14 February 2017

India | India Aviation | Company Update

Price: ` 64
BUY
SpiceJet | SJET IN 12M Target: ` 85

Compelling turnaround story; BUY Ashutosh Somani

[email protected]
Tel: (91 22) 66303083
Spicejet reported a weak set of numbers in a seasonally strong quarter as
Nitin Agarwala
higher utilization was more than offset by lower yields and increased costs. [email protected]
The medium term fleet addition for SpiceJet remains limited at 54 aircraft Tel: (91 22) 66303125
over FY17/18E. However, SpiceJet’s aggressive utilisation levels – FY16E PLF
@90%, block hours @ 151k hours backed by tactical pricing & ancillary
revenue focus, continues to augur well for revenue maximization. Industry
high load factors, cost rationalization by the new management, coupled with
lower ATF prices have helped turn around the loss-making airline –
delivering profits for seven quarters in a row. SpiceJet’s strong regional
presence places it favourably to avail benefits proposed in the new Civil Key Data
Aviation Policy’s regional connectivity scheme. We estimate earnings CAGR Market cap (bn) ` 38.6 / US$ 0.6
of ~16% over FY16-19E given strong PAX growth and low ATF prices. Re- Shares in issue (mn) 599.5
iterate BUY. Diluted share (mn) 599.5
 EBITDAR margins decline YoY led by lower yields and higher costs: 3-mon avg daily val (mn) ` 184.8/US$ 2.8
Revenues for the quarter increased 13% YoY to `16.4bn driven by a 25% 52-week range ` 85.6/54.5
increase in RPK partly offset by 10% YoY decline in yields. Average fares Sensex/Nifty 28,339/8,792
declined 5% YoY. EBITDAR margin for the quarter declined 10ppt YoY at 32% `/US$ 66.9
led by lower yields and higher maintenance costs as the company is moving
Daily Performance
from wet lease to dry lease. This aircraft rental cost increased 9.7% YoY
resulting in a 10ppt decline in EBITDA margin. SpiceJet continues to fare SpiceJet
100 400%
better in blended yields, cost maneuverability vs peers given its sustained 90 350%
higher utilization of assets. PAT declined 41% to `1.4bn. 80 300%
70 250%
 Company has appealed against the order to deposit the disputed amount; 60 200%
50 150%
arbitration to continue: The Company had received amounts aggregating 40 100%
30 50%
`5.8bn from the outgoing promoters as advance money towards proposed 20 0%
allotment of certain securities – namely ~189mn warrants and 3.75mn non- 10 -50%
0 -100%
convertible CRPS. As part of the proceedings in the ensuing litigation, the BSE Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
clarified that the issuance of the warrants under previously agreed terms had
become impossibility in law. The Company has currently filed an appeal SpiceJet Rel ati ve to Sensex (R HS)

against the court order to deposit the amount of `5.8bn till the outcome of % 1M 3M 12M
arbitration over the next 12 months.
Absolute -1.8 1.0 -5.7
 High PLFs, better costs maneuverability to drive earnings; re-iterate BUY:
Relative -5.8 -4.6 -29.0
The medium term fleet addition for SpiceJet remains limited at 54 aircraft
* To the BSE Sensex
over FY17/18E. However, SpiceJet’s aggressive utilisation levels – FY16E PLF
@90%, block hours @ 151k hours backed by tactical pricing & ancillary Shareholding Pattern (%)
revenue focus, continues to augur well for revenue maximization. Industry Dec-16 Sep-16
high load factors, cost rationalization by the new management, coupled with Promoters 60.3 60.3
significantly lower ATF prices have helped turn around the loss-making airline FII 2.3 2.1
– delivering profits for seven quarters in a row. We estimate earnings CAGR of DII 1.1 0.0
~16% over FY16-19E given strong PAX growth and low ATF prices. We roll
Public / others 36.3 37.6
forward to FY19 with a fair value of `85 per share; Re-iterate BUY. 1.

 Exhibit 1. Financial Summary (` mn)

Y/E March FY15A FY16A FY17E FY18E FY19E
Net sales 51,727 50,204 62,939 71,411 83,874
Sales growth (%) -17.1 -2.9 25.4 13.5 17.5
EBITDA -6,167 6,052 8,500 9,154 9,230
EBITDA (%) -11.8 11.9 13.5 12.8 11.0
Adjusted net profit -7,484 5,165 6,728 7,268 8,037 JM Financial Research is also available
EPS (`) -12.5 8.6 11.2 12.1 13.4 on: Bloomberg - JMFR <GO>,
EPS growth (%) -25.4 -169.0 30.3 8.0 10.6 Thomson Publisher & Reuters,
ROIC (%) NA NA NA NA 92.8 S&P Capital IQ and FactSet
ROE (%) 71.1 NA NA NA 68.7
PE (x) NA 7.5 5.7 5.3 4.8 Please see Appendix I at the end of this
Price/Book value (x) NA NA 93.7 5.0 2.5 report for Important Disclosures and
EV/EBITDA (x) NA 8.2 5.3 4.3 3.5 Disclaimers and Research Analyst
Source: Company data, JM Financial. Note: Valuations as of 14/02/2017 Certification.
JM Financial Institutional Securities Limited
SpiceJet 14 February 2017

Exhibit 2. Quarterly and 9 month performance (` mn)

3QFY17 3QFY16 YoY% 2QFY16 QoQ% 9MFY17 9MFY16 YoY%
Net Sales 16,424 14,600 12.5 14,004 17.3 45,655 36,130.8 26
RPK (bn) 3.9 3.1 25.1 3.7 6.9 11.1 8.3 34.3
Yield (`) 3.6 4.1 -10.2 3.4 8.5 3.6 3.8 (6.4)
Total Expenditure (ex rental) 11,166 8,428 32.5 9,892 12.9 30,736 23,601 30
Fuel Cost 4,738 3,666 29.2 4,300 10.2 13,034 10,633 23
Employee Expense 1,827 1,280 42.8 1,531 19.4 4,833 3,590 35
Other Expenditure 4,600 3,481 32.1 4,062 13.3 12,869 9,378 37
EBITDAR 5,258 6,172 -14.8 4,112 -4.4 14,919 12,530 19
EBITDAR (%) 32.0 42.3 29.4 32.7 35
Aircraft Rental (net) 3,511 3,199 9.7 2,996 17.2 10,120 8,122 25
EBITDA 1,747 2,973 -41.2 1,116 -20.5 4,799 4,408 9
EBITDA (%) 10.6 20.4 8.0 10.5 12
Depreciation 524 465 485 1,457 1,372
EBIT 1,224 2,508 -51.2 632 -20.5 3,342 3,036 10
Other Income 280 142 154 647 1,156
Interest 78 250 197 484 773
PBT 1,426 2,399 -40.6 589 142.0 3,505 3,419 3
Tax - - - - -
Eff. Tax rate (%) - - - - -
XO items 386 - - 386 -
PAT- Reported 1,811 2,399 (24.5) 589 207.4 3,891 3,419 14
PAT- Adjusted 1,426 2,399 (40.6) 589 142.0 3,505 3,419 3
Diluted EPS 2.4 4.0 (40.6) 1.0 142.0 5.8 5.7 3

Source: JM Financial

Exhibit 3. Operational analysis

3QFY17 3QFY16 YoY% 2QFY16 QoQ% 9MFY17 9MFY16 YoY%/`
ASK (bn) 4.3 3.4 24.4% 4.0 8.1% 12.1 9.2 32.4%
RPK (bn) 3.9 3.1 25.1% 3.7 6.9% 11.1 8.3 34.3%
Load Factor (%) 91.2% 90.7% 0.5% 92.3% -1.1% 91.7% 90.4% 1.3%
Domestic Market Share (%) 12.8% 12.9% -0.1% 12.3% 0.5% 12.6% 12.3%

Pax (mn) 3.9 2.9 34.6% 3.5 12.5% 10.9 8.3 32.0%
Avg Fare (`) 3,651 3,852 3,354 3,664 3,851

RASK (`) 3.8 4.2 (0.4) 3.5 0.3 3.8 3.9 (0.2)
CASK (`) 3.4 3.4 0.1 3.3 0.2 3.4 3.5 (0.1)
ATF/ ASK (`) 1.1 1.1 0.0 1.1 0.0 1.1 1.2 (0.1)
AR/ ASK (`) 0.8 0.9 (0.1) 0.8 0.1 0.8 0.9 (0.1)
Other exp./ ASK (`) 1.5 1.4 0.1 1.4 0.1 1.5 1.4 0.0
RASK - CASK (`) 0.4 0.9 (0.5) 0.3 0.1 0.4 0.5 (0.1)
EBITDAR/ASK (`) 1.3 2.0 (0.6) 1.1 0.2 1.3 1.5 (0.2)

Crude ($/bbl) 51 45 14.2% 47 8.7% 48 50 -4.0%

Currency (`/$) 67 66 2.3% 67 0.8% 67 65 3.6%
ATF (`/kl) 50,098 46,539 7.6% 48,964 2.3% 48,204 50,423 -4.4%

Source: JM Financial

Exhibit 2. Target Price sensitivity to crude and `/$

Avg price of Brent crude (US$ per barrel)
45 50 55 60 65
63 161 136 111 85 60
Avg `/US$

65 150 124 98 72 46
67 139 112 85 58 31
69 128 100 72 45 17
71 117 88 60 31 3

Source: JM Financial

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SpiceJet 14 February 2017

Exhibit 3. Key assumptions

FY17E FY18E
ASK (bn) 16.1 17.8
RPK (bn) 14.8 16.2
Load Factor (%) 91.4% 91.4%
EBITDAR (` mn) 22,360 25,637
EBITDAR (%) 35.4 35.9

Pax (mn) 14.6 16.7

Avg Fare (`) 3,740 3,602

RASK (`) 3.9 4.0

CASK (`) 3.4 3.5
ATF/ ASK (`) 1.1 1.1
AR/ ASK (`) 0.9 0.9
Other exp./ ASK (`) 1.4 1.5
RASK - CASK (`) 0.5 0.5
EBITDAR/ASK (`) 1.5 1.6

Crude ($/bbl) 50 50
Currency (`/$) 67 67

Source: JM Financial

Exhibit 4. Target price (` bn)

FY19E
EBITDAR 28.2
EV/EBITDAR multiple 6.5x
Target EV 183
Net Debt (6.3)
Adjustment for Maran’s contribution 5.8
Capitalised value of aircraft rental @7x 132.7
Equity Value 51.1
No of shares (mn) 600
Target Price (`/share) 85

Source: JM Financial

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SpiceJet 14 February 2017

Company background
 SpiceJet Limited is an India-based provider of air transportation services. The
Company operates in the Low Cost Carrier (LCC) market and currently
commands ~13% market share by passenger volumes. The Company operates
approximately 342 daily flights to around 45 destinations, including around
39 domestic and six international. The Company connects its network using
fleet of around 31 Boeing 737, along with around 17 Bombardier Q-400
aircraft. In Feb’15, the Company underwent change of control with Mr. Ajay
Singh (founder member) taking over from erstwhile promoters – Mr. Kalanithi
Maran and Kal Airways.

Investment Rationale
 Minimal medium term fleet addition to align with demand: The medium
term fleet addition for SpiceJet remains limited at 55 aircraft over FY17/18E.
SpiceJet with its annual plan of 10% fleet addition will be better able to match
its supplies – FY16 PLF @91.5% (in Dec’16 SpiceJet’s PLF at 93.7% was 90%+
for 20 consecutive months).

 Focus on revenue maximisation: SpiceJet’s aggressive utilisation levels

backed by tactical pricing continue to augur well for revenue maximisation.
The company continues to retain high focus on high margin ancillary
revenues – cargo, food, cancellation and others enabling it to grow its
ancillary revenues from 10% in FY14 to ~16% currently. Low yields in the price
based competitive environment will be offset by high utilization and low ATF
prices.

 In a better position to size up demand in regional routes: SpiceJet with

varied sized aircraft (Q400: 78 seats and B-787: 189 seats) is in a favourable
position to operate with high Load Factor in routes with lesser demand and
thus benefit from Regional Connectivity Scheme.

 Cost efficiencies assist profitability: The management has clocked profits

for 8 quarters in a row now, owing to execution of cost rationalization
strategies. In 3QFY17, RASK less CASK spread stood at 40 paise per seat km
for SpiceJet equivalent to Indigo’s performance. The parity between the two
has reduced from unfavourable Re1 per seat km (in favour of Indigo) in FY15.

 Valuation multiples to get re-rated in tandem with operational

performance: SpiceJet’s industry high load factor, cost rationalisation and
strong regional presence make it a preferable choice in the space. We
estimate earnings CAGR of c.16% over FY16-19E given strong PAX growth and
low ATF prices. The stock trades at inexpensive valuations – c.16% discount to
Indigo’s EV/EBITDAR FY18E and remains a compelling management
turnaround story in the aviation space.

Key risks
 Increase in crude prices, currency depreciation, increasing competition and
pending judgement on warrants are the key risks to our valuation.

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SpiceJet 14 February 2017

Financial Tables (Consolidated)

Profit & Loss Statement (` mn) Balance Sheet (` mn)
Y/E March FY15A FY16A FY17E FY18E FY19E Y/E March FY15A FY16A FY17E FY18E FY19E
Net sales (Net of excise) 51,727 50,204 62,939 71,411 83,874 Share capital 5,995 5,995 5,995 5,995 5,995
Growth (%) -17.1 -2.9 25.4 13.5 17.5 Other capital 0 0 0 0 0
Other operational income 703 677 172 77 97 Reserves and surplus -16,854 -12,311 -5,583 1,685 9,722
Raw material (or COGS) 0 0 0 0 0 Networth -10,859 -6,316 412 7,680 15,717
Personnel cost 5,375 4,928 6,353 7,187 8,856 Total loans 14,773 12,325 11,325 6,325 1,325
Other expenses (or SG&A) 53,223 39,901 48,256 55,146 65,885 Minority interest 0 0 0 0 0
EBITDA -6,167 6,052 8,500 9,154 9,230 Sources of funds 3,914 6,008 11,736 14,004 17,042
EBITDA (%) -11.8 11.9 13.5 12.8 11.0 Intangible assets 0 0 0 0 0
Growth (%) -27.5 -198.1 40.5 7.7 0.8 Fixed assets 21,138 20,955 21,365 21,705 22,055
Other non-op. income 1,388 1,287 1,200 1,350 1,500 Less: Depn. and amort. 3,999 4,934 6,838 8,561 10,093
Depreciation and amort. 1,266 1,176 1,904 1,723 1,532 Net block 17,138 16,021 14,527 13,144 11,962
EBIT -6,045 6,162 7,796 8,781 9,198 Capital WIP 0 0 0 0 0
Add: Net interest income -1,439 -997 -1,068 -706 -268 Investments 0 200 200 200 200
Pre tax profit -7,484 5,165 6,728 8,075 8,930 Def tax assets/- liability 0 0 0 0 0
Taxes 0 0 0 808 893 Current assets 8,928 10,817 13,266 15,751 19,213
Add: Extraordinary items 614 -1,093 0 0 0 Inventories 451 665 571 588 690
Less: Minority interest 0 0 0 0 0 Sundry debtors 1,217 434 571 607 713
Reported net profit -6,871 4,072 6,728 7,268 8,037 Cash & bank balances 236 1,085 4,344 5,743 7,457
Adjusted net profit -7,484 5,165 6,728 7,268 8,037 Other current assets 0 0 0 0 0
Margin (%) -14.3 10.2 10.7 10.2 9.6 Loans & advances 7,024 8,633 7,781 8,814 10,353
Diluted share cap. (mn) 599 599 599 599 599 Current liabilities & prov. 22,152 21,030 16,256 15,091 14,334
Diluted EPS (`) -12.5 8.6 11.2 12.1 13.4 Current liabilities 11,787 7,762 4,488 5,123 6,143
Growth (%) -25.4 -169.0 30.3 8.0 10.6 Provisions and others 10,365 13,268 11,768 9,968 8,191
Total Dividend + Tax 0 0 0 0 0 Net current assets -13,224 -10,213 -2,990 661 4,879
Source: Company, JM Financial Others (net) 0 0 0 0 0
Application of funds 3,914 6,008 11,736 14,004 17,042
Source: Company, JM Financial

Cash flow statement (` mn) Key Ratios

Y/E March FY15A FY16A FY17E FY18E FY19E Y/E March FY15A FY16A FY17E FY18E FY19E
Reported net profit -6,871 4,072 6,728 7,268 8,037 BV/Share (`) -18.1 -10.5 0.7 12.8 26.2

Depreciation and amort. 1,266 1,176 1,904 1,723 1,532 ROIC (%) NA NA NA NA 92.8
ROE (%) 71.1 NA NA NA 68.7
-Inc/dec in working cap. 1,529 -2,162 -3,963 -2,252 -2,505
Net Debt/equity ratio (x) -1.3 -1.7 16.5 0.0 -0.4
Others 5,338 230
Valuation ratios (x)
Cash from operations (a) 1,263 3,315 4,669 6,739 7,064
PER NA 7.5 5.7 5.3 4.8
-Inc/dec in investments 0 -200 0 0 0 PBV NA NA 93.7 5.0 2.5
Capex 596 183 -410 -340 -350 EV/EBITDA NA 8.2 5.3 4.3 3.5
Change in minorities 0 0 0 0 0 EV/Sales 1.0 1.0 0.7 0.5 0.4
Others Turnover ratios (no.)

Cash flow from inv. (b) 596 -17 -410 -340 -350 Debtor days 9 3 3 3 3
Inventory days 3 5 3 3 3
Inc/-dec in capital 642 0 0 0 0
Creditor days NA NA NA NA NA
Dividend+Tax thereon
Source: Company, JM Financial
Inc/-dec in loans -2,316 -2,449 -1,000 -5,000 -5,000
Others
Financial cash flow ( c ) -1,674 -2,449 -1,000 -5,000 -5,000
Inc/-dec in cash (a+b+c) 185 849 3,259 1,399 1,714
Opening cash balance 50 236 1,085 4,344 5,743
Closing cash balance 236 1,085 4,344 5,743 7,457
Source: Company, JM Financial

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SpiceJet 14 February 2017

History of earnings estimates and target price Recommendation history

FY17E FY18E Target
Date EPS (`) % Chg. EPS (`) % Chg. Price % Chg. SpiceJet
10-Mar-16 11.3 12.2 85 100
7-Sep-16 11.2 -0.9 12.1 -0.8 85 0.0 90
B B B
25-Nov-16 11.2 0.0 12.1 0.0 85 0.0 80
70
60
50
40
30
20
10
0
Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17

Target Price S pi ceJet

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SpiceJet 14 February 2017

APPENDIX I

JM Financial Institutional Securities Limited

Corporate Identity Number: U65192MH1995PLC092522
Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
SEBI Registration Nos.: BSE - INZ010012532, NSE - INZ230012536 and MSEI - INZ260012539, Research Analyst – INH000000610
Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]

Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%

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SpiceJet 14 February 2017

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Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement
or a public offering of the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report
to be construed as an offer to sell securities or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale
of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the
relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant
to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or sale is made. This
report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or
similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the
merits of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has
been made available to you based on your representation that you are an “accredited investor” as such term is defined in National
Instrument 45-106 Prospectus Exemptions and a “permitted client” as such term is defined in National Instrument 31-103 Registration
Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the information contained herein to be
construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the needs of the
recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their
affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss
arising from any use of this research report or the information contained herein.

JM Financial Institutional Securities Limited Page 8