Why have SpiceJet shares done better than IndiGo’s?
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After crash landing in 2016, airline stocks are taking off again. Since mid-February, shares of IndiGo parent InterGlobe Aviation Ltd, Jet Airways (India) Ltd and SpiceJet Ltd have risen between 28% and 68%. Interestingly, the 28% appreciation in IndiGo’s stock pales in comparison with SpiceJet’s spectacular 68% gain during this period. Even the Jet Airways stock has done much better, with a 41% gain.
For starters, analysts say that SpiceJet was trading at a large discount to its bigger rival IndiGo, and that it was unwarranted considering that the former has managed its profit margins better. SpiceJet’s profits have grown in the nine-month period ended December, whereas profits of the other two airlines have fallen. Moreover, on the yields front, too, it has performed comparatively better.
While Jet Airways shares have risen sharply since mid-February, they had underperformed by a huge margin prior to that. As such, it remains the least preferred airline stock in terms of valuation multiples.
According to Praveen Sahay, a research analyst at Edelweiss Broking, SpiceJet with its smaller Bombardier Q-400s is better placed than IndiGo, which has Airbus A320 aircraft, as far as the regional connectivity scheme (RCS) is concerned. That is because traffic from RCS is not expected to be robust in the initial stages, making smaller aircraft more suitable under this scheme. “Further, there may not be adequate airport infrastructure to accommodate bigger aircraft,” adds Sahay. News reports say 11 airlines including SpiceJet have bid under the scheme. Needless to say, investors need to be clued in for more details on this and for announcements on the routes that SpiceJet will fly to.
Despite the sharp rally, SpiceJet shares still trade at a meaningful discount to those of IndiGo. Based on Bloomberg data, SpiceJet trades at 10 times estimated earnings for the next fiscal year compared to 18 times in the case of IndiGo. In terms of EV/Ebitda, SpiceJet trades at 8.3 times, lower than Indigo’s 11.8 times valuation. EV stands for enterprise value, while Ebitda is earnings before interest, tax, depreciation and amortization. Of course, the fact that IndiGo is the market leader and still runs a tight ship will continue to result in premium valuations.
For any further rerating of valuations, yields, which have been a big pain point this year, have to inch up.
Among the reasons airline stocks have risen, in general, is the strengthening rupee and a correction in oil prices. Since mid-February, the rupee has appreciated close to 3% against the dollar. Further, while the rally in crude oil looked threatening earlier, prices have softened since. Brent crude prices have declined around a tenth since mid-February. It is a relief that earlier expectations of much stronger crude oil prices on account of measures taken by the Organization of the Petroleum Exporting Countries to curb output, hasn’t really played out.
“A 1% appreciation of the rupee changes earnings positively by around 3.5%, while a similar reduction in crude price changes earnings positively by around 2%”, JM Financial Institutional Securities Ltd said in a note to clients.