Aviation stocks have zoomed since IndiGo (InterGlobe Aviation) made its debut on the exchanges. However, both SpiceJet and Jet Airways were taxiing on the runway even as Indigo was preparing to come out with its initial offer. The listing gave a final boost to shares of airline companies as all three took off together.
While Indigo has stolen the limelight by gaining more than 50% from its offer price in eight trading days, other airline stock too have done a credible job, especially SpiceJet. From a low of Rs 11.25 on December 16, 2014 the stock currently trades at Rs 62.30, a nearly six-time gain in less than a year.
Jet Airways has moved from a low of Rs 203.50 on September 26, 2014, to Rs 458.30, more than double in fourteen months.
As can be seen, the rally in airline stocks started much before Indigo’s primary market issue. Aviation stocks have done well mainly on account of low fuel prices. Profitability of these companies is heavily dependent on aviation fuel prices, which account for almost half of operational expenses. A 20% increase in traffic in the first nine months of the current fiscal has also helped. Government policies, especially the draft aviation policy, has helped in improving sentiment for the sector, which been languishing for over a decade.
But the moot question from an investor’s perspective is: Has the rally outrun financials performance?
SpiceJet is barely profitable (the company posted a profit of Rs 23.77 crore and earnings per share (EPS) of Rs 0.40 for September 2015 quarter). It is still trying to find its bearings with a new management in the pilot’s seat. Justifying its valuation on profitability is a difficult task. The market is betting on a turnaround from the new management.
Jet Airways has been consistently in profits since oil prices started falling. ICICI Direct feels that the company can post an EPS of Rs 68.8 for the current fiscal, making the stock valued at 6.8 times its profits, not too costly if the company does show the numbers.
IndiGo has yet to announce its September quarter numbers, but in the June 2015 quarter the company posted a profit of Rs 640 crore as compared to Rs 1,304 crore for entire FY2014. On an historic basis the company is trading at 30 times, but if the first quarter is anything to go by, its price-to-earnings ratio can turn out to be more attractive. Its share price has also got a boost from the fact that the company has been added in the FTSE All World Index. IndiGo is the largest passenger airline in India and commanded a market share of 37.4 per cent as of August 31.
Dogfights to command the India skies are expected to intensify going forward, especially with GoAir announcing its plan to tap the markets when the going is good for the sector. For an investor, the fight between the four companies is not only in terms of market share but also the business models they represent. While Jet Airways has chosen to be a full service airline, the other three have preferred to use the low cost carrier (LCC) route to grow. Being a price sensitive market, these companies intend to use their operating leverage and efficiencies to stay in profit.
With the outlook for crude oil and aviation fuel prices likely to be depressed in the near future, all airlines would be flying at full speed to gain market share. Volume is expected to rise (October 2015 posted a 19% growth over last year) as ticket prices remain low, filling the seats will not be an issue. As long as oil prices remain low, airline stocks will keep flying high.
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