Here's why analysts choose IndiGo over SpiceJet for the long haul

Analysts are positive on IndiGo amid the airline’s pre-emptive measures to focus and strengthen each of the business verticals, and its fundraising plans
India’s largest airline by market share IndiGo – owned by InterGlobe Aviation – has approved to raise Rs 4,000 crore to tide over the liquidity crisis resurrected by Covid-19 pandemic. In contrast, its competitor SpiceJet has been shown a red flag by its auditor, doubting the airline’s continuity as ‘going concern’.

This poles-apart situation of the two airlines, which collectively controlled 69.4 per cent of the aviation market as of June 30, 2020, according to data provided by Directorate General of Civil Aviation (DGCA), has put brakes on the growth story for the sector which was once seen as the world’s fastest growing markets.

Despite the Covid-19 pandemic that nearly halted the operations of the airlines, analysts say the Indian aviation sector holds promise from a long-term perspective and that the macro-economic factors remain conducive.

“Economic structure for the aviation space is conducive for airlines to grow in India. The sector is a significant contributor towards India’s services sector as a whole. Besides, an average middle class family had begun to switch to airways before Covid-19 hit the world. That said, the only reason why most of the airlines have struggled to operate profitably in India is due to volatile crude oil prices, which may remain subdued in the short to medium term due to the deflationary pressures created by Covid-19,” explains G Chokkalingam, founder and chief investment officer at Equinomics Research.

Once the world gets a vaccine against coronavirus, Chokkalingam expects the aviation sector to see a relatively faster recovery than other discretionary sectors given pent-up demand and presumably safer mode of travel.

According to ICICI Securities, the weekly average daily fliers have increased from 79,000 earlier this year to 391,000 average daily fliers till July. “The number of fliers per departure has increased to 95 in the week ending August 8 vs 90 in the week ending August 1. These are early trends and should improve going ahead at a rate that would depend upon the trajectory of Covid-19 impact,” the brokerage said in a report dated August 10.

Investment strategy

Analysts expect SpiceJet’s stock to remain under pressure till it gets financial support, either from the government or by any private investor. Survival of this airline, they suggest, now depends on the airline’s ability to raise funds. They could either wait for the government to announce any fiscal support or could approach private equity investors to infuse funds. 

"IndiGo, due to its Numero Uno position and strong balance sheet, will weather the storm. But, under the current circumstances, SpiceJet cannot raise funds like the former did. Government support seems to be the only way out now. Of course, a white knight with deep pockets and confidence in the recovery of the business, can surprise and step in," says V K Vijayakumar, chief investment strategist at Geojit Financial Services.

SpiceJet reported a record net loss of Rs 807 crore in Q4FY20 with RASK (excluding Boeing compensation) down 7.4 per cent. “While market leader IndiGo reported 1 per cent yield growth in the same period, SpiceJet reported 10 per cent decline in yields despite industry leading load factors impacted by increased exposure to intensely competitive metro to metro routes and dual class fleet operations,” says Paarth Gala, research analyst at Prabhudas Lilladher.

Grounding of Boeing 737 Max, operation of ageing inefficient ex-Jet Boeing 737 aircraft, and a weak yield environment due to Covid-19 is expected to aggravate SpiceJet’s already tight balance sheet. As of March 2020, SpiceJet’s net debt stood at Rs 830 crore, while trade payables were Rs 1,700 crore.

“Although SpiceJet is generating positive cash flow through its cargo operations and with most pax flights currently contributing positively, the limited scale of operations is proving to be insufficient to cover all costs. We expect FY21 capacity to decline by 58 per cent YoY while FY22/FY23 capacity is likely to be 86 per cent/91 per cent of FY20 capacity. Given the demand uncertainty and weak balance sheet we value the stock at 7x Sept22 adj. EV/EBITDAR arriving at target price of Rs 32,” says Gala with a ‘sell’ call on the stock.

As regards IndiGo, analysts at Motilal Oswal Financial Services and HDFC Securities have ‘Neutral’ and ‘Add’ calls, respectively amid the airline’s pre-emptive measures to focus and strengthen each of the business verticals, fundraising plans, dominant market share (current market share of 52.5 per cent), a healthier balance sheet, and cost reduction measures.

“The company expects to trim down the fixed costs by 15-20 per cent for FY21. Besides, cash burn rate of Rs 40 crore per day in March has come down to Rs 30 crore per day owing to cost cutting initiatives. The company will raise additional funds which makes us positive,” says Aditya Makharia, research analyst at HDFC Securities.

In the past three years, stock price of IndiGo has declined 25 per cent on the BSE, while SpiceJet's has tanked 61 per cent, ACE Equity data show. In comparison, the S&P BSE Sensex has gained 21 per cent on the BSE.


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