Flying high

Prabhudas Lilladher sees growing demand, lower fares and improved connectivity to improve valuations in the aviation sector

Print Edition: January 24, 2008

Demand for air travel is growing in India as a result of economic development, globalisation, regulatory liberalisation and declining passenger fares. The move by a large number of operators to offer improved connectivity to Indian cities opens up opportunities in the feeder segment. Private airlines, especially low-cost carriers (LCCs), have added capacity in the past couple of years. In terms of capacity addition measured in available seat kilometers (ASKM), from a negligible market share in 2003-4, LCCs now account for about 14.8%.

We expect passenger traffic to grow at a CAGR of 16% till 2009-10. This will drive a far larger growth of 20% in revenues. The fallout of recent consolidation has already begun in the form of improving yields. The government is mulling an allocation of Rs 52,100 crore in the 11th Plan period to boost the country’s aviation infrastructure.

Cruise control

It is also undertaking a number of steps to ensure faster growth, including opening more international routes for private carriers, relaxing conditions to fly abroad and ensuring greater private participation in aviation infrastructure. Some of the drivers of the industry are growing tourism, air cargo, lifestyle changes and higher disposable income. With a strong demand, the onset of rational pricing and the fact that the airline industry has underperformed the Sensex by about 19% over the past 18 months, we expect valuations to improve in future.

Jet Airways: Jet is the only private carrier that has rights to fly on international routes. It also transitions between regional (short haul) and international carriers (long haul) and is poised to emerge as a strong player in either business. This inherent strength will see Jet post a three-year CAGR growth in revenue of 22% to Rs 16,500 crore by 2009-10. By 2009-10, the company will have a much improved 19% EBITDA, which will give a net profit of Rs 840 crore. The stock is currently trading at 1.6 times 2008-9 and at 1.4 times 2009-10 estimated adjusted EV/sales. We recommend Buy with a price target of Rs 1,498.

SpiceJet: SpiceJet currently has the lowest cost per ASKM at Rs 2.36. With the best utilisation in the country and the lowest turnaround time at airports, SpiceJet is proving to be the most efficient airline. The company has also started focusing on ancillary revenue to boost sales. The share of ancillary revenue is expected to go up to 10% (from 7-7.5%) in 18 months. We expect the company to achieve profitability in 2008-9.

The stock is currently trading at two times 2008-9 and 1.7 times 2009-10 estimated adjusted EV/sales, which appears attractive for a growing company. We expect its top line to grow at a CAGR of 64% over the next three years to Rs 2,823.9 crore by 2009-10 and achieve a PAT of Rs 76.1 crore (from a loss of Rs 70.8 crore in 2006-7). We recommend Buy on SpiceJet with price target of Rs 84.

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