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Coronavirus impact: Stay away from aviation stocks for now, say analysts

The contagion effect of the coronavirus (Covid-19) could soon bite the Indian aviation sector that is already dealing with a modest air-traffic growth due to the on-going economic slowdown. While the sector has seen limited impact thus far, failure to curb the virus till April could dent sentiment, experts say.

Kapil Kaul, chief executive officer of CAPA’s South Asia unit says that the demand to East Asia and Southeast Asia could be affected, and outbound travel from April onwards will have to be watched, depending upon the severity of the situation in the next few weeks. So far, Indian carriers have either cancelled or temporarily suspended their flights between India and China/ Hong Kong. Air India and IndiGo have terminated flights to China, while SpiceJet is running a few routes to Hong Kong.

“There are two scenarios in which the sector could be affected. Firstly, a massive outbreak of the virus in the West could hamper freight movement. Secondly, the spread of the virus in Indonesia, Thailand, Vietnam, and Singapore, especially till March or April, that are peak tourist seasons could affect the outlook,” said Jagannarayan Padmanabhan, director for transport and logistics at Crisil Infrastructure Advisory.

According to Crisil estimates, there were 6 million passengers that travelled to East Asia in 2019. Further, market leader InterGlobe Aviation-run IndiGo has 9 per cent of its entire international capacity allocated towards East Asia, of which China accounts for 3 per cent. Air India operates the maximum number of flights to the region.

Given the developments, analysts remain cautious on, both, SpiceJet and IndiGo due to weak fundamentals and advise investors to avoid the stock. The coronavirus outbreak, they say, adds to the concerns.

“Each flight cancelled could cause an Indian carrier to miss out on gross revenue of approximately Rs 55-72 lakhs per flight as per CARE Rating’s estimates, which would eventually impact the profitability of these players who are already reeling under intense pressure. Both Indigo SpiceJet will remain highly volatile until the epidemic stabilises. It is best for investors to avoid both these stocks for now,” says Nirali Shah, a senior research analyst, at Samco Securities.

Fundamentally, she says that Airbus has shut down its final assembly line producing A320 planes in Tianjin due to Coronavirus, which will slow down aircraft delivery to IndiGo. SpiceJet, too, recently inducted two A320 aircraft to its fleet.

At the bourses, both, SpiceJet and IndiGo have underperformed the benchmark S&P BSE Sensex in the past three months. While SpiceJet and IndiGo have declined 19 per cent and 0.6 per cent, respectively, the Sensex has added 2 per cent during the period.

Gagan Dixit, an analyst tracking the sector at Elara Capital further says while IndiGo has been unable to resolve its A320 neo-based engine issues, growth prospects for SpiceJet remain dependent on the return of Boeing 737 Max, which could negatively affect their expansion plans.

“Firstly, the on-going Coronavirus outbreak coupled with the domestic slowdown has impacted consumer sentiments. However, the recent correction in crude oil prices – 17 per cent in the past month – has worked in favour of SpiceJet and IndiGo. Going forward, while we remain constructive on the growth prospects of the industry, but given its highly cyclical nature, we would recommend avoiding both these stocks for long term investment,” says Ajit Mishra, vice-president for research at Religare Broking.

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