Monday, July 10, 2017

SpiceJet: Not a smooth flight

After losing ground in calendar 2016, the stock of low-cost carrier SpiceJet has come back roaring in 2017, more than doubling over the past six months. A few factors have aided this rally. First, a dip in oil prices and strength in the rupee over the past four to five months that could reduce the fuel costs of airlines.

Next, reports suggest that yields (average fares) that had been under pressure in FY-17 have been looking up. Also, SpiceJet placing big aircraft orders at the recent Paris Air Show helped the stock. So did the commencement on flights on the regional connectivity scheme (UDAN) routes. However, the stock slipped last week on an adverse ruling by the Delhi High Court in the share transfer dispute with the Marans, the erstwhile promoters of the airline.

Despite this fall, the stock is still trading close to its all-time highs. Meanwhile, the airline’s financial performance slipped in 2016-17 due to higher costs and lower fares.

Weak earnings along with the market rally has made the SpiceJet stock quite pricey. At ₹124, it now trades at more than 17 times the trailing 12-month earnings, as against the average of about 10 times in the past three years. Investors can sell the stock, given its high valuation and likelihood of the company’s earnings staying weak.

This is primarily due to huge capacity additions expected in the sector that could keep fares subdued. The cost benefits are also not a given in the medium-to-long term. Besides, the share allocation dispute with the Marans remains an overhang.
09/07/17 Anand Kalyanaraman/Business Line