SpiceJet with a fleet size of 12 and market share of 8% is the second largest Low Cost Carrier (LCC) in India. With industry moving into the consolidation phase, we expect air fares to strengthen over the next two years and the entire industry would be a beneficiary. SpiceJet would be increasing its fleet from 11 in fy07 to 23 by FY09E. SpiceJet is expected to break-even in FY09E on account of its superior operational efficiencies, strong passenger volume growth and expected improvement in fares. We are initiating coverage on the stock with a BUY rating and target price of Rs 81.
Consolidation in the industry to provide much needed relief:
Consolidation in the aviation industry has marked the 1HFY2007 with three M&A deals happening during the period. Air India - Indian merger, Jet airways buying out Air Sahara and the latest being UB group picking up 26% stake in Air Deccan, all of them bringing the much needed boost to this loss making industry. Consolidation will ease competition and give pricing power to the dominant players and as a result of higher fares even smaller players like SpiceJet will benefit.
Strong passenger growth to boost top-line and profit:
Strong passenger growth would lead to 86% CAGR growth in revenues for the next two years. Increased passenger volume would also help in spreading fixed cost over larger passenger base there by bringing down per unit cost. We expect the revenue passengers for SpiceJet to increase from 2.8mn in FY07 (12 months) to 6.8mn in FY09E, a CAGR of 58%. The expected growth in revenue passenger is on account of aggressive increase in fleet size from 11 aircrafts in FY07 to 23 aircrafts by FY09E.
SpiceJet to break even in FY09E:
Superior operational efficiencies, strong passenger volume growth and expected improvement in fares are expected to make SpiceJet profitable by FY09E. With consolidation happening in the industry fares are expected to move upwards which we believe along with volume growth would be sufficient for SpiceJet to turn profitable. SpiceJet is expected to grow its revenues at 86% CAGR over FY07-FY09E and turnaround in FY09E with net profit of Rs759mn.
Increased focus on ancillary revenue stream:
In order to break even, SpiceJet is focusing on income coming from ancillary services like in-flight catering, selling insurance, excess baggage, promotional offers, providing hotels and car on rent. In a move to increase ancillary revenues, SpiceJet has started selling food on-board and has recently tied-up with TATA AIG insurance to provide insurance to air travelers for Rs129. During FY07, SpiceJet earned Rs348mn as ancillary revenues which were 5.4% of the total operating revenues. We expect the share of ancillary revenues to increase to 6.9% and 7.7% for FY08E and FY09E respectively.
Valuations: SpiceJet's revenues are expected to grow by 86% CAGR over the next two years with fleet size increasing from 11 to 23 by FY09E. On back of expected increase in yields due to consolidation in the industry, SpiceJet is expected to turnaround in FY09E and report net profits of Rs759mn. At the current market price of Rs56 the stock is trading at a PE of 22.3x its FY09E earnings and at an EV/EBITDAR of 12x and 3.2x for FY08E and FY09E respectively. We are initiating coverage on the stock with a buy rating and target price of Rs81. We have valued the stock at an EV/EBITDAR of 5x its FY09E earnings.
Consolidation in the industry to provide much needed relief:
Consolidation in the aviation industry has marked the 1HFY2007 with three M&A deals happening during the period. Air India - Indian merger, Jet airways buying out Air Sahara and the latest being UB group picking up 26% stake in Air Deccan, all of them bringing the much needed boost to this loss making industry. Consolidation will ease competition and give pricing power to the dominant players and as a result of higher fares even smaller players like SpiceJet will benefit.
Strong passenger growth to boost top-line and profit:
Strong passenger growth would lead to 86% CAGR growth in revenues for the next two years. Increased passenger volume would also help in spreading fixed cost over larger passenger base there by bringing down per unit cost. We expect the revenue passengers for SpiceJet to increase from 2.8mn in FY07 (12 months) to 6.8mn in FY09E, a CAGR of 58%. The expected growth in revenue passenger is on account of aggressive increase in fleet size from 11 aircrafts in FY07 to 23 aircrafts by FY09E.
SpiceJet to break even in FY09E:
Superior operational efficiencies, strong passenger volume growth and expected improvement in fares are expected to make SpiceJet profitable by FY09E. With consolidation happening in the industry fares are expected to move upwards which we believe along with volume growth would be sufficient for SpiceJet to turn profitable. SpiceJet is expected to grow its revenues at 86% CAGR over FY07-FY09E and turnaround in FY09E with net profit of Rs759mn.
Increased focus on ancillary revenue stream:
In order to break even, SpiceJet is focusing on income coming from ancillary services like in-flight catering, selling insurance, excess baggage, promotional offers, providing hotels and car on rent. In a move to increase ancillary revenues, SpiceJet has started selling food on-board and has recently tied-up with TATA AIG insurance to provide insurance to air travelers for Rs129. During FY07, SpiceJet earned Rs348mn as ancillary revenues which were 5.4% of the total operating revenues. We expect the share of ancillary revenues to increase to 6.9% and 7.7% for FY08E and FY09E respectively.
Valuations: SpiceJet's revenues are expected to grow by 86% CAGR over the next two years with fleet size increasing from 11 to 23 by FY09E. On back of expected increase in yields due to consolidation in the industry, SpiceJet is expected to turnaround in FY09E and report net profits of Rs759mn. At the current market price of Rs56 the stock is trading at a PE of 22.3x its FY09E earnings and at an EV/EBITDAR of 12x and 3.2x for FY08E and FY09E respectively. We are initiating coverage on the stock with a buy rating and target price of Rs81. We have valued the stock at an EV/EBITDAR of 5x its FY09E earnings.
