Will aviation stocks continue to fly high?

Rupee depreciation and sharp rise in crude prices will be adverse for the sector

Falling crude prices came as manna from the heavens for aviation companies in financial year (FY) 2016. India’s most profitable airline, InterGlobe Aviation Ltd, that runs IndiGo Airlines, saw an impressive 53% annual growth in its net profit for FY16. On the other hand, SpiceJet Ltd and Jet Airways (India) Ltd swung to profits for the nine-month ended December from losses during the same period in the previous year. While oil prices have shown some strength lately, they are still expected to be relatively subdued this year. That should continue to support the financials of aviation companies.

That apart, the operating environment is favourable for the aviation sector. According to JM Financial Institutional Securities Ltd, Indian air travel demand stands to gain immensely given that India remains the most underpenetrated aviation market in the world (India’s domestic seats per capita is an abysmal 0.08; for Brazil, and China, it is between 0.4x and 0.7x). The narrowing gap between rail and air fares along with expected pick-up in economic activity also bodes well for aviation. “New Civil aviation Policy’s focus on regional connectivity likely to bring more passengers on board—4-5x passenger growth targeted by 2022," wrote JM Financial analysts in a report on 10 March.

What is more, domestic passenger traffic growth has continued to remain strong. According to data from the Directorate General of Civil Aviation, passengers carried by domestic airlines recorded a 20% year-on-year growth in 2015. During January-March 2016, it increased 24% year-on-year.

Even as above mentioned factors augur well for the sector, it is worth remembering that aviation stocks have outperformed. In FY16, SpiceJet’s share price rose as much as 195%, while Jet Airways increased at a slower pace of 12%. By 31 March, IndiGo’s share price had increased 14% from its issue price. The sharp jump in SpiceJet’s share price could limit further meaningful upsides from a medium-term perspective. For Jet Airways, higher debt on the books is worrisome and any relief on that front would be welcome. IndiGo has said that it has started getting deliveries of the fuel efficient A320neos, and progress on that front will be crucial to follow.

In general, rupee depreciation and sharp rise in crude prices will be adverse for the sector.