Company Report

Industry: Aviation

SpiceJet
On an upswing; initiate with a BUY

Rohan Korde (rohankorde@plindia.com)

+91-22-66322235

SpiceJet

Contents
Page No.
Indian aviation sector, in a sweet spot ....................................................................... 4
Increasing Passenger traffic............................................................................................................... 4
Increasing middle class, graduating to travel by flight ...................................................................... 4
Higher GDP growth can drive air travel ............................................................................................. 6
7th Pay Commission, another booster .............................................................................................. 7
PLFs to remain healthy despite capacity addition ............................................................................. 7
Draft aviation policy highlights growth potential ............................................................................ 10

Spicejet, outperforming the industry ....................................................................... 12

Highest PLF in the domestic carriers ............................................................................................... 12
Ancillary revenues to grow faster.................................................................................................... 13
In a strong road to recovery ............................................................................................................ 14

Serendipity at play .................................................................................................... 17

Fall in crude price ............................................................................................................................ 17
Cost reduction measures ................................................................................................................. 18

Financials .................................................................................................................. 19
3QFY16 results were impressive ..................................................................................................... 21

Valuations ................................................................................................................. 24
Risks ................................................................................................................................................. 24

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that
the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report

January 27, 2016

Company Report
January 27, 2016

SpiceJet
Rating
Price
Target Price
Implied Upside
Sensex
Nifty

The Indian aviation sector is in a sustained growth phase on the back of multiple
levers like increasing load factor, sustained growth in passenger traffic and fall in
jet fuel prices. Lower industry fleet size and the continued propensity of Indian
travelers to gravitate towards Low Cost Airline Carriers (as against preferring
alternative modes or Full Service Carriers) have led to higher Passenger Load
Factor (PLF) for the airline companies. Our positive stance on the sector is
further reinforced by the sharp fall in crude oil price which leads to not only
higher profitability, but eases up the working capital requirement.

In tune with the above, SpiceJet (SJ) offers the highest PLF in the industry after a
striking return to profitability in FY16 post four years of being in the red. In
addition to the aforementioned triggers, with its strategy to increase nonpassenger related revenues, SJ is focusing on cargo services and other ancillary
services like food and beverage and this foray is expected to result in increasing
the share of cargo services revenues from 2.9% of sales in FY15 to 5.3% in
FY18E. Similarly, with its fleet size expected to increase on a steady basis from
43 in FY16 to 56 by FY18-end, there is ample scope to take advantage of the
growing passenger traffic.

With aviation companies performing better on parameters related to both

revenues and profitability we place an Overweight stance on the sector. As a
turnaround story, we believe Spicejet is in a strong position to provide the best
profitability growth in the sector, coupled with cheaper valuations as compared
to the industry leader Interglobe Aviation. We expect revenue CAGR of 11.3%
over FY15-18E and an EBITDAR CAGR of 79.3% over the same period.

We initiate coverage on SJ as our top pick in the sector with a BUY rating. Our
price target for SJ is Rs128 (based upon 12.5x FY17e EPS); at CMP it trades at
8.8x FY17e. At our price target, SJ trades at EV/EBITDAR of 4.5x FY17e.

BUY
Rs90
Rs128
42.2%
24,492
7,438

(Prices as on January 27, 2016)

Trading data
Market Cap. (Rs m)
Shares o/s (m)
3M Avg. Daily value (Rs m)

53,950.5
599.5
1135.4

Major shareholders
Promoters
Foreign
Domestic Inst.
Public & Other

52.70%
3.28%
9.02%
35.00%

Stock Performance
(%)
1M
Absolute
30.1
Relative
35.3

6M
258.6
271.5

12M
299.1
315.5

How we differ from Consensus

EPS (Rs)
PL
Cons.
2017
10.2
11.6
2018
14.1
14.9

% Diff.
-12.0
-5.5

Price Performance (RIC: SPJT.BO, BB: SJET IN)

(Rs)
100
80
60
40
20

Source: Bloomberg

Jan-16

Nov-15

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Key financials (Y/e March)

Revenues (Rs m)
Growth (%)
EBITDA (Rs m)
PAT (Rs m)
EPS (Rs)
Growth (%)
Net DPS (Rs)
Profitability & Valuation
EBITDA margin (%)
RoE (%)
RoCE (%)
EV / sales (x)
EV / EBITDA (x)
PE (x)
P / BV (x)
Net dividend yield (%)
Source: Company Data; PL Research

2015
52,448
(17.5)
(6,149)
(7,300)
(12.2)
(35.0)

2016E
48,431
(7.7)
5,552
4,829
8.1
(166.1)

2017E
58,581
21.0
8,024
6,120
10.2
26.7

2018E
72,257
23.3
10,652
8,439
14.1
37.9

2015
(11.7)
64.6
NM
1.3
(11.1)
(7.4)
(4.3)

2016E
11.5
NM
183.9
1.3
11.6
11.2
(7.4)

2017E
13.7
NM
166.7
1.1
7.7
8.8
(10.4)

2018E
14.7
NM
167.5
0.8
5.2
6.4
16.7

SpiceJet

Indian aviation sector in a sweet spot

Increasing Passenger traffic
With an increased propensity of Indian travellers to gravitate towards airlines, the
domestic passenger traffic in India has increased at a CAGR of 9% over FY10-15 from
45.4m in FY10 to 69.8m in FY15. In comparison, Railway passenger traffic in India has
increased at a CAGR of just 4.3% over FY11-15 (6.6% for domestic aviation sector
over the same period). On a long-term basis, the passengers carried domestically by
airlines in India have grown at a CAGR of 8% over FY1989-FY2015.
Exhibit 1: Domestic Passengers Carried by airlines (Nos)
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
-

Exhibit 2: Passenger Load Factor

85%
80%

75%
70%
65%
60%
55%

Source: DGCA

2014-15

2012-13

2010-11

2008-09

2006-07

2004-05

2002-03

2000-01

1998-99

1996-97

1994-95

1992-93

1990-91

1988-89

1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15

50%

Source: DGCA

Increasing middle class, graduating to travel by flight

The non-suburban railway passenger traffic increased at a CAGR of 5.9% over FY0113, while the passengers travelling in the non-ordinary or other than general
category grew at a 10% CAGR over the same period. This category constitutes a high
potential catchment population for airlines.
Moreover, the increasing number of middle class as well as the ever increasing ticket
prices for Tier II and Tier III AC travel and other non-general categories by Railways
will help bolster aviation passenger traffic ahead.
Railway fares have also increased over a period of time and the average AC 1st class
earnings per passenger journey were Rs1661 in FY13, while those for AC 3-tier were
Rs744. These fares trend even higher on some of the high density routes, and on
premium category train (like Rajdhani), thereby, blurring the lines between fares for
Railways and for Low Cost Airlines. The average rate charged per passenger
kilometre by Railways was Rs2.69 in FY13, which was just 19% lower than SJs
passenger RASK (Revenue per available seat kilometre) during FY13.

January 27, 2016

SpiceJet

Exhibit 3:

Non-suburban railway passenger traffic

Mn pass.

AC sleeper

AC 3-tier

Mail 1st class

Ordy 1st class

AC chair car

Total pass.

FY01

1st AC Executive class

0.84

12.63

10.79

2.24

5.89

7.57

1971.86

FY02

1.06

12.68

12.85

1.69

4.89

7.63

2093.83

FY03

1.07

12.13

15.84

1.32

3.95

7.69

2036.74

FY04

1.08

10.9

16.15

1.37

4.01

8.61

2126.15

FY05

1.07

11.35

17.36

1.25

3.65

8.93

2200.38

FY06

1.14

11.43

21.14

1.46

4.83

9.35

2395.28

FY07

1.33

13.3

26.51

1.15

4.49

11.14

2705.11

FY08

1.58

14.01

31.31

1.1

4.59

12.96

2834.96

FY09

1.53

0.39

16.21

38.61

1.02

5.12

13.54

3118.2

FY10

1.66

0.64

17.37

45.03

1.62

5.47

14.56

3370.37

FY11

1.92

0.7

19.56

53.25

1.44

6.28

16.69

3590.14

FY12

2.34

0.87

21.68

60.35

0.99

6.77

19.44

3846.94

FY13

2.39

0.93

22.39

70.08

0.88

6.88

22.13

3944.15

Source: Indian Railways

Exhibit 4:

Non-suburban passenger traffic Average Per passenger earnings

Rs per pass.

1st AC Executive class

AC sleeper

AC 3-tier

Mail 1st class

Ordy 1st class

AC chair car

Total

FY06

1459

861

581

799

37

341

57

FY07

1470

860

606

750

39

336

58

FY08

1464

970

695

914

41

326

64

FY09

1601

1121

914

751

821

47

354

65

FY10

1478

907

891

707

461

42

368

64

FY11

1475

974

887

703

846

40

390

67

FY12

1495

975

923

749

829

36

404

69

FY13

1661

1103

1048

744

907

38

408

74

Source: Indian Railways

This increased preference for air travel has been driven by a growing middle class
population which has felt the benefits of a decade of economic growth in the
country and an increase in purchasing power. Low Cost Carriers (LCCs) promoted the
conversion of the railway traveller from Tier III and Tier II AC coaches to airlines,
thereby, increasing the catchment population significantly. Similarly, measures such
as providing a booking option well in advance of the date of travel also helped to
stimulate demand.
Over FY01-13, airline passengers have grown at a CAGR of 12.7%, while railway
passengers travelling in non-general category have increased at a lower CAGR of
10%. In absolute terms, these constituted 57.9m air travellers and 125.7m rail
travellers (i.e. more than 2x or air travellers, and 3.2% of all rail travellers).

January 27, 2016

SpiceJet

Exhibit 5: Growth in domestic airline passenger traffic

Domestic Passengers carried (m nos)

YoY gr. (%) (RHS)

120

25.0

100

20.0

15.0

80

10.0

60

5.0

40

20

(5.0)

(10.0)
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: DGCA, CAPA, PL Research

The total fleet size in India was 362 air planes in FY15, catering to 69.7m passengers.
For every 1% of the non-general railway passengers in FY13 shifting to air travel,
assuming a constant PLF of 79%, there would be a requirement of 6.5 more air
planes to be added to the existing fleet in FY15. Similarly, based upon the projections
by CAPA, for a 14% CAGR in domestic passenger traffic, we estimate the fleet size
would need to be increased from 362 in FY15 to 499 by FY18E, implying a CAGR of
11.3% (after factoring in PLF to increase from 79% in FY15 to 84.6% in FY18E). This
again serves to highlight the high potential for growth that the aviation sector in
India possesses.

Higher GDP growth can drive air travel

Exhibit 6: Domestic RPKM growth v/s Real GDP growth (x)

7.0
6.0

5.0

(x)

4.0

3.0
2.0

1.0
0.0
-1.0

-2.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Indigo RHP

The trend in increased usage of airlines as a mode of transportation can be

correlated to GDP growth in India and in other countries. Domestic RPKM has grown

January 27, 2016

SpiceJet

at an average ~2.3x real GDP growth in India in the past decade, with only three
intermittent years when it was lower than 1x.
Exhibit 7: Domestic passenger traffic growth compared to Indias GDP growth
Dom. Pax Traffic Gr.

GDP Growth YoY (%)

25.0
20.0

15.0
10.0
5.0

(5.0)

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

(10.0)

Source: CAPA, IMF

7th Pay Commission, another booster

With the 7th Pay Commission recommendations likely to be implemented in FY17,
discretionary spend by Govt. employees can increase. The 7th Pay Commission has
recommended ~23% increase in emoluments of Central government employees. This
would in all probability be followed by an increase in State government employee
salaries. Post revision in their salaries, the purchasing power and borrowing
capacities of the government workforce are likely to increase, brightening the
prospects for sectors like consumer discretionary and for leisure travel. It can also
increase the propensity of travel via air as opposed to other modes.

PLFs to remain healthy despite capacity addition

The growth ahead is expected to be stronger CAPA (Centre for Aviation) projects a
12.7% CAGR for ASKMs (Available Seat kilometre) on domestic scheduled services,
which is nearly 2x that of the 6.8% CAGR recorded over FY10-15. Domestic RPKM,
which recorded CAGR of 8.7% over FY10-15, would mirror the growth in ASKM, given
the increased pipeline for new aircrafts by all Indian aviation companies.

January 27, 2016

SpiceJet

Exhibit 8:

Fleet addition pipeline for major domestic airlines in India as of March 2015

As of Mar'15
IndiGo

Jet Airways

Air India

Launch year

Fleet family

Fleet size

Aircraft order book

of which narrow body

of which re-engined

2006

A320

94

430

430

430

Total

104

104

19

14

29

19

14

42

42

42

1993

1932

SpiceJet

2005

GoAir

2005

Air Costa

2013

AirAsia India

2014

Vistara

2015

Total

B737

75

ATR72

18

A330

B777-300

Total

126

B747-400

B777

15

B787-8

18

A320

61

B737-800

17

ATR42

ATR72

CRJ700

Total

30

B737

16

DHC-8Q-402(NG)-14

14

A320

19

72

72

72

Total

50

ERJ170-100LR-2

ERJ190-100STD-2

A320

4
6

14

14

362

727

582

572

Source: Indigo RHP

Note 1: As of Mar'15, Air Pegasus had received its Air Operator permit, but had not commenced operations.
Note 2: Air Carnival, Air One, Premier Airways, TruJet, Zav Airways, and Zexus had received NOC from AAI as of Mar'15, but had not received AOP

January 27, 2016

SpiceJet

Exhibit 9: Available seat kilometres of domestic scheduled services

Dom ASKs (bn)

YoY gr. (%) (RHS)

180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
-

20.0
15.0
10.0
5.0
(5.0)
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: CAPA, PL Research

As a consequence of the faster than ASKM growth of the passenger traffic in India,
PLF has increased significantly in Indias domestic travel from just 71.9% in FY10 to
79.1% in FY15 and stands at 81.9% in YTD FY16.
Exhibit 10: Trend in PLF

82.0
80.0
78.0

(%)

76.0
74.0
72.0
70.0
68.0
66.0
FY10

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: DGCA, PL Research

Lower aircraft penetration in India v/s other countries provides ample scope for a
further increase in passenger traffic growth, even while maintaining a high PLF.

January 27, 2016

SpiceJet

Exhibit 11: Low aircraft penetration in India - CY14

GDP Per Capita Based Upon PPP Annual Domestic Seats Per Capita
India

5,777

0.1

Malaysia

24,521

1.0

Brazil

15,153

0.7

Turkey

19,556

0.6

Colombia

13,459

0.5

Thailand

14,443

0.5

Indonesia

10,157

0.4

Russia

24,764

0.4

Mexico

17,925

0.4

China

12,893

0.4

6,986

0.3

Norway

65,896

4.8

Australia

46,631

3.3

USA

54,678

2.6

Canada

44,519

1.6

Japan

37,683

1.1

Spain

32,975

0.8

Italy

34,455

0.7

France

40,445

0.5

Germany

44,741

0.4

Philippines

Source: Indigo RHP

Draft aviation policy highlights growth potential

The Draft National Civil Aviation Policy 2015 highlights Indias potential to be among
the top 3 nations in terms of global and international passenger traffic, whereas the
current position is tenth. Factors that support this growth include an ideal
geographic location, a middle class population of ~300m (against 70m domestic
tickets sold in FY15) and a growing economy.
NCAP Vision: The vision of the NCAP is to create an eco-system that would enable
300m domestic ticketing by 2022 and 500m by 2027. This implies a CAGR of ~23%
over FY15-22 and ~18% CAGR over FY15-27. Steps to make this possible would
include enhanced regional connectivity, ease of doing business and deregulation,
safety through use of technology and effective monitoring and promoting the entire
aviation value chain (cargo, general aviation, aerospace manufacturing, etc).

January 27, 2016

10

SpiceJet

RCS: The regional connectivity scheme has been proposed to come in effect from
April 1, 2016. The target under this scheme would be have an all-inclusive airfare not
exceeding Rs2500 per passenger indexed to inflation for a one hour flight on RCS
routes. RCS will be implemented by: (1) revival of un-served or under-served
aerodromes and airstrips, (2) concessions by different stakeholders, (3) viability gap
funding for scheduled commuter airlines and (4) cost-effective security solutions by
BCAS and State Governments. A Regional Connectivity Fund would be funded by a
levy of 2% on all domestic and international tickets on all routes other than Cat IIA
routes and RCS routes.
Air cargo: Promotion of air cargo is important from an e-commerce, exports,
employment of semi-skilled labour and Make in India perspective. Currently air
cargo volumes in India are extremely low as compared to other leading countries
due to high charges and high turnaround time. The NCAP looks to put in place a
framework to ensure growth of air cargo business.
Ground handling: The Ground Handling Policy of 2010 will be replaced by a new
framework wherein the airport operator will ensure that there will be at least three
Ground Handling Agencies (GHA) including Air Indias subsidiary/JV at an airport,
with no upper limit. Domestic airlines and charter operators would have an option to
carry out self-handling themselves or through their subsidiaries or to outsource the
same to other airlines or to a GHA.
Ancillary revenues: With a need to facilitate higher ancillary revenue for airlines in
order to reduce the base airfare, airlines would be free to charge any amount for
additional services, except for check-in luggage and assistance to differently-abled
passengers, as long as such charges are communicated clearly to the passenger.

January 27, 2016

11

SpiceJet

Spicejet - outperforming the industry

Highest PLF among the domestic carriers
After bottoming out in FY15, SJs market share has witnessed a rapid recovery,
indicating the strong brand recall in India. With the industry outlook now
significantly improved, SJ is in a position to capture market share from its
competitors over a period of time yet again.
The pipeline of aircraft being ordered by various airlines is ideal for the growing
market needs, and is unlikely to cause overcapacity since the net additions per
annum would be just 10% of the order size. SJs fleet addition is unlikely to witness a
significant net addition in FY17, with several aircraft on wet leases being replaced
with those on dry leases, but should see a major improvement in FY18. However, if
demand remains consistently higher, then a faster capacity increase by the industry
can occur.
SJ has the highest PLF at ~90% in the industry in YTD FY16, much higher than
industry peers. The benefits of the high PLF are two-fold: maximising passenger
revenue and driving higher ancillary revenues for the company, as well as helping in
keeping the planes well maintained. Average flying time for SJ is 13.5 hours /day,
which is the highest in the industry. SJ is currently flying 250 flights per day, with the
focus ahead likely to be more on domestic flights.
Exhibit 12: Comparative PLF SJ and industry for domestic routes
Spicejet

Indigo

Jet

Air India

Go

Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15

95.0%
90.0%
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
55.0%

Source: DGCA

While there were constraints during 1HFY16, due to which SJ was not getting
aircrafts on dry leases, they took five planes on wet lease in Q3FY16. While these
have lower margins (5% additional cost on aircraft related costs), they were able to
meet passenger demand, thereby, justifying this decision.

January 27, 2016

12

SpiceJet

SJ currently has 27 Boeing aircrafts, with two more possibly being added before the
end of FY16. Additionally, they have 14 Bombardier, thereby, taking the total fleet
size to 43 by Mar 2016. The strategy would be to maintain this fleet size in the nearterm; the five planes on short-term lease will be replaced in May 2016 by planes on a
long-term lease. Net aircraft addition would be 2-3 in CY16 and ~8 in CY17. In the
next 2-3 months, SJ will place a long-term order for which delivery would start 2018
onwards. SJ is also open to taking planes on wet lease, so any short-term demandsupply gaps can be met through this route.

Ancillary revenues to grow faster

We expect SJs ancillary revenues to move up from 8% of total in FY11 to ~11% in
FY17, recording a CAGR of ~60% over the next two years. A major improvement for
this will accrue from cargo services, both on the aircraft, as well as from the
companys plan to provide door-to-door delivery by maintaining a fleet of trucks. The
growth in cargo services is being accentuated by increased e-commerce portals
which require immediate/overnight delivery, thereby, making air transport the
optimal alternative.
Exhibit 13: Growth (%) in cargo revenues and total revenues for SJ
Cargo Services

Total Revenues

50.0
40.0
30.0
20.0
10.0

(10.0)
(20.0)
(30.0)
FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company Data, PL Research

Moreover, contrary to Railways, where passenger revenues constitute just 28% of

their total earnings and 67% contribution accruing from goods, airline companies are
heavily dependant upon the passengers for generating revenues (~90% of revenues).
Hence, there remains an immense potential to wean away some of the high priority
cargo from Railways, particularly on the non-metro routes which will be covered by
airlines under the NCAP.

January 27, 2016

13

SpiceJet

Exhibit 14: Share of Revenues Railways

Sundry
2.0

Exhibit 15: Share of Revenues - Spicejet

Ancillary
revenues
10.3

YTD FY16
Passenger
28.0

H1 FY16

Other
Coaching
3.0

Goods
67.0

Passenger
89.7

Source: Indian Railways, PL Research

Source: Company Data, PL Research

Exhibit 16: Share of Revenues - Jet Airways

Exhibit 17: Share of Revenues - Indigo

Ancillary
revenues
8.6

Ancillary
revenues
11.5

FY15

Passenger
88.5

Passenger
91.4

Source: Company Data, PL Research

FY15

Source: Company Data, PL Research

In a strong road to recovery

With the Indian aviation industry housing 360-400 planes (over FY15-16), an annual
growth rate of 10% means that the industry size can increase by 38 planes annually.
Since a number of aircrafts also need to be replaced due to expiry of leases, the net
addition is not expected to be high. In this environment, SJ with its higher PLF is in a
position to improve its market share consistently on a YoY basis. The management
also has a view that aircraft have to fly as much as possible. This mindset also helped
in increasing ASKMs by ~15% on the same assets.

January 27, 2016

14

SpiceJet

Exhibit 18: Domestic market share of Indian carriers based upon passenger volume (%)
Indigo

Jet Airways

Air India

SpiceJet

GoAir

Kingfisher

Others

100%
80%
60%
40%
20%
0%
FY09

FY10

FY11

FY12

FY13

FY14

FY15

1QFY16 2QFY16

Source: DGCA, PL Research

Exhibit 19: Growth in SJs ASKMs
International

18,494

20,000
16,106
(ASKs (m))

15,000

Domestic
18,052
14,766

14,541

13,730

12,560

10,000
5,000
0
FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company Data, PL Research

Exhibit 20: Growth in SJs RPKMs

(RPKs (m))

International

18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0

Domestic
16,297

12,034

13,367

11,833

10,224

FY12

FY13

FY14

FY15

13,561
11,336

FY16E

FY17E

FY18E

Source: Company Data, PL Research

January 27, 2016

15

SpiceJet

Exhibit 21: PLF for SJ

International

Domestic

Passenger Load Factor

95

92

93

90

92
89

90

85

82

85

80
74

74
79

75
74

75

FY12

FY13

75
70

90

90
90

81
79

72
73
72

65
FY14

FY15

FY16E

FY17E

FY18E

Source: Company Data, PL Research

International operations are expected to grow further with the launch of non-metro
flights into the Middle East. These are highly profitable routes for SJ and in some
instances constitute the most profitable routes for the company. SJ is currently flying
to 5-6 International routes which they are further planning to increase.
Exhibit 22: Comparative PLF SJ and industry for international routes
Spicejet

Indigo

Jet

Air India

95.0%
90.0%
85.0%
80.0%
75.0%
70.0%
65.0%
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15

60.0%

Source: DGCA

January 27, 2016

16

SpiceJet

Serendipity at play
Fall in crude price
The correction in crude price has been a big factor in the turnaround of the financial
performance of aviation companies in FY16. In addition to the turnaround in
fortunes thanks to the lower cost of fuel, SJ has also taken efforts on its part to
introduce methods that lower the fuel burn on its flights and has also invested in a
fuel management software etc, thereby, increasing efficiency of operations leading
to improvement in profitability.
Exhibit 23: Correction in crude price

120.0

(US$ / bbl)

100.0
80.0
60.0
40.0
20.0
3QFY16

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

3QFY14

2QFY14

1QFY14

4QFY13

3QFY13

2QFY13

1QFY13

4QFY12

3QFY12

2QFY12

1QFY12

Source: Bloomberg

Despite the decrease in fuel costs, adjusted for the same, the average realisation per
passenger has increased. This has been done by reducing the ticket bucket options
available for customers. For SJ, while fuel costs were lower ~36% YoY in 9MFY16, the
average fare per passenger declined just ~8% YoY over the same period. Moreover,
this also coincided with the increase in PLF.
Exhibit 24: Decrease in fuel cost per ASKM

Mar-16

Dec-15

Sep-15

Jun-15

Mar-15

Dec-14

Sep-14

Jun-14

Dec-13

Mar-14

Sep-13

Jun-13

Mar-13

Sep-12

Dec-12

Jun-12

Mar-12

Dec-11

Sep-11

Jun-11

2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
-

Source: : Company Data, PL Research

January 27, 2016

17

SpiceJet

Exhibit 25: Fuel cost / km

Fuel cost / km (Rs)

YoY gr. (%) (RHS)

Mar-16

Dec-15

Sep-15

Jun-15

(50.0)

Mar-15

(40.0)

Dec-14

50.0

Sep-14

(30.0)

Jun-14

(20.0)

100.0

Mar-14

150.0

Dec-13

(10.0)

Sep-13

200.0

Jun-13

250.0

Mar-13

10.0

Dec-12

300.0

Sep-12

20.0

Jun-12

350.0

Source: Company Data, PL Research

Cost reduction measures

In addition to the benefits visible due to lower crude price, SJ has also taken
initiatives to reduce cost optimisation. At the same time, manpower was not
escalated and focus was to work more efficiently and effectively. Some old contracts
were restructured. Long-term related costs helped to get a better rate on contracts.
Even after the improved financial performance, there is further potential to reduce
SJs non-fuel operating cost by further 10%. In addition to this, there can be a 0.5-1%
increase in fuel efficiency annually.
Exhibit 26: Decrease in non-fuel costs per ASKM

3.5
3.0
2.5

2.0
1.5
1.0

0.5

Mar-16

Dec-15

Sep-15

Jun-15

Mar-15

Dec-14

Sep-14

Jun-14

Mar-14

Dec-13

Sep-13

Jun-13

Mar-13

Dec-12

Sep-12

Jun-12

Mar-12

Dec-11

Sep-11

Jun-11

Source: Company Data, PL Research

January 27, 2016

18

SpiceJet

Financials
In the past 6-7 months, the industry growth has been ~20%; this trend should
continue for a further 6-10 months due to latent demand. On a long-term basis, the
airline companies have recorded a historical domestic CAGR of 8%, while on a
medium-term basis, this has been ~12-15%. The latter rate should continue in the
future as well. A growth at this rate would also justify the fleet addition planned by
the industry. Based upon the projections by CAPA, for a 14% CAGR in domestic
passenger traffic, the fleet size would need to be increased from 362 in FY15 to 499
by FY18E, implying a CAGR of 11.3% (after factoring in PLF to increase from 79% in
FY15 to 84.6% in FY18E).
Exhibit 27: Revenue growth for SJ

(Rs m)

Sales

YoY gr. (%) (RHS)

80,000

50.0

70,000

40.0

60,000

30.0

50,000

20.0

40,000

10.0

30,000

20,000

(10.0)

10,000

(20.0)

(30.0)
FY11

FY12

FY13

FY14

FY15

FY16E FY17E FY18E

Source: Company Data, PL Research

SJ intends to maintain an asset-light model. SJ has been able to lower its working
capital debt as well. Payables were also lowered. A further 10% reduction is possible
as the cash flow generation continues. We expect the company to have a positive
net worth by FY18.

January 27, 2016

19

SpiceJet

Exhibit 28: Trend in EBITDAR

EBITDAR (incl OI)

% of sales (RHS)

25,000

35.0
30.0

20,000
(Rs m)

25.0
15,000

20.0

10,000

15.0

10.0
5,000

5.0

FY11

FY12

FY13

FY14

FY15

FY16E FY17E FY18E

Source: Company Data, PL Research

Lower costs have led to a strong improvement in financial performance for SJ and a
complete turnaround from the dismal performance of the past four years.
Exhibit 29: Trend in EBITDA
EBITDA

% of sales (RHS)

15,000

20.0
15.0

10,000
(Rs m)

10.0
5,000

5.0
-

(5.0)
(5,000)

(10.0)

(10,000)

(15.0)
FY11

FY12

FY13

FY14

FY15

FY16E FY17E FY18E

Source: Company Data, PL Research

The better financial performance also has an additional effect of improving SJs
bargaining power with their vendors and financiers. This will also in turn help to
lower costs. A long-term order also helps in lowering the Lease Rental Factor on
asset value per month. Currently SJ operated at 0.9% LRF (similar to Go), while
Indigo is at 0.65%. A long-term order with improved financial position can help SJ
catch up with the industry leader on this ratio.

January 27, 2016

20

SpiceJet

Exhibit 30: Trend in RASK CASK for SJ

0.60
0.40
0.20

(0.20)
(0.40)

(0.60)
(0.80)
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

FY18E

Source: Company Data, PL Research

Exhibit 31: Turnaround to Profits
Adjusted Net Profit

% of sales (RHS)

10,000

15.0
10.0

5,000
(Rs m)

5.0
-

(5.0)

(5,000)

(10.0)
(10,000)

(15.0)

(15,000)

(20.0)
FY11

FY12

FY13

FY14

FY15

FY16E FY17E FY18E

Source: Company Data, PL Research

Q3FY16 results were impressive

January 27, 2016

SJ reported a strong performance in Q3FY16, recording its higher ever quarterly

profits, driven by lower fuel costs and a high passenger load factor.

SJs sales growth was 12.2% YoY to Rs14.6bn. ASK was lower by 3% YoY at
~3.4bn km. RASK increased ~15 % YoY to Rs4.3. SJs PLF was 91.6% in Q3, which
was the highest in the industry.

Fuel cost was 25.1% of sales (v/s 43.2% YoY and 32.5% QoQ). Led by decline in
fuel costs, the EBITDAR grew from Rs201m in Q3FY15 to Rs5.2bn in Q3FY16.
EBITDAR margin was 35.6% (v/s 1.5% YoY and 23.5% QoQ), which was another
peak for SJ.

21

SpiceJet

January 27, 2016

CASK (Cost per available seat kilometre) declined ~21% YoY to Rs3.6. Of this fuel,
CASK was lower 32.8% YoY and other CASK was lower ~15% YoY. There was also
higher aircraft redelivery cost of Rs301m during the quarter.

Lease rentals increased 5.9% YoY to Rs2.3bn to 15.6% of sales (v/s 16.5% YoY
and 16.3% QoQ). EBITDA (ex-other income) was Rs2.8bn; margin at 19.2% YoY.

With lower YoY interest costs and other income and stable depreciation, the
profit for Q3 was Rs2.38bn (v/s loss of Rs2.75bn YoY and a profit of Rs238m in
Q2FY16).

Management has stated that despite the progress, margins were slightly
impacted due to wet lease operations, Chennai floods and exchange losses. The
company intends to work on reducing legacy cost and increasing efficiency.

22

SpiceJet

Exhibit 32: Q3FY16 Result Overview (Rs m)

Y/e March
Net Revenues
Fuel Cost
% of Net Sales
Other Operational Expenses
% of Net Sales
Personnel
% of Net Sales
Other Exp

Q3FY16

Q3FY15

YoY gr. (%)

Q2FY16

9MFY16

9MFY15

YoY gr. (%)

14,600

13,008

12.2

10,401

36,064

44,293

(18.6)

3,666

5,624

(34.8)

3,378

10,633

21,234

(49.9)

32.5

29.5

47.9

(26.7)

3,057

9,237

12,534

29.4

25.6

28.3

1,157

3,596

4,300

11.1

10.0

9.7

(22.9)

1,090

3,196

4,506

25.1

43.2

3,457

4,720

23.7

36.3

1,280

1,434

8.8

11.0

1,121

1,455

(10.7)

(26.3)
(16.4)
(29.1)

% of Net Sales

7.7

11.2

10.5

8.9

10.2

Total Expenditure

9,525

13,232

(28.0)

8,682

26,662

42,573

(37.4)

EBITDAR

5,200

201

NA

2,447

10,522

2,716

287.3

23.5

29.2

6.1

5.9

1,695

5,580

7,490

16.3

15.5

16.9

EBITDA Margin (%)

Aircraft Rentals
% of Net Sales
EBITDA
EBITDA Margin (%)
Depreciation
EBIT

35.6

1.5

2,277

2,151

15.6

16.5

2,797

(2,376)

19.2

(18.3)

305

327

NA

24

3,821

(5,770)

0.2

10.6

(13.0)

(6.6)

304

902

967

(25.5)
NA
(6.8)

2,492

(2,703)

NA

(279)

2,920

(6,737)

NA

Interest Expenses

233

474

(50.8)

211

700

1,355

(48.4)

Non-operating income

125

426

(70.6)

727

1,120

997

12.4

2,384

(2,750)

NA

238

3,340

(7,096)

NA

NA

NA

0.0

0.0

NA

0.0

0.0

0.0

NA

Reported PAT

2,384

(2,750)

NA

238

3,340

(7,096)

NA

Adj. PAT

2,384

(2,750)

NA

238

3,340

(7,096)

NA

PBT
Tax-Total
Tax Rate (%) - Total

Source: Company Data, PL Research

Exhibit 33: Operating Metrics
Y/e March

Q3FY16

Q3FY15

YoY gr. (%)

Q2FY16

9MFY16

9MFY15

YoY gr. (%)

ASK (m)

302

307

(1.8)

256

804

1,051

(23.5)

Passenger RASK

3.69

3.39

8.8

3.16

3.47

3.32

4.3

Ancillary RASK

0.59

0.36

63.9

0.70

0.58

0.40

45.0

Total RASK

4.28

3.75

14.1

3.86

4.05

3.72

8.7

Fuel CASK

1.07

1.59

(32.7)

1.17

1.17

1.74

(32.8)

Other CASK

2.52

2.93

(14.0)

2.61

2.54

2.57

(1.4)

Total CASK

3.59

4.53

(20.8)

3.78

3.71

4.31

(14.1)

RASK - CASK

0.69

-0.78

(188.5)

0.08

0.34

-0.59

(157.6)

Source: Company Data, PL Research

January 27, 2016

23

SpiceJet

Valuations
With aviation companies performing better on parameters related to both revenues
and profitability we place an Overweight stance on the sector. As a turnaround story,
we believe that SJ is in a strong position to provide the best profitability growth in
the sector, along with relative cheaper valuations as compared to the industry leader
Interglobe Aviation.
We initiate coverage on SJ as our top pick in the sector with a BUY rating. Our price
target for SJ is Rs128 (based upon 12.5x FY17e EPS). At the current price, SJ trades at
a PE of 8.8x FY17E, which is at a substantial discount to the PE for Interglobe Aviation
(~11.7x). At our price target, SJ trades at EV/EBITDAR of 4.5x FY17e.

Risks

January 27, 2016

A sharp spike in crude price would lead to lower profitability for airline
companies, especially if they are unable to pass on the price increase to
customers.

In particular, overcapacity if built up by the competition would lower the

possibility of thus passing on the higher costs to customers.

A global recession would lower air traffic and can lead to lower PLFs.

Depreciation of the Indian currency would increase costs related to rentals and
fuel costs.

As per our calculations, the international routes to the Middle East are among
the most profitable for SJ. These routes are also subject to greater geopolitical
risks and also bear the burden of potentially an oil-led recession in these regions
lowering load factors.

24

SpiceJet
Income Statement (Rs m)
Y/e March
Net Revenue
Raw Material Expenses
Gross Profit
Employee Cost
Other Expenses
EBITDA
Depr. & Amortization
Net Interest
Other Income
Profit before Tax
Total Tax
Profit after Tax
Ex-Od items / Min. Int.
Adj. PAT
Avg. Shares O/S (m)
EPS (Rs.)

Cash Flow Abstract (Rs m)

Y/e March

2015

2016E

2017E

2018E

52,448
39,414
13,035
5,375
13,809
(6,149)
1,266
1,635
2,180
(6,871)

(6,871)
429
(7,300)
599.5
(12.2)

48,431
26,111
22,320
4,837
11,931
5,552
1,235
899
1,410
4,829

4,829

4,829
599.5
8.1

58,581
30,842
27,740
5,563
14,153
8,024
1,296
630
1,551
7,649
1,530
6,120

6,120
599.5
10.2

72,257
38,210
34,047
6,536
16,859
10,652
1,361
409
1,668
10,549
2,110
8,439

8,439
599.5
14.1

2015

2016E

2017E

2018E

(1,741)
370
1,557
185
51
236
(3,218)
(4,196)

5,929
(2,000)
(2,899)
1,030
236
1,265
3,030
530

9,081
(2,000)
(7,635)
(553)
1,265
712
6,452
3,452

9,658
(3,000)
(5,409)
1,249
712
1,961
6,249
1,249

Key Financial Metrics

Y/e March
Growth

2015

2016E

2017E

2018E

Revenue (%)
EBITDA (%)
PAT (%)
EPS (%)

(17.5)
(23.1)
(27.2)
(35.0)

(7.7)
(190.3)
(166.1)
(166.1)

21.0
44.5
26.7
26.7

23.3
32.7
37.9
37.9

(11.7)
(13.9)
NM
64.6

11.5
10.0
183.9
NM

13.7
10.4
166.7
NM

14.7
11.7
167.5
NM

NM
(97)

NM
(134)

NM
(127)

0.5
(98)

NM
NM
NM
1.3

11.2
NM
11.6
1.3

8.8
NM
7.7
1.1

6.4
16.7
5.2
0.8

Eff. Tax Rate

Other Inc / PBT

(20.9)
Eff. Depr. Rate (%)
6.0
FCFE / PAT
57.5
Source: Company Data, PL Research.

29.2
5.3
11.0

20.0
20.3
5.2
56.4

20.0
15.8
4.8
14.8

C/F from Operations

C/F from Investing
C/F from Financing
Inc. / Dec. in Cash
Opening Cash
Closing Cash
FCFF
FCFE

Profitability
EBITDA Margin (%)
PAT Margin (%)
RoCE (%)
RoE (%)

Balance Sheet Abstract (Rs m)

Y/e March

2015

2016E

2017E

2018E

Shareholder's Funds
Total Debt
Other Liabilities
Total Liabilities
Net Fixed Assets
Goodwill
Investments
Net Current Assets
Cash & Equivalents
Other Current Assets
Current Liabilities
Other Assets
Total Assets

(12,645)
14,185

1,539
17,138

(15,599)
236
8,692
24,527

1,539

(7,317)
11,685

4,368
17,904

(13,536)
1,265
8,676
23,477

4,368

(5,202)
8,685

3,482
18,607

(15,125)
712
9,087
24,924

3,482

3,237
3,685

6,922
20,246

(13,324)
1,961
9,612
24,897

6,922

Quarterly Financials (Rs m)

Y/e March

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Net Revenue
EBITDA
% of revenue
Depr. & Amortization
Net Interest
Other Income
Profit before Tax
Total Tax
Profit after Tax
Adj. PAT

7,927
(663)
(8.4)
299
280
854
225

(388)
225

11,063
1,000
9.0
293
256
267
718

718
718

10,401
24
0.2
304
211
727
238

238
238

14,600
2,797
19.2
305
233
125
2,384

2,384
2,384

Key Operating Metrics

Y/e March

2015

2016E

2017E

2018E

ASKM (m)
14,541
RPKM (m)
11,833
RASK
3.7
CASK
4.2
RASK-CASK
(0.5)
PLF (%)
81.4
Avg aircraft in operation
41.6
Source: Company Data, PL Research.

12,560
11,336
3.9
3.6
0.3
90.3
39.6

14,766
13,561
4.0
3.6
0.5
91.8
44.0

18,052
16,297
4.1
3.5
0.5
90.3
50.5

Balance Sheet
Net Debt : Equity
Net Wrkng Cap. (days)

Valuation
PER (x)
P / B (x)
EV / EBITDA (x)
EV / Sales (x)

Earnings Quality

January 27, 2016

25

SpiceJet

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January 27, 2016

26

SpiceJet

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January 27, 2016

27

SpiceJet

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage

% of Total Coverage

60%
50%

PLs Recommendation Nomenclature

48.6%
40.2%

40%
30%
20%

11.2%

10%

0.0%

0%

BUY

Accumulate

Reduce

Sell

BUY

Over 15% Outperformance to Sensex over 12-months

Accumulate

Outperformance to Sensex over 12-months

Reduce

Underperformance to Sensex over 12-months

Sell

Over 15% underperformance to Sensex over 12-months

Trading Buy

Over 10% absolute upside in 1-month

Trading Sell

Over 10% absolute decline in 1-month

Not Rated (NR)

No specific call on the stock

Under Review (UR)

Rating likely to change shortly

DISCLAIMER/DISCLOSURES
ANALYST CERTIFICATION
We/I, Mr. Rohan Korde (MMS, BCom), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the
subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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January 27, 2016

RADHAKRISHNA
N SREESANKAR

Digitally signed by RADHAKRISHNAN SREESANKAR

DN: c=IN, o=Personal, cn=RADHAKRISHNAN
SREESANKAR,
serialNumber=8859da2df03122989b585ad520865
a4f59be69fbc1b7ba2c5315941f987f41de,
postalCode=400104, st=MAHARASHTRA
Date: 2016.01.27 20:09:39 +05'30'

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