Spicejet Ltd - Analysis of Future Prospects (as on December 18)

Report date: 26-12-18

A. REVENUE DRIVERS

Air Transport Services constitute 99.95% of the total revenues.

The Revenue estimates for 2018-19 are:

Revenue

Head

Total for the YE 2018

PAX in YE 2018

Revenue/User

PAX estimated for YE 2019 assuming 2% growth

Revenue/User at same levels

Revenue estimated for YE 2019

7728 Cr

1.99 crore at 90% load

Rs 3883

2.05 cr at 93% load

Rs 3883

8000 cr

Source of 2018 figures: Company Presentation

The results for the half year ended 30-9-18 have yielded a revenue of 4100 crores and it does seem that the company will meet or exceed 8200 crores in the current year – higher than expectations.

In the previous year, PAX grew by 8%. While projecting for 2019 I have assumed a 3% growth despite the company being awarded new sectors. Therefore, the revenues for the full year may surprise on the upside.

Still, to be conservative, the assumption is that the company will clock 8000 crores turnover for 2019.

B. VARIABLE EXPENSES CONNECTED TO MAIN BUSINESS

Expense Head	Total for the YE 2018	Underlying	Underlying prices for YE 2018	Underlying prices for YE 2018 (estimated)	Expense for YE 2019 estimated
Jet Fuel	2433 cr	Crude	$57/barrel	$66	2817 cr
				Crude touched a high of $81 in October 2018. It started cooling off from November 2018.

Source:

https://ycharts.com/indicators/average_crude_oil_spot_pricehttps://ycharts.com/indicators/average_crude_oil_spot_price

https://www.statista.com/statistics/262861/uk-brent-crude-oil-monthly-price-development/

C. OTHER EXPENSES

The company is optimizing its other expenses as per a management report.

However, we have assumed the expenses for YE 2019 to be sightly above the YE 2018 expenses while making the projections.

D. PROJECTIONS FOR YE 2019 (CONSOLIDATED)

Head	Rs (In Cr)
Income incl all operating income	8000
Other income (per last year)	130
Total Income	8130

Jet Fuel	2817
Aircraft Lease	1100
Airport Charges	670
Aircraft Maintenance	1200
Employee Expense	980
Depreciation	220
Other Expense	700
Finance Cost	100
Total Expense	7787
Net Profit projected for 2019	343 (EPS 6.50)
Net profit for 2018	557 (EPS 9.50)
Growth	-39%

ANALYSIS

The high fuel costs are factored into the price which fell from 150 to 61 after fuel prices started moving north.

The company has incurred a loss of Rs 427 crores in the first two quarters, mainly because of high crude prices. Therefore it is extremely important to watch the third quarter results because crude has started reacting from there on. To make the projected profit of 343 crores, the company must report a profit of at least 775 crores in the forthcoming quarters of 2018-19.

This report has calculated fuel costs assuming that crude will remain static @ $50 per barrel till March 2019.

If crude falls further, the company will benefit. And, vice versa.

The company also has successfully experimented with alternative fuels, a bullish sign.

The company is managed efficiently and works at 90% load factor.

The company generates healthy cash flows at the operational level which have been used in the past to repay debt and expand capacities, a very positive factor.

The one big negative associated with this company is that it is politically affiliated and if the government changes, it can be hit negatively and severely.

At Rs 9.50 EPS the company did Rs 150, giving it a discount factor of 16. If we apply the same factor to the projected EPS, we can safely say that the upside is capped at 104 (130 at best case if we discount it 20 times), NOT taking into account the following:

(a) Further fall in fuel price

(b) Successful switchover to alternative fuels (Spicejet has successfully experimented jathropa-oil-mixed fuels)

(c ) Addition of capacities

(d) Very efficient cost reduction

(e) Negative political fallout, which is a huge factor. On the flipside, if the BJP forms the government, Spicejet can head to new and unthinkable highs.