Indian Financial Markets: FDI in aviation to boost ailing industry, says Antique

Mon, Aug 06, 2012 at 12:00

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FDI in aviation to boost ailing industry, says AntiqueVikram Suryavanshi of Antique Stock Broking is quite happy with the quarterly results of these two companies and feels it is important to watch how they maintain yields and load factor. If they successfully manage these, there would be a strong case for rerating the industry, Suryavanshi told CNBC-TV18. Share . Email . Print . A+A- FDI in aviation to boost ailing industry, says Antique

Jet Airways as well as SpiceJet came up with good performances in the first quarter of FY13. Vikram Suryavanshi of Antique Stock Broking is quite happy with the quarterly results of these two companies and feels it is important to watch how they maintain yields and load factor. If they successfully manage these, there would be a strong case for rerating the industry, Suryavanshi told CNBC-TV18.

Suryavanshi believes foreign direct investment (FDI) in aviation will help the ailing aviation sector to boost its balance sheets. Moreover, the government's role in introducing policies favouring the sector will have a positive impact on the ailing companies.

Below is the edited transcript of the interview on CNBC-TV18.

Q: Take us through the key parameters or maybe a comparison between the performance of Jet and SpiceJet. How do you think both of them did operationally and which one do you think came out with a better performance this quarter?

A: We have seen very strong improvement in the first quarter operational numbers. We have seen almost 33% growth in Jet's domestic revenue while SpiceJet's revenue growth is 55%. In terms of growth rates, SpiceJet has really done well and even been able to improve its market share from 14% to around 18.6%.

In terms of load factor also SpiceJet has done around 80%. If you look at Jet, domestic load factors are around 75%. Both have improved but, I think SpiceJet has operationally done really well and even in terms of EBITDA margin which used to be in single digits, it has moved to almost 18-19% and it is really encouraging.

If you look at this industry, there are two major problems - one is very high taxes on the ETF and second is the pricing discipline. We are clearly seeing signs that they have got huge confidence in terms of pricing discipline and that gives a strong confidence. We have to wait and see how they maintain these yields and load factor. If that happens, there is a strong case to rerate this industry.

Q: While it is a bottom-line profit for both the companies after four or five quarters, it is also because of other income. It is because of sell and leaseback money that they have got and this is not really an operational income for the companies. Would you think it is very tenuous coming into the black and things can topple over?

A: What you mentioned is true but, the fourth quarter losses were very high. It was close to Rs 200-300 crore losses per quarter. Even if you remove this, they are still breakeven. Basically, they have turned around from almost Rs 200 crore losses to a breakeven level by addressing one parameter in this quarter and that’s pricing discipline.

Now that the industry is mainly run by four players and there has been a pricing discipline from a very sub-optimal level, they are holding prices. Secondly, we are looking at delta from fuel prices. We have very discretionary prices for domestic and international operations.

So government can do away with some of the taxes which are very high in the domestic market. I think there is a huge delta which can play in for these companies because sensitivity with fuel is very high.

In case of SpiceJet, even Rs 1 change in fuel levies will have almost Rs 40-45 crore change in bottom-line and that is Re 1 EPS. What we are looking at is that pricing discipline has come into the system and now with government support, if some taxes on fuel is reduced, they can maintain a huge margin at the bottom-line. That is what we are looking at from the industry.