Private sector carrier Jet Airways (India) Ltd has said it will turn profitable in a year. But, investors were not impressed—the company’s shares slid by more than 2% on Thursday and trade at close to a 50% discount to its 52-week high.
Jet is one of the rare cases where shares underperformed the market both during the rally and during the recent correction because of the sharp increase in oil prices recently.
For the company to turn profitable, quite a few things need to fall in place. First, oil prices need to recede considerably. For now, the company is planning to pass on the increase in fuel cost to consumers by hiking fares. The fuel surcharge component of air fares has already been increased considerably, and this has impacted growth.
Domestic passenger growth rate has dropped to 11.5% year-on-year during January and February, from as high as 30% between April and November 2007. The consolidation in the industry may have helped rationalize fares, but the sedate rate at which passenger traffic is growing is a worry.
Fuel costs accounted for 38% of sales last quarter, and the company would have no choice but to pass on the cost inflation, since it’s already running at an operating loss. The sad part would be if this hits capacity utilization further. Although the rate of new capacity addition has slowed, an additional 20% seats are still expected to be added in the country this fiscal that began 1 April.
Jet’s operating statistics for January and February show that passenger load factor hasn’t been impacted yet, but unless some of the industry’s capacity addition is deferred, utilization at the company may soon get affected.
The carrier has other worries as well. Its debt-equity ratio was nearly 5:1 at the end of the December quarter. The company has been trying to raise funds through a rights issue for some time now, but that needs to be preceded by a stake sale by the promoter in order to fund his contribution in the rights issue. A further delay in the company’s plans to raise equity could affect expansion plans, considering the already high leverage.
In the October-December quarter last year, which is when the company does best because of the holiday season, Jet posted a loss of Rs222 crore, excluding other income. Interest cover (again excluding other income) was less than 1.
In sum, oil prices need to recede, passenger growth needs to pick up, equity needs to be infused quickly, and perhaps capacity addition deferred for the company to return profits in a year. Looks like a tall order, which is probably why investors were not too excited.
Apollo Hospitals to grow, unlock value
Few sectors are more defensive than hospitals. After all, people are going to spend on health care come what may. That’s one reason why the Bombay Stock Exchange’s Health Care index is down a comparatively low 15% from the highs it hit last January.
The stock of integrated health care company Apollo Hospitals Enterprise Ltd, about 17% off its January highs, is in the enviable position of not only being in a defensive sector, but also having high growth. For the nine months to December 2007, its income from services was up 25%, but its net profit went up 51%.
The company aims to maintain that growth, which is why it is planning to add 10 new hospitals over the next 18-24 months. Company chairman Prathap Reddy told reporters on Thursday that the bed count would rise to 10,000 from the current 7,400 during the period.
Funds have already been infused into the company, with a placement to global private equity firm Apax Partners Inc. at Rs605 per share. A warrant issue has also been approved at Rs497.69 a share.
Apollo Hospitals’ operating margin was at 16.6% for the first nine months of last fiscal year that ended 31 March, compared with 16.7% in the comparable period of the previous year, despite rolling out a string of pharmacies.
Higher occupancy rates have been a big factor helping to maintain margins. The pharmacy business made a small loss in the third quarter of fiscal 2008. The company intends to increase its pharmacy network significantly and once the retail pharmacy business turns around, which analysts say will happen in this fiscal, that will add to the bottom line.
In addition, Apollo Hospital’s medical business process outsourcing, Apollo Health Street, has recently filed its draft red herring prospectus with markets regulator Securities and Exchange Board of India and the initial public offering will unlock its value.
Apollo Hospitals, therefore, has revenue and profit growth, a sector with great potential, a defensive sector, higher efficiencies, high entry barriers and value unlocking all in its favour.
That’s an impressive list, but the problem is that at 26 times consensus fiscal 2009 earnings, it’s not cheap. Nevertheless, these factors should also help to cushion the downside, helping investors in the stock through these difficult times.
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