December quarter results announcements by SpiceJet Ltd and Interglobe Aviation Ltd, which runs IndiGo, have evoked starkly contrasting reactions. SpiceJet shares rallied by 11% soon after the results were announced, while IndiGo’s shares corrected by 25% post results. This has helped SpiceJet bridge the valuation gap with IndiGo to quite an extent.
Of course, SpiceJet is still in the midst of a turnaround, which means investors are rewarding it for a quicker-than-expected improvement in performance, rather than actually besting IndiGo.
Still, SpiceJet did manage to perform better on some parameters. For instance, while both companies have gained tremendously from the fall in crude oil prices, SpiceJet’s fuel costs as a percentage of revenue dropped to 25% for the December quarter, compared with 27% in the case of IndiGo. It also did better in garnering a load factor of 91.6%, compared with IndiGo’s 84.6%.
And revenue per available seat kilometres stood at Rs.4.25 for SpiceJet, compared with Rs.4 for IndiGo. Considering that Spicejet was in the doldrums just a year ago, all of this speaks of a rather remarkable turnaround.
A combination of above factors meant that SpiceJet’s earnings before interest, taxes, depreciation, amortization and lease rentals (Ebitdar, excluding other income) margins improved substantially by over 18 percentage points over the September quarter to 34.7% for the December quarter. IndiGo’s Ebitdar margin rose 14 percentage points to 38.7%.
SpiceJet’s net profit of Rs.238 crore is its highest ever quarterly profit, and is nearly 10 times higher than its September quarter profit. It’s little wonder investors cheered SpiceJet’s numbers. IndiGo’s net profit, too, is about six times higher sequentially. However, the IndiGo stock was hit as the results announcement included both December and September quarter results, and the latter were far lower than the Street’s estimates. Besides, the news of delay in delivery of Airbus’s A320neo aircraft hit investor sentiment.
Mayur Milak of Anand Rathi Research wrote in a note to clients on 12 January that under its new management, SpiceJet has taken a slew of corrective measures such as fleet rationalization and capacity deployment in key markets. The airline is now increasing the number of its aircraft in order to keep up with the growth in demand. Anand Rathi’s analysts believe a combination of these factors should result in compound annual growth rates of 17%, 41% and 62% over FY16-18 in revenue, Ebitda and profit after tax, respectively.
The outlook for crude oil prices is quite bearish from a near-term perspective and that helps airline companies. Further, passenger growth has been strong. Passengers carried by domestic airlines in 2015 increased 20% year-on-year, according to the Directorate General of Civil Aviation. While that augurs well, SpiceJet’s shares have outperformed the broader markets this fiscal year by a huge margin, and investors may do well to look for signs that the company will sustain its performance.
The writer does not own shares in the above-mentioned companies.