been flying high for a long while now. Stocks of two airline operators SpiceJet and Jet Airways have skyrocketed 346 per cent and 77 per cent, respectively, in the past one year. This is against a meagre return of 2 per cent seen by the benchmark S&P BSE smallcap index during the same period.
Slump in crude prices has helped aviation companies log profits, while entry of InterGlobe Aviation, which runs low-cost carrier IndiGo, has also added to the sentiment on the counters that the market loved to hate the most.
Experts believe airline stocks will perform well in short to medium term, but their long-term outlook for the sector still remains bearish given a likely pick up in the competition in the wake of entry of new players in the sector.
Crude oil prices may not trade in lower range forever, they said, adding that any uptick in air turbine fuel (ATF) prices may again shrink their margins.
"Aviation stocks will do well in the short to medium term because crude prices are likely to trade around $40 per barrel level in the next one year. That said, operators' profitability would surely take a hit, once crude prices start rebounding again," said Ravi Rastogi of Globe Capital Market.
"Opening of aviation sector will increase competition in the sector, triggering price war. Once the price war starts, consumer becomes the king and airlines won't be able to command higher prices. This, along with higher crude prices might put margins into doldrums," added Rastogi.
As per data available with Petroleum Planning and Analysis Cell (PPAC), the Indian crude basket declined 25 per cent to $40.35 a barrel level on Friday, from $53.81 a barrel level on December 31, 2014.
Declining global oil prices have made oil imports cheaper, resulting in price cut for the airlines. Air Turbine Fuel (ATF) constitutes more than 30 per cent of airlines' expenditure. The price reduction will ease the financial burden of cash-strapped carriers.
Commodity experts pointed out the black gold has made several attempts to bounce back, but the upside has largely been capped by supply glut amid subdued economic environment globally.
As far as domestic aviation stocks are concerned, G Chokkalingam, Founder, Equinomics Research & Advisory believes valuations have turned rich, given that the recent rally was purely perception-driven, thanks to IndiGo's listing.
"There is no valuation comfort at all. Airline stocks rose because perception turned positive with the entry of IndiGo. Hence the rally was perception-driven, and fundamental factors did not play much role into it," said Chokkalingam.
The expert advised to book profits in stocks of SpiceJet and IndiGo and recommended to pick up shares of Jet Airways on dips.
"One should book profits in IndiGo and SpiceJet and should pick up Jet Airways purely on relative valuation basis, even if it corrects marginally," added Chokkalingam.
Stock of SpiceJet hit its fresh 52 week high of Rs 69.75, up 11.95 per cent in trade on Monday. The scrip settled the day at Rs 68.85, up 10.51 per cent, while stock of Jet Airways closed at Rs 466.90, up 1.88 per cent after rising as much as 3.42 per cent through the day.