Airline investors look forward to clearer skies

For the quarter ended June, IndiGo and SpiceJet posted net loss of  ₹3,179 crore and  ₹729 crore, respectively.  (Photo: Mint)
For the quarter ended June, IndiGo and SpiceJet posted net loss of ₹3,179 crore and ₹729 crore, respectively.  (Photo: Mint)

Summary

The average daily passenger traffic in July was around 158,000. Naturally, the upward traffic trend bodes well for the sector. The rising pace of vaccinations helps, too. But much depends on the potential third covid wave and its impact

The aviation industry has been in pain since the beginning of the covid-19 pandemic, as traffic took a sharp beating and understandably so.

The second covid wave stalled the recovery that was in progress after lockdown restrictions were eased last year. This meant average daily passengers declined to a low in May and, since then, traffic is gradually improving.

“Weekly average daily fliers came in at 205k in the week ended 21 August versus 213k in the W.E. 14 August," said analysts from ICICI Securities Ltd in a report on 24 August.

For perspective: average daily passenger traffic in July was around 158,000. Naturally, the upward traffic trend bodes well for the sector. The rising pace of vaccinations helps, too. But much depends on the potential third covid wave and its impact. As such, investors in aviation firms InterGlobe Aviation Ltd and SpiceJet Ltd would keep a close eye on that in the days to come. InterGlobe runs IndiGo, India’s largest airline.

Pandemic blues
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Pandemic blues

Both firms reported losses for the financial year 2021 and it’s not as if this year has begun well.

For the quarter ended June (Q1FY22), IndiGo and SpiceJet posted net loss of ₹3,179 crore and ₹729 crore, respectively. Higher crude oil prices were an additional burden for airlines, as they were already coping with subdued demand.

Note that IndiGo’s net worth turned negative after the Q1 results. In its earnings conference call, the management said: “July (revenue) is projected to recover back to April levels." On a monthly basis, IndiGo’s April revenues were the highest in Q1.

Given the tough business conditions, shares of IndiGo and SpiceJet have underperformed the broader Nifty 500 index in this calendar year.

Even so, market share gains have augured well for the IndiGo stock, which is trading above its pre-covid highs seen in early 2020. But valuations are pricey.

“IndiGo’s stock at 10.7 times FY23E Ebitdar already factors in strong traffic/earnings recovery and leaves little room for error," said analysts from Centrum Broking Ltd in a report on 21 August. Ebitdar is earnings before interest, tax, depreciation, amortization and lease rentals. The broker has a ‘reduce’ rating on both the stocks. “With (SpiceJet’s) earnings under pressure, we remain concerned about its fragile liquidity position," they said.

SpiceJet’s shares are 41% lower than its pre-covid highs seen in January 2020. For SpiceJet, recapitalization and compensation from Boeing are key factors to watch out for, said analysts.

“The expected compensation from Boeing continues to be added every quarter at a run-rate of ₹140 crore; however, with more delay, the chances of realization of the cumulative amount (approximately ₹1,400 crore till date and it changes with forex fluctuation) becomes doubtful," said ICICI Securities’ analysts in their SpiceJet results review report.

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