Jet Airways Ltd’s shares fell by as much as 6% soon after its March quarter results were announced, indicating that its earnings fell short of Street expectations. The company’s shares were trading at around Rs516 just before the results were announced, but fell to Rs484.5 on the National Stock Exchange soon after. The stock regained some ground in the last hour of trading, ending the day at Rs496.3.
Earnings before interest, tax, depreciation and amortization (Ebitda) fell by 26.4% to Rs295.8 crore in the March quarter, compared with the December quarter. This excludes revenue the company earned by leasing idle aircraft. Operating margin fell by 330 basis points quarter-on-quarter. One basis point is one-hundredth of a percentage point.
The December quarter is traditionally the strongest quarter for airline companies because of the festive and holiday season, and so a sequential fall in profit and margins the following quarter is understandable. But the profit decline was more than what some analysts had expected. Citigroup Inc., for instance, had estimated an 18% drop in Ebitda quarter-on-quarter.
Graphic: Yogesh Kumar/Mint
While the performance of the airline industry has improved considerably in the past 15-18 months, investor expectations seem to have gone ahead of fundamentals. Jet Airways’ shares have risen by almost 50% since October, at a time when the markets have been flat. There’s little doubt that Jet Airways did very well in the last fiscal, cutting costs aggressively and adapting to the changing dynamics of the industry. In FY09, it had a loss of around 2.7% of sales at the operating level, which has turned to a profit of 11.1% in FY10. Both the company and the industry put the brakes on capacity addition, and this, coupled with an increase in demand, has led to the improved performance.
But all this and more is factored into Jet’s share price. At current levels, Jet Airways has a market capitalization of Rs4,285 crore. But it has a consolidated debt of Rs14,963 crore, giving it an enterprise value of Rs19,248 crore. Even if one were to include revenue earned from leasing aircraft, the company’s consolidated Ebitda in FY10 stood at only Rs1,177 crore. This results in an enterprise value/Ebitda valuation of 16 times.
Of course, earnings can rise considerably from current levels, but valuations will still be rich, especially considering the mountain of debt on the company’s books and its ongoing struggle to raise funds from the market.
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