Aviation Sector Report Feb 16 EDEL

SECTOR UDPATE
`
AVIATION
Gaining altitude
India Equity Research| Aviation
Lower yields are key to stimulating passenger traffic. However, unlike the
previous cycles, the current low yields are supported by a deflated cost
structure and higher passenger traffic is driving record PLFs. Rising incomes,
competitive fares and, eventually, improving economy will sustain high
double digit traffic over next several years. Importantly, expect a more
staggered aircraft supply given incumbents’ state of unpreparedness,
financial stress and a relatively tight lessors’ inventory. We expect record
profits to accompany record PLFs over FY16/17. Oil price is a higher risk only
if it stays sustainably over USD50/bbl and domestic economy stays subdued.
While Indigo is our top pick, turnaround in SpiceJet is commendable and on
key metrics it is outpacing the former; we initiate with ‘BUY’.

Upcycle with a difference
The domestic aviation sector is in the midst of an upcycle, which is markedly distinct
from the previous cycles. While the first cycle (FY04‐08) was characterised by low PLFs,
the second cycle (FY09‐14) was marked by high fuel prices coupled with a moderating
economy, resulting in losses, driving consolidation and need for recapitalisation. Unlike
the previous cycles, currently the aviation industry is growing at 20% plus, operating at
healthy PLFs of 80% in a benign fuel price—down 50%—environment. Ergo, airlines
having retained a sizeable portion of the benefit of fall in ATF prices are reporting
decade high gross contribution levels and robust profits.

Medium‐term visibility robust
We envisage traffic spurt to sustain buoyed by compelling growth enablers. While
competitive fares riding low oil prices are driving traffic, pick up in economy as a
demand enabler is yet to meaningfully reflect in passenger volumes. Further, rising
middle class incomes improve affordability of air travel in a benign price environment.
Also, time and convenience benefits, besides narrowing fare gap between rail and air
travel, is moving the pendulum in latter’s favour. More importantly, we believe
capacity addition has and will continue to lag demand as: (a) reality of low prices sinks
in gradually; (b) adding aircraft at competitive prices is a challenge in buoyant traffic
environment. Our calculations indicate airlines will need 5‐6% higher yield to add
aircraft on wet lease at 30‐40% higher cost; and (3) incumbents’ stretched balance

sheets. Thus, measured capacity addition will translate into firm yields.

Outlook and valuations: Profits to remain elevated

We estimate industry players to deliver record profits over the medium term—expect 30‐
100% jump in FY17E profits across players. We value aviation companies on EV/EBITDAR
Santosh Hiredesai (Click on image
by capitalising lease rentals by 7x. Among companies, we reiterate IndiGo as our top to view video)
pick—value it at 8x FY18E EV/EBITDAR with TP of INR1,186. We initiate coverage on +91 22 6620 3027
santosh.hiredesai@edelweissfin.com
SpiceJet with ‘BUY’, valuing it at 7.5x FY18E EV/EBITDAR and TP of INR127. We revise up
Jet Airways’ FY16E and FY17E EPS 18% and 6%, respectively, and value it at 7x
February 03, 2016
EV/EBITDAR to arrive at a revised TP of INR750 (INR518 earlier).
Edelweiss Research is also available on www.edelresearch.com,
1 Edelweiss Securities Limited
Edelweiss Securities Limited
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Aviation
Upcycle with a difference
The domestic aviation sector is in the midst of an upcycle, which we believe is markedly
distinct from the previous 2 cycles. While the upcycle (FY04‐08) had been characterised
by healthy passenger volumes driven by entry of LCCs, high capacity in the system led
to tepid utilisation levels and hence earnings pressure. The second cycle (FY09‐14) was
marked by elevated fuel prices coupled with a moderating economy, resulting in losses,
driving consolidation and need for recapitalisation. Unlike the previous 2 cycles, the
industry is currently operating at healthy PLFs (80% plus) and is in a benign fuel price
(down 50%) environment. Ergo, airlines having retained a sizeable portion of the
benefit of fall in ATF prices are reporting decade high gross contribution levels and
strong profits.

FY03‐08 upcycle: 26% passenger CAGR on stimulation by low cost
carriers (LCC)
Domestic aviation, post liberalisation, soared in the early part of the previous decade, which
started sometime in FY04 and clocked 5 consecutive years of double digit passenger growth
—26% CAGR. This was driven by entry of airline operators with a new business model—
LCCs (Air Deccan in 2003, SpiceJet in 2005, IndiGo & GoAir in 2006). While economic growth
was supportive, LCCs stimulated the highly under penetrated aviation market with their
differentiated pricing strategies.

Chart 1: Passenger volumes clocked 26% CAGR over FY03‐08
50.0 12.5
40.0 10.0
30.0 7.5
(%)
(%)
20.0 5.0
10.0 2.5
0.0 0.0
FY03
FY04
FY05
FY06
FY07
FY08
Pax growth GDP growth(RHS)

Source: DCGA, CMIE

However, airlines, in anticipation of burgeoning demand and in a race to increase their
market shares expanded capacity aggressively during this period—in less than 5 years the
number of aircrafts catapulted 3x to ~380 planes on a base of 140. Thus, rapidly expanding
capacity—23% CAGR—led to tepid utilisation levels with PLFs well below 70%. This
pressurised yields rendering them unremunerative, thereby hurting profitability across
airlines. This is not unusual when new business models are experimented with. In airlines
capacity is fairly fungible and generally expandable at short notice.

Aviation
Chart 2: 23% capacity CAGR took a toll on PLFs, yields and profits
400 80
340 75
280 70
(Nos)
(%)
220 65
160 60
100 55
FY03 FY04 FY05 FY06 FY07 FY08
No of planes PLF (RHS)

Source: DCGA

FY09‐14: Downcycle singes growth leading to consolidation
The early part of the current decade was characterized by elevated oil prices
(>USD90/barrel) driving up costs for the airline industry. This was reflected in higher fares
which catapulted almost 30%. This, coupled with moderating GDP growth, hurt passenger
growth, which cooled off significantly starting FY09—down to 9% CAGR in FY09‐14.

Chart 3: Elevated crude prices increased costs… Chart 4: …fares up 30% which impacted passenger traffic
125
140
110
130
(Air fares index)
95
120
(USD)
80
110
65 100
50 90
FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14

Source: Bloomberg, Company, Edelweiss research

Aviation
Chart 5: even as economy struggled passenger growth moderated significantly
25.0 10.0
17.0 8.0
9.0 6.0
(%)
(%)
1.0 4.0
(7.0) 2.0
(15.0) 0.0
Pax growth GDP growth(RHS)

Source: DCGA, CMIE

Leading to industry consolidation and need for recapitalisation
The volatile traffic coupled with elevated ATF prices eroded profitability of Indian carriers
during this phase. According to CAPA estimates, India’s airlines lost more than USD10bn
since FY09, a large portion of it having funded by debt has led to stretched balance sheets.
This triggered consolidation in the sector—Jet Airways acquired Air Sahara and Kingfisher
acquired Air Deccan—and the need for recapitalisation—Ethiad picked up 24% stake in Jet
Airways by infusing INR20bn.

Chart 6: Airlines suffered huge losses driving consolidation/recapitalisation
12,000
0
(12,000)
(INR mn)
(24,000)
(36,000)
(48,000)
FY10 FY11 FY12 FY13 FY14
IndiGo SpiceJet Jet

Source: Company

We believe management decisions to acquire companies at premium valuations in a bid to
shore up market share proved costly as market shares were not easily transportable
compared to growing organically by augmenting fleet. In the process, companies inherited
aircrafts of different make/models into their fleets, further compounding scheduling,
maintenance and management issues.

Aviation
FY15 rings in upcyle: Benign crude + soaring PLFs = Driving growth
From the peak, domestic ATF prices are down 50%, a huge relief to airline companies as fuel
prices which comprised ~45% of their total cost are now down to 28‐30%.

Chart 7: India ATF prices down 50% from peak
100
90
80
(Index)
70
60
50
Apr‐14
Apr‐15
Feb‐14
Sep‐14
Feb‐15
Sep‐15
Mar‐14
Jun‐14
Mar‐15
Jun‐15
Dec‐13
Dec‐14
Dec‐15
Jul‐14
Jul‐15
Oct‐13
Aug‐14
Oct‐14
Aug‐15
Oct‐15
Nov‐13
May‐14
Nov‐14
May‐15
Nov‐15
Jan‐14
Jan‐15
Jan‐16

Source: IOCL

Moderate fare cuts effected by airlines passing on some benefit of the fall in ATF prices has
propelled the domestic air traffic to a strong 20% plus (21% YTD December 2015) on back of
15% growth clocked in FY15. Capacity, on the other hand, has been lagging, leading to all
time high PLFs (80% plus) in the history of the Indian aviation industry.

Chart 8: Moderate fare cuts effected by airlines aided by fall in ATF prices
5.0
4.0
(INR/RPKM)
3.0
2.0
1.0
0.0
Jet SpiceJet IndiGo
FY14 FY15 YTD16

Source: Company

Aviation
Chart 9: Strong domestic traffic growth driving all time high PLFs
60.0 85.0
Low PLFs High oil prices
45.0 low growth 80.0
75.0
30.0
(%)
(%)
70.0
15.0
65.0
0.0 60.0
(15.0) 55.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
YTD16
PLF (RHS) Pax growth

Source: DCGA

Unlike the previous 2 cycles, the industry is currently operating at healthy PLFs (versus low
PLFs of FY04‐08 cycle) and in a benign fuel price environment (versus elevated prices in 1st
half of current decade). Ergo, airlines having retained a sizeable portion of the benefit of fall
in ATF prices are reporting decade high gross contribution levels and strong profits.

Chart 10: Gross contribution at a decade high for Indian carriers
5.0
4.0
(INR/ASKM)
3.0
2.0
1.0
0.0
FY10
FY11
FY12
FY13
FY14
FY15
H116
FY6
FY7
FY8
FY9
Jet Airways SpiceJet IndiGo

Source: Company, Edelweiss research

Aviation
Medium term visibility robust
We envisage the traffic spurt to sustain buoyed by compelling growth enablers. While
competitive fares riding low oil prices are currently driving traffic, pick up in economic
activity as demand enabler is yet to meaningfully reflect in passenger volumes. Further,
rising income levels among the middle class improve affordability of air travel in a
benign price environment. Also, time and convenience benefits, besides narrowing fare
gap between rail and air travel, is moving the pendulum in latter’s favour. More
importantly, we believe capacity addition has and will continue to lag demand, atleast
initially, as: (a) reality of low prices sinks in gradually; (b) adding aircraft at competitive
prices is a challenge in a buoyant traffic environment. Our calculations indicate that
airlines would need 5‐6% higher yield to add aircraft on wet lease at 30‐40% higher
cost; and (3) stretched balance sheets of most incumbents. Thus, measured capacity
addition will translate into firm yields.

We believe there are enough levers for the traffic spurt to sustain the high double digit
growth momentum of 18‐20% in the medium term:
1) Oil prices to remain benign in USD40‐50 range in the medium term: While we believe
it is not easy to predict crude oil prices, given the elevated supply amidst demand
slowdown, our view is that prices will remain in the USD40‐50 range in the medium
term. We believe, it’s beyond these price levels that pass through becomes difficult
without hurting demand.
While current growth in the domestic market is being led by pent up demand on
account of moderate fare cuts effected by players, pick up in economic activity as
demand enabler is yet to meaningfully reflect in passenger volumes, which will give
some room to pass on cost of higher fuel costs if required.
2) Rising middle class income levels: While a growing middle class with an aspiration to
fly is still a palpable target market (only ~2% of total Indian population is estimated to
have flown in any year), the Indian market remains highly under penetrated. Rising
disposable incomes among the middle class significantly improves the affordability of
air travel, which was earlier restricted largely to corporate travel.
3) Gaining competitive price edge: Rail travel, a widely used mode of transport in India,
has seen steep rise in fares in the recent past. With reduction in air fares, the discount
to rail fares is narrowing further, rendering air travel more competitive. Given the time
benefits and convenience offered by air travel there is huge potential in shift from
rail/road.

Aviation
Chart 11: AC Rail fares at ~15‐50% discount to air fares; to narrow further into FY16
6.0
4.8
3.6
(INR/Km)
2.4
1.2
0.0
AC‐I Exec AC‐I Firt AC‐II tier AC‐III tier IndiGo SpiceJet Jet Airways

Source: Indian Railways, Company

Chart 12: Rail fares to keep increasing further rendering airfares more competitive
350.0 16.0
320.0 12.0
290.0 8.0
(Paisa)
(%)
260.0 4.0
230.0 0.0
200.0 (4.0)
2005‐06
2006‐07
2007‐08
2008‐09
2009‐10
2010‐11
2011‐12
2012‐13
2013‐14
2014‐15*
AC I class (Paisa/Km) Change (YoY)

*In June 2014, Passenger fares were increased by 14.2% which was inclusive of 4.2% Fuel Adjustment
Component (FAC)
Source: Indian Railways, Edelweiss research

4) Further, with the government sharpening focus on enhancing connectivity to regional
airports by subsidising fares (proposed viability gap funding in draft national civil
aviation policy) traffic on such routes should clock healthy growth going ahead.

Measured capacity addition to result in firm yields
On a steady state, if the industry were to grow at 14‐15% (13.5% CAGR in previous decade),
India, with a current base of ~420 aircrafts, will need to add a net 40‐60 aircrafts every year.
We believe unlike the previous cycles capacity will lag demand initially as companies will be
mindful of sustenance of low crude prices for a reasonable period before they start
augmenting capacity in a big way.

Aviation
Table 1: Sensitivity of aircrafts needed to passenger growth & aircraft seat capacity
Growth in domestic airline traffic
32 8% 10% 15% 18% 20%
100 32 41 61 73 81
seats/aircraft
Average
120 27 34 51 61 68
150 22 27 41 49 54
160 20 25 38 46 51
180 18 23 34 41 45
Source: Edelweiss research

Further, availability of aircrafts at competitive prices remains a challenge, especially with
the buoyancy in the global aviation market. According to IATA, global passenger traffic for
2015 (till November) at 6.7% has clocked robust growth of above 20‐year average rate of
5%. The healthy demand sustained during the year despite some softening in economic
growth, predominantly owing to falling fares. IATA highlights that data for the first 10
months of FY15 shows a 5% decline in average fares in currency‐adjusted terms.

Chart 13: Buoyancy in global air traffic has fuelled demand for aircrafts
12.0
8.0
4.0
(%)
0.0
(4.0)
(8.0)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

*Data till Nov 2015
Source: IATA

The optimism in the global aviation market coupled with the benefit of benign crude prices
has boosted earnings/cash flows of airline companies. Ergo, many have placed record
orders with aircraft/jet manufacturers, reflected in the all time high order backlog of
OEMs—narrow body order book currently at ~10,000 units from around 7,000 units in
2012.

Aviation
Chart 14: Airbus and Boeing have record order backlogs of aircrafts …
15,000
12,000
9,000
(Nos)
6,000
3,000
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
Narrowbody Widebody

Source: Bloomberg

Order deliveries, however, are yet to see any meaningful uptick—while Boeing’s narrow
body deliveries have risen from a quarterly run rate of 100 to 125 units, Airbus at peak has
delivered 140 units and is currently going at 120/quarter.

Chart 15: …however, no meaningful increase in run rate of deliveries
300
240
126 142 129

180 138 119 120 140 111 111 109 114
(Nos)
114
120
60 105 116 112 110 115 124 120 125 121 128 126
102
0
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
Boeing 737 family Airbus A320 family

Source: Bloomberg

In order to match the burgeoning demand, OEMs have now stepped up efforts to increase
production of narrow body aircrafts—Airbus from current 42/month to 63 by 2019; Boeing
from current 42/month to 52 by 2018.

Secondary/lessor market for aircraft also tight
Given robust demand for aircraft globally, the secondary market for aircraft also remains
tight. Getting an aircraft at competitive rates is a challenge especially with most top lessors
already being pre‐booked for 90% of their deliveries over next 3‐4 years. According to
AerCap, a leading aircraft lessor, only 300 A320 Neos (the A320 family constitutes 30‐35%
of total global aircraft market whose estimated size is ~22,000 aircraft) are available to be
Aviation
deployed over next 4 years (nil for 2016). Air Lease, another listed aircraft leasing company,
maintains that out of their expected deliveries in 2016‐17, 94% are already pre‐booked for
leasing out. Thus, the lessor market, which is estimated to be ~50% of aircraft market, also
has limited supply of aircraft going ahead.

Chart 16: Open position of A320 Neos in lessors’ market
200
160
120
(Nos)
80
40
0
2016 2017 2018 2019

Source: AerCap

Further, on wet leasing of aircrafts at a 30‐40% premium to prevailing dry lease rates we
estimate airline operators will need 5‐6% higher rates over existing yields to recover the
higher lease rent costs. This indeed remains a challenge in a highly competitive price
sensitive India market. Also wet lease is predominantly to augment short term capacity to
address seasonal demand.

Table 2: Wet lease needs 5‐6% higher yields to offset cost impact
Dry lease
Yearly Rental of A320 brand new (USD mn) 4.7
Yearly Rental of A320 brand new (INR mn) 309
ASKM generated in year @ 6500 Kms/day 427
Lease cost /ASKM (INR) 0.7
Wet lease at 30% premium to dry lease
Yearly Rental of A320 brand new (USD mn) 6.1
Yearly Rental of A320 brand new (INR mn) 402
ASKM generated in year @ 6500 Kms/day 427
Lease cost /ASKM (INR) 0.9
Diference in cost/ASKM (INR) 0.2
SpiceJet yield in YTDFY16 3.8
Premium over existing (%) 5.7
IndiGo yield in YTDFY16 4.0
Premium over existing (%) 5.4

Aviation
Stretched balance sheets to limit capacity addition
Finally, given stretched balance sheets of most air lines, we anticipate most of them to use
this opportunity in the near‐to‐medium term to focus on reinvigorating their balance sheets
rather than growth. Hence, we anticipate capacity addition to be more measured in the
system, which augurs well for the industry as it will translate into firm yields.

Table 3: Most incumbents have weak B/S, limiting their ability to scale up sizeably
Airline O/S debt (INR mn) FY15 NW Comments
FY15 end (INR mn)
IndiGo 35,884 4,262 All aircraft debt
Jet Airways 119,027 (63,248) ~50% non aircraft debt
SpiceJet 16,416 (12,645) INR3bn of non aircraft debt
Go Air* 15,167 (3,930)
Air India* 483,593 (176,466)
* Based on FY14 available data
Source: Company

Chart 17: Expected year‐end fleet size of some key private airlines
150
121 140
112 115 112 113 116 116 116
120 125
105
90 94
(Nos.)
77
66
60 59
55 55 53 51
39 40 43 39
30 35
29
20 25 23 19 19
13
0 3 9
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Indigo Jet SpiceJet Go Air Vistara


Aviation
Outlook and Valuations: Industry Profits to Remain Elevated
We envisage airlines to retain a large portion of the fuel benefits, as yields remain firm
given robust demand for air travel amidst measured capacity addition. This will propel
gross contribution and help industry post high profits – expect 30‐100% jump in FY17E
profits across players to report all time high profitability for the Indian aviation sector.
Among coverage companies, we maintain ‘BUY’ on IndiGo with TP of INR1,186. We
initiate coverage on SpiceJet with ‘BUY’, valuing it at 7.5x FY18E EV/EBITDAR and TP of
INR127. We revise up Jet Airways’ FY16E and FY17E EPS by 18% and 6%, respectively,
with a revised TP of INR750 (INR518 earlier); maintain ‘BUY’.

We remain positive on passenger growth rates as more people join the flying club,
especially propelled by low fuel price and enhanced connectivity to tier‐2/3 cities. In our
view, airlines will be able to retain a sizeable portion of the fuel benefit as yields are
expected to largely remain firm given the robust demand for air travel amidst measured
capacity addition in the system. This portends further increase in contribution spread across
carriers and improved profitability for the industry going ahead.

Table 4: Revenue, fuel and contribution/ASKM for coverage companies (INR)
Jet Airways FY15 Q1FY16 Q2FY16 Q3FY16 FY16E FY17E
RASK 4.69 4.50 4.45 4.50 4.47
Fuel CASK 1.60 1.24 1.13 1.13 1.04
Contribution 3.09 3.25 3.32 3.37 3.43
SpiceJet
RASK 3.58 3.91 3.61 4.24 3.82 3.83
Fuel CASK 1.66 1.27 1.17 1.06 1.11 1.05
Contribution 1.92 2.64 2.44 3.17 2.71 2.78
IndiGo
RASK 3.94 4.15 3.36 4.00 3.75 3.77
Fuel CASK 1.65 1.35 1.20 1.11 1.17 1.10
Contribution 2.29 2.80 2.15 2.88 2.58 2.68

Among companies, we reiterate IndiGo as our top pick—value it at 8x FY18E EV/EBITDAR
with a TP of INR1,186. We initiate coverage on SpiceJet with ‘BUY’, valuing it at 7.5x FY18E
EV/EBITDAR and TP of INR127. On account of lowering our fuel price assumptions we revise
up Jet Airways’ FY16E and FY17E EPS by 18% and 6%, respectively, and value it at 7x
EV/EBITDAR to arrive at revised TP of INR750 (INR518 earlier).

India Midcaps
INITIATING COVERAGE
`
SPICEJET
Air borne: Scaling new heights
SpiceJet, after scripting a commendable turnaround in 2015 (refer our visit EDELWEISS RATINGS
note, On come back trail) is strategising for all‐round growth. Tactical Absolute Rating BUY
pricing (driving industry best PLF of >90%) and focus on ancillary revenues Investment Characteristics Growth
have helped it maximise revenue. To achieve structural cost advantages,
the company is addressing legacy issues, restructuring its long‐term
contracts and rationalising costs. Moreover, SpiceJet’s strong regional
presence places it favourably to avail benefits proposed in the new Civil
MARKET DATA (R: SPJT.BO, B: SJET IN)
Aviation Policy’s regional connectivity scheme. We estimate the company’s
CMP : INR 83
profit to double to ~INR6bn in FY17 riding buoyant domestic markets, fall
Target Price : INR 127
in ATF prices and fleet expansion. We initiate coverage with ‘BUY’ valuing 52‐week range (INR) : 95/ 16
the stock at 7.5x FY18E EV/EBITDAR to arrive at a fair value of INR127. Share in issue (mn) : 599.5
M cap (INR bn/USD mn) : 50 / 742
Revenue maximisation an appropriate strategy at current scale Avg. Daily Vol.BSE (‘000) : 6,046.6
SpiceJet’s revenue maximisation strategy has been backed by tactical pricing which has
successfully propped up occupancy levels (industry best PLF of 90% plus). The SHARE HOLDING PATTERN (%)
company’s yield is at 6% discount to competition, but superior asset utilisation ensures Current Q2FY15 Q1FY15
that it earns 9% higher revenue per seat flown (as of Q2FY16). Unlike competition, Promoters % 60.3 60.3 58.5
SpiceJet’s current scale (smaller fleet) prevents cannibalization, thereby maximising MF's, FI's & BK’s 0.0 0.0 0.0
revenue. This, coupled with obsessive focus on ancillary revenue generation, has paid FII's 0.7 0.8 0.5
rich dividends — high margin ancillary income share jumped to 13% from 9% in FY15. others 39.0 38.9 41.0
* Promoters pledged shares : 20.1
(% of share in issue)
Next big focus on industry leading cost structure
Shirking legacy issues and to ensure structural cost advantages, management is RELATIVE PERFORMANCE (%)
restructuring its long‐term contracts. Towards this, it is working with lessors and other Stock over
Sensex Stock
service providers to rationalise its cost base. Moreover, SpiceJet is working towards Sensex
sealing a 150 aircraft order to lower ownership costs and gain structural advantage. 1 month (6.2) 7.2 13.4
3 months (7.7) 76.3 84.0
Outlook and valuations: Profits to double; initiate with ‘BUY’ 12 months (15.4) 279.3 294.7
With robust passenger growth, benefit of reduction in ATF prices coupled with
expansion of fleet, we estimate SpiceJet’s profit to double to ~INR6bn in FY17. We
initiate coverage with ‘BUY’ valuing it at 7.5x FY18E EV/EBITDAR (discount to IndiGo
and premium to Jet) to arrive at fair value of INR127, i.e., 50% upside from current
level.
Financials (INR mn)
Year to March FY15 FY16E FY17E FY18E
Net revenues (INR mn) 52,015 49,014 62,911 74,605
EBITDAR (INR mn) 2,062 12,648 18,489 22,399
Adjusted PAT (INR mn) (7,484) 3,034 5,951 7,081 Santosh Hiredesai (Click on image
Diluted EPS (INR) (12.5) 5.1 9.9 11.8 +91 22 6620 3027 to view video)
santosh.hiredesai@edelweissfin.com
Diluted P/E (x) NA 16.4 8.3 7.0
EV/EBITDAR (x) 61.3 9.3 7.3 6.2
ROAE (%) 60.2 (31.9) (79.2) (709.0) February 03, 2016
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Spice Jet
Investment Rationale

Revenue maximisation an appropriate strategy at current scale
SpiceJet’s tactical pricing strategy has been extremely successful in propping up its
occupancy levels (industry best PLFs of 90% plus), in turn driving passenger growth by
stimulating demand. While the strategy has received some flak for diluting industry
yields, given the low marginal cost of carrying an extra passenger it has helped the
company maximise revenue in a hyper competitive market. Though SpiceJet’s average
yield was at 6% discount to IndiGo in Q2FY16, adjusting for higher occupancy levels and
superior asset utilisation its average passenger revenue earned per seat flown (RASK)
was at a 9% premium to the latter’s. Further, more passengers flying would imply
higher contribution of high margin ancillary income—share jumped to 13% in Q3FY16
from 9% in Q4FY15.

SpiceJet management, piloting a strong come back (refer our visit note, On come back trail,
dated October 13, 2015) from the near grounding experience, is unwaveringly focusing on
regaining volumes/market share and maximising revenue via effective pricing and inventory
management. Armed with this agenda, the company is exploring various strategies to
enhance revenue in the highly price sensitive Indian market.

Tactical pricing: Stimulate market to prop PLFs, albeit at lower yield
SpiceJet has championed the strategy of running innovative consumer promotions to
stimulate the market. Such sales and promotions, if done right, are win‐win for customers,
airlines and the travel industry as they are optimally designed to minimise dilution and
maximise revenue on seats deployed. This helps:
1) consumers by improving access to air travel at cost effective prices.
2) the airline improve PLFs by selling a small percentage of seats on certain low demand
routes which otherwise would have gone empty.
3) the airline gain access to cash flows well ahead (3‐5 months) of the delivery of the
service when the actual cost is incurred.

Table 1: SpiceJet’s recent promotional schemes
Discounted seats as a
Discounted
Month of offer Travel period (days) percentage of total seats
seats on offer
during offer period (%)
Aug‐15 214 100,000 1.5
Jul‐15 260 100,000 1.3
Jul‐15 106 150,000 3.5
Jul‐15 115 400,000 9.3
Mar‐15 50 100,000 7.6
Feb‐15 135 500,000 14.3
Source: Media articles

The company’s discounting strategy has faced some flak from industry participants for
disrupting the market by diluting yields, thus hurting the industry’s profitability. However,
SpiceJet management’s philosophy is that flying empty seats, which are ultimately
Aviation
perishable commodity/lost forever once the flight has departed, is a crime, and the best
way to fill them is to sell them well in advance at highly attractive rates to those willing to
plan and book early in exchange for competitive prices. Pricing of such inventory is based
on the marginal cost of carrying an extra passenger (which is nominal) and not on average
cost. Thus, such offers (entailing lower yield) help maximise revenue (improve PLFs and
thereby revenue per available seat kilometer ‐ RASK) and contribute incremental revenue to
the airline which flows directly to the bottom line.

Chart 1: The strategy has propped up PLFs even during weak season
100.0
95.0
90.0
(%)
85.0
80.0
75.0
Dec‐15
Aug‐15
Oct‐15
Apr‐15
May‐15
Nov‐15
Jan‐15
Feb‐15
Sep‐15
Mar‐15
Jun‐15
Jul‐15
Jet Go Air SpiceJet IndiGo

Source: DCGA

While the fare discounting strategy props up PLFs, yields (pax revenue/RPKM) tend to come
under pressure. For Q2FY16, the average yield reported by SpiceJet was at a 24% discount
to that of Jet Airways and 6% to that of IndiGo.

Chart 2: SpiceJet’s passenger yield (Rev/RPKM) at a discount to peers…
5.0
4.6
20% discount
4.2 24% discount
(INR)
3.8 6% discount 4.6
3.4
3.7
3.5
3.0
SpiceJet IndiGo Jet


Spice Jet
But, the high occupancy levels ensure that the discount significantly narrows on the
revenue earned/ASKM. After adjusting for PLFs, average passenger revenue earned/ASKM
by SpiceJet is down to 16% discount to Jet Airways, but at a 9% premium to IndiGo.

Chart 3: …however, pax revenue/ASKM at a premium due to higher occupancy
4.0
3.8
16% discount 23% discount
3.5
(INR)
3.3 9% premium 3.8
3.0
3.2
2.9
2.8
SpiceJet IndiGo Jet


Despite clocking lower yields than peers in Q3FY16, SpiceJet managed to maximise revenue
per available seat kilometer (RASK) by clocking high PLFs and strong ancillary income.

Chart 4: IndiGo build up of RASK (Q3FY16) Chart 5: SpiceJet build up of RASK (Q3FY16)
5.0 5.0
4.0 4.0 0.34 0.52

0.64 0.50
3.0 3.0
(INR)
(INR)
2.0 4.14 4.00 2.0 4.06 4.24
1.0 1.0
0.0 0.0
Yield Adj for PLF Cargo/ASKM RASK Yield Adj for PLF Cargo/ASKM RASK


This strategy, while ensuring optimisation of revenue generation through effective pricing
and inventory management has helped stimulate the air travel market and in the process
made it affordable for more people to fly. This, in turn, benefits the airline by increasing
footfalls/people, which also boosts the high margin ancillary revenue.

Aviation
Unbundling fares, in house functions strategy boosting high margin

ancillary revenue
Driven by its core strategy of “unbundling fares” which enables consumers to obtain value
for their spends, SpiceJet has taken the lead to launch innovative pricing of the tickets like
the hand baggage only fares by offering a discount for those passengers who carry only
hand baggage. Additionally, the company has brought back cargo, catering & reservations in
house (from earlier outsourced model) to gain the upside on revenue potential.

The strategy has paid rich dividends, helping the company increase the share of high margin
ancillary revenue, as evident in recent quarters.

Chart 6: Ancillary revenue as a percentage of passenger revenue
70,000 16.0
56,000 14.0
42,000 12.0
(INR mn)
(%)
28,000 10.0
14,000 8.0
0 6.0
FY12 FY13 FY14 FY15 Q1FY16 Q2FY16 Q3FY16
Pax Revenues Ancillary Revenue Anc Rev. as % of total


Spice Jet
Next big focus on industry leading cost structure
SpiceJet’s cost structure had deteriorated in recent years due to the spike in
maintenance costs and costs associated with early termination of operating leases in
FY15. To rationalise costs and ensure structural cost advantages, the company has
been addressing legacy issues and restructuring its long‐term contracts, working with
lessors and other service providers to. The company is also working towards sealing a
150 aircraft order to lower ownership costs.

Cost rationalisation
SpiceJet’s cost structure (both maintenance and ownership costs) had deteriorated during
the recent years, putting it at a disadvantage to competition, especially during adverse
market conditions, limiting pricing flexibility.

Table 2: IndiGo versus Spicejet—Cost/ASKM comparison
Indigo
Other Expenses (INR/ASKM) 0.45 0.45 0.49 0.54 0.58 0.63
Maintenance cost (INR/ASKM) 0.07 0.08 0.09 0.10 0.11 0.12
Total ownership cost/ASKM 0.40 0.41 0.51 0.60 0.67 0.67
Spicejet
Other Expenses (INR/ASKM) 0.64 0.68 0.78 0.86 1.04 1.22
Maintenance cost (INR/ASKM) 0.27 0.29 0.37 0.42 0.55 0.60
Total ownership cost/ASKM 0.48 0.43 0.50 0.63 0.72 0.79

Owing to the provisions for aircraft redelivery and other aircraft related costs relating to
early termination of Boeing aircraft leases in FY15, the company’s maintenance cost had
catapulted significantly over the previous years.

Chart 7: Early termination of aircraft leases catapulted maintenance cost in FY15
1,100
1,000
(USD/Block Hr)
900
800
700
600
FY11 FY12 FY13 FY14 FY15


Aviation
However, now management is working with lessors and other service providers to
restructure long‐term contracts related to aircraft lease, engineering, maintenance and
other areas as some of the pacts are out of sync with realities. This should help the
company address its legacy issues, including those related to aircraft costs, over the next 2‐
3 quarters and rationalise the cost base going ahead.

Chart 8: Maintenance cost has come down marginally but more to go
1,850
1,600
(USD/Block hr) 1,350
1,100
850
600
Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16


The company is also working towards a big ticket aircraft order (150 nos) for which it has
received proposals from Airbus and Boeing currently under extensive evaluation and
expected to be placed by end of the financial year. This will improve structural costs driven
by ownership cost led advantage in the long run.

Spice Jet
Pan‐India regional play: A niche
The government, under the proposed Regional Connectivity Scheme (RCS), has
sharpened focus on enhancing regional connectivity by incentivising carriers with fiscal
incentives (waiver of state taxes, airport charges) and also through viability gap
funding. By their very nature, these smaller airports—some do not support landing of
larger aircrafts—entail less competition in such sectors. SpiceJet, armed with a fleet of
Bombardiers (78 seaters), has sharpened focus on connecting these healthy growth
clocking smaller regional destinations, thereby creating a niche by having pan‐India
regional connectivity.

The emergence of LCCs in early 2000 dramatically revolutionized the Indian aviation
sector—clocked 14% passenger volume CAGR. This was driven by favourable government
polices like open skies coupled with economic growth and increase in tourism/leisure
related travel.

However, if one were to analyse the traffic distribution across Indian airports, ~65% traffic
is linked (either originating or landing) to the top 6 metro airports in the country. This
indicates that air connectivity is currently concentrated in select airports/centres and
certain routes, implying that parts of India are devoid of market generated supply of air
services.

Chart 9: Distribution of passenger volume at Indian airports
6.3%
6.1%
20.2%
34.8% 65.2%
17.8%
9.3%
5.5%
Others Chennai Kolkata Delhi (Dial)

Mumbai (Mial) Bangalore (Bial) Hyderabad (Ghial)
Source: AAI

The Government of India endeavoured to improve connectivity to regional destinations via
the Route Dispersion Guidelines (March 1994) which require Indian commercial airlines to
deploy a certain percentage of their total capacity on defined regional routes.

Among private carriers, other than Jet Airways, SpiceJet, is the only airline with a sizeable
number of smaller aircrafts in its fleet well suited to take advantage of the regional
connectivity where the economics of bigger aircrafts are not favourable. Passenger traffic
originating at such destinations is just enough to ensure healthy occupancy for smaller
aircrafts and thereby prove financially viable. According to DCGA, as on September 2015,
Aviation
SpiceJet had a fleet of 15 Bombardier aircrafts each with a capacity to seat 78 passengers
connecting various smaller airports.

Table 3: Operators with aircrafts of capacity below 100 seats as on Sep‐2015
Operator Aircraft type No of aircrafts Seat capacity
Air Pegasus ATR‐72‐212A 2 66
Airline Allied Services ATR42‐320 4 48
CRJ‐700 4 74
ATR‐72‐212A 4 70
Jet Airways (India) ATR‐72‐212‐A 18 62
SpiceJet DHC‐8‐402 15 78
Turbo Megha Airways ATR‐72‐500 1 72
LEPL Projects ERJ‐170‐100LR 2 67
Source: DCGA

As a differentiated strategy, SpiceJet has sharpened focus on connecting smaller towns,
some of which (serviced by SpiceJet according to the winter schedule of 2015) have clocked
healthy growth in passenger volumes during the year.

Table 4: Passenger volume growth at some regional airports in H1FY16
YTD Pax nos
2014‐15 2015‐16 Growth YoY (%)
Dehradun 255,503 303,325 18.7
Tirupati 152,751 234,302 53.4
Vijayawada 134,495 246,943 83.6
Rajahmundry 95,593 141,251 47.8
Jabalpur 72,053 128,399 78.2
Belgaum 54,213 91,783 69.3
Tuticorin 56,481 61,869 9.5
Source: AAI

To further promote regional connectivity, the government in the draft National Civil
Aviation policy 2015 has proposed a regional connectivity scheme (RCS) which will come
into effect from April 1, 2016. Under this, airlines will be incentivized to operate certain
routes where the all‐inclusive airfare would not exceed INR2,500 for one hour of flight. The
scheme is expected to further boost passenger volumes, thus sustaining growth momentum
from such destinations. Few airports also do not carry adequate infrastructure (length of
the runway, handling equipment, etc) limiting the ability to handle larger aircrafts (100+
seater) thus limiting competition – Fig 1 of Annexure highlights airports that currently do
not support the narrow body aircrafts.

Under the RCS scheme, airlines will benefit from cheaper fuel due to reduction in state VAT
(to 1%) and waiver of excise duty on fuel, concessional airport charges, waiver of service tax
on booked tickets, which will significantly bring down the cost structure on these routes.
According to our calculations, with an occupancy level of 80%, airlines will be able to earn
contribution without any viability gap funding (VGF) from the government at prevailing
fuel prices.

Spice Jet
Table 5: Workings on profitability of a regional route on a Q400
Assumption
Q400 Yearly rent (usd mn) 1.65 Data from AFM magazine for April 2015
No of Block Hours 2,738 5 Dep/day with 1.5Hr/flight Or 7.5Hr/Day
Cost/Hr calculations (USD)
Rent/Hour 603 Average lease rate/Hr
Maintainence cost/Hr 500 Including supplementray rentals
Fuel cost 424 2 Ltr/KM; 400Km/Hr at 35/Ltr
Airport charges 303 INR30bn/landing
Employee Charge 111 INR20mn/ Year for crew of Q400
S&D cost 236 INR250/ticket
Others 300
Total cost/Hr 2,477
Revenue/Hr calculations (USD)
No of seats 78 Capacity of Bombardier Q400
PLF (%) 80.0 Assuming this is under written by govt
Net Revenue/Seat/Hr 38 INR2500/Hr as in policy
Total Anc rev @ 10% 236
Total revenue/Hr 2,600 Total revenue /block hour

Further, owing to the concept of connecting flights for passengers coming from such
regional destinations SpiceJet is well placed to improve its load factors across its
sectors i.e., domestic metro routes and also international destinations.

Aviation
Big‐ticket orders to augment capacity underscore growth focus
SpiceJet, after changing hands in January 2015 and 4 consecutive quarters of
profitability, has been gradually discharging its past liabilities and has significantly
improved its liquidity position. It has re‐inducted aircrafts and currently has a fleet 41
aircrafts from 31 in Q4FY15. It has commendably regained lost customer volumes and
confidence over the past few quarters, driving market share gains to 13% from the lows
of 9% in Q4FY15. With resumption of growth focus, the company is looking to order 150
aircrafts by the year end (42 737 Max already in pipeline for delivery starting 2018) to
secure long‐term capacity requirements and ensure structural cost advantages.

With change of ownership in January 2015 and INR3.5bn capital infusion by outgoing
promoters (subscribed to warrants and non‐convertible redeemable preference shares
issued by the company), SpiceJet entered into settlement agreements with certain lessors
and vendors in respect of past overdue payments, and also negotiated deferred payment
plans with certain vendors for overdue amounts. This, coupled with 4 consecutive quarters
of profitability, has helped the company discharge its liability and lower past dues to
~INR5bn from a peak of INR10‐11bn during Q3FY15. Further, the company on its balance
sheet has largely aircraft debt of INR10.5bn (external commercial borrowing debt relates to
acquisition of Bombardier Q400 aircraft) with interest rates benchmarked to LIBOR ranging
from 2.4‐4.1% and short‐term debt of INR1.8bn from the outgoing promoter.

Chart 10: Liabilities were at a peak during Q2FY15, which have declined subsequently
35,000
28,000
21,000
(INRmn)
14,000
7,000
0
Q4FY14 Q2FY15 Q4FY15 Q2FY16
Other current liabilities Trade payables
Source: Company

The company had, at the peak, a fleet of 58 aircrafts, which dipped to 31 after the Q3FY15
fiasco. However, given the improvement in liquidity and the conducive market, the
company has re‐inducted a few of the surrendered aircrafts and taken some on wet lease to
end Q3FY16 with a fleet 41 aircrafts.

Spice Jet
Chart 11: Favourable market driving fleet addition since Q4FY15
75.0
60.0
15
45.0
(Nos)
30.0 14
14 14
43 14
15.0
20 22 25
17
0.0
Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16
Boeing/Airbus Bombardier

Source: Company

It has regained lost customer volumes and confidence over the past 3 quarters, which has
driven market share gains from the lows hit post Q3FY15.

Chart 12: SpiceJet has regained market share from the lows in the domestic market
100.0%
9%
21% 13%
80.0%
60.0%
40.0%
20.0%
0.0%
2014 July 2015 Feb 2015 Dec
Air India GoAir Indigo Jet + JetLite Spicejet Others

Source: DCGA

With the revival of the airline and a strong demand outlook for air travel in India
underscored by low fuel prices and the new aviation policy boosting regional connectivity,
the new promoter has now turned focus on growth and is looking to order 150 aircrafts by
the year end (42 737 Max already in pipeline for delivery starting 2018) to secure long‐term
capacity requirements. This is expected to improve structural costs driven by long‐term
contracts and size of the order.

Aviation
Table 6: SpiceJet orders and pending deliveries with Boeing
Model Series First Order Orders Deliveries Unfilled First Delivery
737 MAX 23‐Oct‐13 42 ‐ 42
737‐800 9‐Feb‐05 26 26 ‐ 7‐Feb‐06
737‐900ER 9‐Aug‐06 6 6 ‐ 7‐Nov‐07
737 Total 74 32 42
Customer Total 74 32 42
Source: Boeing, Edelweiss research

Spice Jet
Valuations
SpiceJet has significantly improved its liquidity position and quality of balance sheet
having only aircraft finance lease debt (no debt to fund historical losses) on books. The
company has been steadily adding capacity every quarter, which will help it deliver
healthy earnings growth in FY17 riding a buoyant domestic market. Thus, we value the
company by assigning 7.5x FY18E EV/EBITDAR (discount to 8x of IndiGo and premium to
7x of Jet Airways) to arrive at a fair value of INR127/share i.e. upside of 50% from CMP
and initiate coverage with ‘BUY’.

SpiceJet has significantly improved its liquidity position and brought down past dues from a
peak of INR11bn in Q3FY15 to ~INR5.5bn currently partly aided by INR3.5bn of capital
infusion via subscription of warrants/preference by out‐going promoters and also internal
cash generation over the past few quarters. While most of the statutory dues have been
settled, the company is currently in discussion with its lessors/suppliers to settle the
balance in a phased manner over the coming 2‐3 quarters.

These, coupled with increase in fleet capacity to cater to the buoyant domestic market, will
help doubling of profit in FY17 to ~INR6bn aided by subdued ATF prices in a strong demand
environment. Thus, we value the company by assigning 7.5x FY18E EV/EBITDAR (discount to
8x of IndiGo and premium to 7x of Jet Airways) to arrive at a fair value of INR127/share i.e.
upside of 50% from CMP and initiate coverage with ‘BUY’.

Table 7: Spicejet valuation
INR mn INR/share
Standalone FY18e EBITDAR 22,399 37
EV/EBITDAR (x) 7.5
EV 167,994 280
Less: Aircraft lease rentals capitalised at 7x 88,817 148
Less: Net debt (213) (0)
Less: Pref capital from ex promoters 3,505 6
Equity value 75,885 127
*Adj. for INR3.5bn of advance paid towards warrants/preference shares outstanding as on FY15

Table 8: Sensitivity of FY17 PAT to average oil price and change in yields
Avg Crude price
37 40 42 44 48
Avg chnage in yield
‐5.0% 4,280 2,995 1,924 853 (1,289)

‐4.0% 4,871 3,586 2,515 1,444 (698)
‐2.0% 6,053 4,768 3,697 2,626 484
0.0% 7,236 5,951 4,880 3,809 1,667
2.0% 8,418 7,133 6,062 4,991 2,849
3.0% 9,009 7,724 6,653 5,582 3,440
4.0% 9,600 8,315 7,244 6,173 4,031

Aviation
Key Risks

According to the FY15 annual report the company in its 30th AGM proposed and approved
allotment of 189,091,378 warrants convertible into equivalent number of equity shares.
Subscribers to these warrants have paid an amount aggregating INR2.3bn against such
proposed warrants. However, warrants have not been allotted till date due not receipt of
regulatory approval. Company also approved the issuance of up to 3,750,000 non‐
convertible CRPS of Rs. 1,000 each to the outgoing promoters on a preferential basis and
has received INR1.2bn against such proposed CRPS. Treatment for these amounts which
total to IRN3.5bn in not very clear and any dilution on account of this is a risk to the
valuations.

Sharp uptick in ATF prices (accounted for 50% of revenue in past) and INR depreciation (bulk
of cost is USD denominated) will impact profitability given high price sensitivity of the Indian
consumer leaving limited ability to pass on costs.

Economic slowdown putting pressure on demand for corporate / leisure travel will impact
load factors and hence profitability given the high operating leverage structure of the airline
business. Failure to keep the occupancy levels at 90% plus owing to any demand weakness
will pressurize the RASK and hence a risk to the earnings/valuations.

Uncertainty and unpredictability of the policy/ regulatory framework continues to be a
concern. Adverse taxation structure will drive up cost of doing business, hurting profitability.

Existing airports at Indian metros like Mumbai, Chennai and Kolkata running at peak
capacity could prove to be bottlenecks for growth.

Spice Jet
Company Description

SpiceJet, erstwhile Royal Airways (erstwhile Modiluft), is India’s No.2 low fare airline with
market share of ~13%. The company started operations in May 2005 with 3 aircrafts and
had scaled up to a fleet of 55 aircrafts at its peak without generating adequate profits and
hence was in need of recapitalization.

Owing to difficulty in meeting some of its financial obligations due to liquidity constraints,
the airline had to cancel a considerable number of scheduled flights during Q3FY15, which is
a seasonally peak quarter for the domestic airline market. This not only impacted the
quarter’s operations, but also severely eroded the brand and customer confidence in the
airline, which had a cascading impact on future bookings. Consequent to flight cancellations,
the airline lost significant market share—plummeted from 18‐20% to 9‐10%—to
competition in subsequent months.

In January 2015, Mr. Ajay Singh (one of the founder members) through a share purchase
agreement took over ownership and control of the company from erstwhile promoters—
Mr. Kalanithi Maran and Kal Airways who held 58.46%. Unlike previous promoters, Mr.
Singh, with deep understanding and experience in the airline sector, is known to be hands‐
on in his approach and gets involved in day‐to‐day operations.

Chart 13: Promoter holding before take over Chart 14: Promoter holding after take over
Kalanithi
Maran
25%
Others
Others
39%
41%
Ajay Singh
& family
60%
Kal Airways Institutions
Institutions
Pvt Ltd 1%
0% 34%

SpiceJet has managed to discharge a significant portion of its overdue obligations to
statutory authorities in the past few quarters. Currently, it has a fleet of 41 aircrafts (14
Bombardiers Q‐400 for regional destinations, 25 Boeing 737NG and 2 Airbus A320 family)
and operates 291 daily flights to 40 destinations, including 34 domestic and 6 international
ones.
Aviation
Financial outlook

Rise in margins aided by sharp correction in ATF prices
Owing to steep fall in fuel prices, Spicejet reported constant improvement in its margins
(Revenue/ASKM less Fuel expenses/ASKM) over FY 2008‐15 and we expect the
improvements to continue over FY 2015‐17 considering that the fuel prices will continue to
fall / remain subdued in FY 2017 and FY 2018.

Chart 15: Margins expected to be on an upswing aided by reduction in fuel prices
6.0
5.0
4.0
(INR)
2.71 2.78 2.78

3.0
1.92
2.0 1.65
1.0
FY14 FY15 FY16E FY17E FY18E
RASK ‐ Fuel CASK


EBITDAR growth trajectory strong
Well supported by strong growth in fleet size and focus on improving PLF and revenue
maximization strategy, we expect SpiceJet to register revenue growth (after a dip in FY16)
to report its highest revenue in FY18.

Chart 16: driving healthy growth in EBITDAR
80,000 40.0
64,000 28.0
48,000 16.0
(INR mn)
(%)
32,000 4.0
16,000 (8.0)
0 (20.0)
FY14 FY15 FY16E FY17E FY18E
Revenue EBITDAR YoY Rev growth (RHS)

Spice Jet
Annexure

Regional connectivity
Since the air traffic to/from smaller/remote/regional towns remains unpredictable and also
the ability to pay (highly price sensitive customers), globally regulators have devised
regional connectivity polices/schemes to promote and enhance connectivity. Such areas
need to be connected as: (1) they could be key tourism destinations; (2) strategically
important for a country; or (3) entail difficult terrain.

Table 1: Comparison of regional and remote connectivity policy
Country Connectivity policy Mode of implementation
USA Essential Air Services Program and the Small Community Air Direct subsidy to air carriers and grants to
Service Development Program (SCASDP) communities
UK Public Service Obligations Subsidy to carriers on non‐viable routes
Australia Regional Aviation Access Program (RAAP),Remote Airstrip Assistance for remote airport works and
Upgrade funding and Remote Air Services Subsidy Scheme upgrades. Subsidies to essential flights to
remote communities.
Germany Public Service Obligations Subsidy to carriers on non‐viable routes in
addition to price ceilings on fare levels
France Public Service Obligations Subsidies in addition to the ability to grant
monopoly status or have few airlines fly route
China Subsidy for routes to remote areas Direct subsidy
India Route dispersal guidelines Airlines forced to allocate capacity to remote
regions

Table 2: Process of determining routes for regional and remote connectivity
Country Engagement with Procedure
stakeholders
USA Yes Routes determined via consistent engagement
UK Yes Routes tendered out. Subsidy amount only
determined after a cost benefit analysis conducted
Australia Yes Routes determined via engagement with

communities.For specific flights navigation fees
may also be waived or refunded
Germany Yes Routes tendered out and subsidies allocated

France Yes Routes tendered out
China Yes Routes determined
India Yes Routes determined by government; all airlines
forced to fly routes; no subsidies

Source: CAPA

The government of India issued the Route Dispersal Guidelines (March 1994) which
mandated 10% of capacity deployed on certain key routes to be deployed on identified
remote areas (North‐East, J&K, Port Blair and Lakshwadeep) and 1% in intra‐remote
regions. Hence, under current guidelines, it is mandatory for Indian carriers to fly unviable
routes to connect remote regions, which was provided the impetus to increase air
connectivity to remote areas in the country. However, governments in other aviation
Aviation
markets tend to incentivise airlines to fly unviable routes, which encourages the latter to
operate to such airports where infrastructure is made available.

As of January 2015, India had over 130 airports, according to AAI, including at least 56
airports capable of landing one or more equipment types from the Airbus A320 family
(including A319, A320 and A321 aircraft and variants thereof) and Boeing B737 family,
according to the CAPA Report.

Fig.1: Domestic and International airports of India

Source: Airports Authority of India, CAPA

The Government of India, under the draft National Civil Aviation Policy of 2015 has
proposed a Regional Connectivity Scheme (RCS) effective April 1, 2016. Under the scheme,
airlines will be incentivised to operate certain routes where the all‐inclusive airfare will not
exceed INR2,500 for one hour of flight. The policy looks to implement this through:

Spice Jet
i) Revival of unserved or under‐served aerodromes and airstrips.
ii) Concessions by different stakeholders:
a. RCS will be made operational only in those states which reduce VAT on ATF at
these airports to 1% or less.
b. State governments will provide free land and multi‐modal hinterland connectivity.
c. No airport charges will be levied on SCA for operations under RCS.
d. ATF drawn by SCA’s from RCS airports will be exempt from excise duty.
e. Service tax on tickets under RCS will be exempted.
f. State government will provide police and fire services free of cost. Power, water
and other utilities will be provided at substantially concessional rates.
iii) Viability Gap Funding (VGF) for scheduled commuter airlines:
a. Indexed to ATF prices and inflation will be provided for a particular route on a
competitive bidding basis, if necessary, for 10 years from commencement of
operation.
iv) Cost‐effective security solutions by BCAS and state governments.

VGF will be shared between MoCA and the state government in the 80:20 ratio and will be
funded by a levy of 2% on all domestic and international tickets.

Aviation
Financial Statements

Key assumptions Income statement (INR mn)
Year to March FY15 FY16E FY17E FY18E Year to March FY15 FY16E FY17E FY18E
Macro Total operating income 52,015 49,014 62,911 74,605
GDP(Y‐o‐Y %) 7.2 7.4 7.9 8.3 Aircraft Fuel Expenses 24,096 14,223 17,262 21,206
Inflation (Avg) 5.9 4.8 5.0 5.2 Employee Expenses 5,375 4,918 6,049 7,080
Selling and Distribution Exp. 2,794 0 0 0
Repo rate (exit rate) 7.5 6.8 6.0 6.0
Other Expenses 17,689 17,225 21,111 23,921
USD/INR (Avg) 61.2 65.0 67.5 67.0
Total expenses 49,954 36,366 44,422 52,206
Sector
EBITDAR 2,062 12,648 18,489 22,399
Domestic pax growth(%) 15.2 20.0 18.0 18.0
Aircraft Lease Rentals 8,644 8,061 11,345 12,688
Domestic ASKM growth(%) 4.4 15.0 15.0 15.0 Depreciation 1,266 1,220 1,309 1,365
Domestic oil price(INR/Ltr) 67.9 48.3 45.0 48.0 EBIT (7,849) 3,367 5,835 8,346
Company Other income 2,000 1,242 875 1,062
Average fleet size(No) 41.6 37.0 47.0 55.0 Interest Expense 1,635 921 759 558
Avg. flying hours (Hrs) 9.2 10.0 9.9 9.9 Exceptionals 614
Emp. exp growth (%) (6.6) (8.5) 23.0 17.0 Profit before tax (6,871) 3,688 5,951 8,851
S&D Exp/pax (INR) 238 250 250 250 Provision for Tax 0 0 0 1,770
Airport chg/dep (INR) 37,178 38,114 39,000 39,000 Reported profit (6,871) 3,688 5,951 7,081
Maint. Cost/B Hr (USD) 1,031 820 768 731 Less: Exceptionals 614 654 ‐ ‐
Lease rent/Aircrart (USDmn) 5.0 5.3 5.1 4.6 Adjusted PAT (7,484) 3,034 5,951 7,081
Pax growth (%) (7.1) 0.8 25.7 17.4 Equity shares outstanding (mn) 599 599 599 599
EPS (INR) basic (11) 6.2 9.9 11.8
Pax yield/RPKM 4.00 3.77 3.77 3.81
Diluted shares (mn) 599 599 599 599
Anc. rev as % of pax 9.1 11.7 11.7 11.7
Diluted EPS (INR) (12.5) 5.1 9.9 11.8
Tax rate 0.0 0.0 0.0 20.0 CEPS (9.3) 8.2 12.1 14.1
DPS 0.0 0.0 0.0 0.0

Common size metrics (% net revenues)
Aircraft fuel expenses 46.3 29.0 27.4 28.4
Non‐fuel expenses 49.7 45.2 43.2 41.6
EBITDAR margins 4.0 25.8 29.4 30.0
EBIT margins (15.1) 6.9 9.3 11.2
Net profit margin (14.4) 6.2 9.5 9.5

Growth metrics (%)

Revenues (17.5) (5.8) 28.4 18.6
EBITDAR 2.1 513.5 46.2 21.1
Net profit NA NA 61.4 19.0
EPS NA NA 96.1 19.0
Spice Jet
Balance sheet (INR mn) Cash flow metrics

Total equity capital 5,995 5,995 5,995 5,995 Operating cash flow (4,109) 5,353 6,562 6,233
Reserves & surplus (18,640) (16,484) (10,534) (3,453) Financing cash flow 1,804 (3,159) (3,559) (3,358)
Shareholder's equity (12,645) (10,490) (4,539) 2,542 Investing cash flow 2,491 (1,207) 75 262
Long term borrowings 13,430 9,510 7,510 5,510 Net cash flow 185 986 3,078 3,138
Short term borrowings 2,986 2,436 1,636 836 Capex 370 (1,643) (800) (800)
Loan funds 16,416 11,946 9,146 6,346 Dividends paid ‐ ‐ ‐ ‐
Sources of funds 3,771 1,457 4,607 8,888
Tangible assets 17,138 17,561 17,052 16,487 Profitability ratios (%)
Total net fixed assets 17,138 17,561 17,052 16,487 Year to March FY15 FY16E FY17E FY18E
Cash and cash equivalents 236 344 3,421 6,559 ROACE (%) (155.6) 128.8 192.5 123.7
Inventories 451 319 380 445 ROAE (%) 60.2 (31.9) (79.2) (709.0)
Sundry debtors 1,217 284 338 396 Receivables (days) 10 6 2 2
Loans & advances 6,453 5,056 5,056 5,056 Inventory (days) 3 3 2 2
Other assets 571 1,463 1,463 1,463 Payables (days) 82 83 61 49
Current assets (ex cash) 8,692 7,122 7,237 7,360 Cash conversion cycle (days) (69) (75) (57) (45)
Trade payable 11,787 10,634 10,448 9,523 Net debt‐equity (x) (1.3) (1.1) (1.3) (0.1)
Other current liabilities & prov. 10,509 12,936 12,655 11,995
Total current liabilities & prov. 22,295 23,570 23,103 21,519 Operating ratios (x)
Net current assets (ex‐cash) (13,603) (16,448) (15,866) (14,159) Year to March FY15 FY16E FY17E FY18E
Uses of funds 3,771 1,457 4,607 8,888 Total asset turnover 10.3 18.8 20.7 11.1
Book value per share (21) (17) (8) 4 Fixed asset turnover 2.9 2.8 3.6 4.4
Equity turnover (4.6) (4.2) (8.4) (74.7)
Free cash flow (INR mn)
Year to March FY15 FY16E FY17E FY18E Valuation parameters
Net profit (7,484) 3,034 5,951 7,081 Year to March FY15 FY16E FY17E FY18E
Add: Depreciation 8,644 8,061 11,345 12,688 Diluted EPS (INR) (12.5) 5.1 9.9 11.8
Add: Deferred tax ‐ ‐ ‐ ‐ Y‐o‐Y growth (%) NA NA 96.1 19.0
Add: Others (3,076) (5,742) (10,734) (13,536) CEPS (INR) (9.3) 8.2 12.1 14.1
Gross cash flow (1,917) 5,353 6,562 6,233 Diluted P/E (x) NA 16.4 8.3 7.0
Less:Changes in WC 2,192 ‐ ‐ ‐ P/BV (x) NA NA NA 19.5
Opertaing cash flow (4,109) 5,353 6,562 6,233 EV/Sales (x) 2.4 2.4 2.1 1.9
Less: Capex (370) 1,643 800 800 EV/EBITDAR (x) 61.3 9.3 7.3 6.2
Free cash flow (3,739) 3,710 5,762 5,433 Dividend yield(%) ‐ ‐ ‐ ‐

Aviation
Additional Data
Directors Data
Mr. Ajay Singh Promoter Director ( Managing Director) Mrs. Shiwani Singh Promoter Director (Non‐Executive)

Mr. R Sasiprabhu Independent & Non‐Executive director

Auditors ‐ M/s S. R. Batliboi & Associates LLP
*as per latest available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*as per last available data

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

COMPANY UPDATE

INTERGLOBE AVIATION (INDIGO)
Realigning expectations
EDELWEISS 4D RATINGS
IndiGo witnessed correction in yields much higher than peers during the
past couple of quarters owing to strong reoccurrence of competition. Absolute Rating BUY
Rating Relative to Sector Outperform
However, we believe in FY16 yields will normalise for IndiGo and thereon
Risk Rating Relative to Sector High
move in line with market. The company has been able to expand capacity
Sector Relative to Market Overweight
(20% plus) on improved aircraft utilisation, even though there has been a
delay in delivery of Neos. We reiterate our conviction on IndiGo and expect
it to deliver industry‐leading growth anchored by robust business model. MARKET DATA (R: , B: INDIGO IN)
Maintain ‘BUY’ with TP of INR1,186. CMP : INR 838
Target Price : INR 1,186
52‐week range (INR) : 1,396 / 821
Yields to track market trend
Share in issue (mn) : 360.4
In the past couple of quarters, IndiGo registered correction in yields higher than peers M cap (INR bn/USD mn) : 302 / 4,463
impacted by strong comeback of competition and the need to stimulate volumes. The Avg. Daily Vol.BSE/NSE(‘000) : 3,328.8
company enjoyed premium yields in FY15, even as it gained significant market share, as
SpiceJet (a formidable competitor in LCC market) had drastically cut its fleet size due to SHARE HOLDING PATTERN (%)
liquidity constraints in H2FY15. However, under its new promoter, SpiceJet has made a
Current Q2FY16 Q1FY16
strong come back, added sizeable capacity in FY16 and was successful in narrowing the
Promoters * 86.2 94.0 94.0
premium on yields. For IndiGo, with premium reducing significantly, we now believe
MF's, FI's & BK’s 0.8 0.0 0.0
incremental correction in FY16 on existing rebased yields would likely move in line with
FII's 5.1 0.0 0.0
market.
Others 13.9 6.0 6.0
* Promoters pledged shares : NIL
Higher capacity on improved aircraft utilisation (% of share in issue)
Despite delay in delivery of Neos, IndiGo increased capacity by 20% plus by improving
PRICE PERFORMANCE (%)
utilisation of existing aircraft and sourcing aircraft on operating lease from secondary
markets. Utilisation of aircraft has increased to 12 hours/day (Industry best of ~13 hours Stock Nifty
for airlines doing international routes) from earlier 11.4 hours/day owing to improved 1 month (37.1) (6.4)
turnaround of aircraft. 3 months N/A (7.4)
12 months N/A (15.3)
Outlook and valuations: Strong fundamentals; maintain ‘BUY’
We believe IndiGo will incrementally move in tandem with industry in FY17 with
rebasing of yields in FY16. We maintain the company will continue to deliver industry‐
leading growth, driven by its robust business model and prudent long‐term strategies.
We value the stock at 8x FY18E EV/EBITDAR and arrive at a fair value of INR1,186. We
maintain ‘BUY/SO’.

Financials (INR mn)
Net revenues (INR mn) 139,253 159,617 185,149 215,028
EBITDAR (INR mn) 38,219 54,776 66,707 76,499
Adjusted PAT (INR mn) 12,956 18,153 23,743 27,831 Santosh Hiredesai
+91 22 6620 3027
Diluted EPS (INR) 37.7 50.4 65.9 77.2 santosh.hiredesai@edelweissfin.com

Diluted P/E (x) 22.2 16.6 12.7 10.8
EV/EBITDAR (x) 11.5 8.8 7.6 7.0
ROAE (%) 306.0 165.6 131.2 146.0 February 03, 2016
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Aviation

Chart 1: Narrowing of yields going into FY16
5.5
5.0
4.5
(INR)
4.0
3.5
3.0
Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16
IndiGo SpiceJet


Table 1: Valuation
Comments FY18 value Multiple (X) Total Value Per Share
EBITDAR 76,499 8.0 611,994 1,698
Net debt * (63,755) (177)
Operating lease rent Capitalized at 7x 35,505 7.0 248,535 690
Equity value (INR mn) 427,214 1,186
* includes assumed dividend payout to investors during the period

InterGlobe Aviation (IndiGo)

Company Description
IndiGo, operated by Interglobe Aviation Limited, having commenced operations in August
2006 with a single aircraft has grown its fleet over the years and is now leader in the
domestic airline industry with 35.6% market share (December 2015). The airline, with a
modest beginning, has significantly outpaced market and its peers since 2008 having
clocked 29.5% CAGR in passenger growth versus industry CAGR of 6.7% and has been the
only profitable airline in India for the past seven years.

Investment Theme
Indian domestic aviation market has been clocking healthy growth rates driven by the
changing socio‐economic profile of the Indian consumers with increasing income levels
amidst low level of air travel penetration in India. We expect robust growth to continue
owing to competitive pricing of air travel vs the substitutes, growth in tourism and leisure
travel and the need for air travel driven by geographical distribution of the Indian working
population.

With a uniform AirBus A320 fleet having average age of 3.2 years (100 numbers, as of
December, 2015), IndiGo has reaped multiple benefits. IndiGo has been taking big bets of
placing bulk purchase orders for aircraft/engines helping it negotiate favourable terms with
the OEMs. The airline flies limited point‐to‐point destinations selected based on
attractiveness of market. All this has helped company have the lowest cost structure in the
highly competitive industry.

The company has been delivering best in class performance thereby gaining market share.
Despite being largely domestic focused IndiGo has aircraft utilization levels being the best in
the industry at 11.6 Hrs/aircraft/day consistently. Further, its comfortable liquidity position
and healthy B/S enables IndiGo to take delivery of aircrafts and grow in a competitive
scenario.

Key Risks
Sharp uptick in ATF prices (accounted for 50% of revenues in past) and INR depreciation
(bulk of cost is USD denominated) will impact profitability given high price sensitivity of the
Indian consumer leaving limited ability to pass on costs.

Uncertainty and unpredictability of the policy/ regulatory framework continues to be a
concern. Adverse taxation structure will drive up cost of doing business hurting profitability

Economic slowdown putting pressure on demand for corporate / leisure travel will impact
load factors and hence profitability given the high operating leverage structure of the airline
business.

Existing airports at the Indian metros like Mumbai, Chennai and Kolkata running at peak
capacity could prove to be bottlenecks for growth.

Aviation
Key Assumptions Income statement (INR mn)
Macro Net revenue 139,253 159,617 185,149 215,028
GDP(Y‐o‐Y %) 7.2 7.4 7.9 8.3 Aircraft fuel expenses 58,270 49,738 53,820 63,737
Inflation (Avg) 5.9 4.8 5.0 5.2 Employees Costs 11,887 17,593 21,111 25,333
Repo rate (exit rate) 7.5 6.8 6.0 6.0 Selling and Dist. Exp. 8,730 9,577 11,110 12,903
USD/INR (Avg) 61.1 65.0 67.5 67.0 Operating expenses 22,147 27,933 32,401 36,555
Sector Total operating expenses 101,034 104,841 118,443 138,529
Domestic pax growth(%) 15.2 20.0 18.0 18.0 EBITDAR 38,219 54,776 66,707 76,499
Domestic ASKM growth(%) 4.4 12.0 15.0 15.0 Aircraft Lease Rentals 19,522 26,250 30,780 35,505
Domestic oil price(INR/Ltr) 67.9 48.0 45.0 48.0 Depreciation 3,022 5,214 5,340 5,466
Company EBIT 15,675 23,312 30,587 35,528
Average fleet size(No) 85.1 98.5 114.0 131.5 Add: Other income 3,838 3,949 4,373 5,272
Avg. flying hours (Hrs) 11.4 12.4 12.4 12.4 Less: Interest Expense 1,155 1,329 1,042 1,042
Employee Exp. Growth(%) 29.1 48.0 20.0 20.0 Profit Before Tax 18,357 25,933 33,918 39,758
S&D Exp/pax (INR) 347 297 297 300 Less: Provision for Tax 5,402 7,780 10,175 11,928
Airport chg/dep (INR) 56,507 58,979 57,618 58,011 Reported Profit 12,956 18,153 23,743 27,831
Maint. Cost/B Hr (USD) 193 202 194 195 Adjusted Profit 12,956 18,153 23,743 27,831
Lease rent/Aircrart (USDmn) 3.4 4.1 4.0 4.0 Shares o /s (mn) 344 360 360 360
Pax growth (%) 28.7 28.0 16.0 15.0 Diluted shares o/s (mn) 344 360 360 360
Pax yield/RPKM 4.4 4.0 4.0 4.0 Adj. Diluted EPS (INR) 37.7 50.4 65.9 77.2
Cargo rev as % of pax 5.3 5.0 5.0 5.0 Adjusted Cash EPS 56.9 64.8 80.7 92.4
Exc baggageas % of pax 6.2 6.0 6.0 6.0 Dividend per share (DPS) 31.4 40.3 52.7 61.8
Tax rate (%) 21.1 30.0 30.0 30.0
Common size metrics
Aircraft fuel expenses 42 31 29 30
EBIT margins 11.3 14.6 16.5 16.5
Net Profit margins 9.3 11.4 12.8 12.9

Growth ratios (%)
Revenues 25.3 14.6 16.0 16.1
EBITDAR Growth 76 43 22 15
Adjusted Profit 173.7 40.1 30.8 17.2
EPS 173.7 33.6 30.8 17.2

InterGlobe Aviation (IndiGo)

As on 31st March FY15 FY16E FY17E FY18E Year to March FY15 FY16E FY17E FY18E
Share capital 344 360 360 360 Operating cash flow 23,839 22,626 26,319 30,564
Reserves & Surplus 3,918 17,298 18,179 19,212 Investing cash flow (9,405) 2,649 2,973 3,872
Shareholders' funds 4,262 17,658 18,539 19,572 Financing cash flow (13,081) (18,807) (23,904) (27,840)
Long term borrowings 35,884 23,162 23,162 23,162 Net cash Flow 1,353 6,468 5,388 6,596
Total Borrowings 35,884 23,162 23,162 23,162 Capex (12,227) (1,300) (1,400) (1,400)
Sources of funds 40,146 40,820 41,701 42,734 Dividend paid (12,911) (17,479) (22,861) (26,798)
Tangible assets 48,664 44,750 40,810 36,745
Intangible Assets 96 96 96 96 Profitability and efficiency ratios
CWIP (incl. intangible) 5 5 5 5 Year to March FY15 FY16E FY17E FY18E
Total net fixed assets 48,765 44,851 40,911 36,846 ROAE (%) 306.0 165.6 131.2 146.0
Non current investments ‐ ‐ ‐ ‐ ROACE (%) 41.7 57.6 74.1 84.2
Current Investments 5,168 5,168 5,168 5,168 Inventory Days 3 3 3 3
Cash and Equivalents 19,994 26,462 31,850 38,446 Debtors Days 3 3 3 3
Inventories 1,306 1,531 1,775 2,062 Payable Days 11 12 12 12
Sundry Debtors 1,046 1,312 1,522 1,767 Cash Conversion Cycle (6) (6) (6) (6)
Loans & Advances 12,792 12,792 12,792 12,792 Net Debt/Equity 2.5 (0.5) (0.7) (1.0)
Other Current Assets 18,668 18,668 18,668 18,668
Current Assets (ex cash) 33,811 34,302 34,757 35,289 Operating ratios
Trade payable 4,755 5,745 6,490 7,591 Year to March FY15 FY16E FY17E FY18E
Other Current Liab 62,837 64,218 64,495 65,424 Total Asset Turnover 3.7 3.9 4.5 5.1
Total Current Liab 67,591 69,963 70,985 73,014 Fixed Asset Turnover 3.2 3.4 4.3 5.5
Net Curr Assets‐ex cash (33,780) (35,660) (36,228) (37,725) Equity Turnover 32.9 14.6 10.2 11.3
Uses of funds 40,146 40,820 41,701 42,734
BVPS (INR) 12.4 49.0 51.4 54.3 Valuation parameters
Free cash flow (INR mn) Adj. Diluted EPS (INR) 37.7 50.4 65.9 77.2
Year to March FY15 FY16E FY17E FY18E Y‐o‐Y growth (%) 173.7 33.6 30.8 17.2
Reported Profit 12,956 18,153 23,743 27,831 Adjusted Cash EPS (INR) 56.9 64.8 80.7 92.4
Add: Depreciation 19,522 26,250 30,780 35,505 Diluted P/E (x) 22.2 16.6 12.7 10.8
Deferred tax 3,563 ‐ ‐ ‐ P/B (x) 67.6 17.1 16.3 15.4
Others (22,671) (23,657) (28,771) (34,269) EV / Sales (x) 4.1 3.9 3.5 3.1
Gross cash flow 13,370 20,746 25,751 29,067 EV/EBITDAR (x) 11.5 8.8 7.6 7.0
Less: Changes in WC (10,469) (1,880) (567) (1,497) Dividend Yield (%) 3.7 4.8 6.3 7.4
Operating cash flow 23,839 22,626 26,319 30,564
Less: Capex 12,227 1,300 1,400 1,400
Free Cash Flow 11,611 21,326 24,919 29,164
Aviation
Additional Data
Directors Data
Mr. Devadas Mallya Chairman and Nonexecutive Independent Director Mr. Rahul Bhatia Non‐executive Director
Mr. Rakesh Gangwal Non‐executive Director Dr. Anupam Khanna Non‐executive Independent Director

Ms. Rohini Bhatia Non‐executive Director Mr. Aditya Ghosh President and Whole‐time Director

Auditors ‐ B S R & Co. LLP, Chartered Accountants
*as per last annual report

Holding – Top 10
Perc. Holding Perc. Holding
Motilal Oswal Asset Management 0.72 Columbia Management Investment 0.60
Fidelity Management & Research 0.36 Jupiter Asset Management 0.35
HDFC Asset Management Co Ltd 0.26 Goldman Sachs Group Inc 0.17
DSP Blackrock Investment Manager 0.14 Vanguard Group Inc 0.11
Davis Selected Advisers Lp 0.03 Neuberger Berman Group Llc 0.02

Bulk Deals

No Data Available
*in last one year
Insider Trades

No Data Available
*in last one year
India Midcaps
COMPANY UPDATE

JET AIRWAYS (INDIA)
Setting its house in order
Jet Airways (JAL) is focused on consolidating its operations, expanding only EDELWEISS RATINGS
opportunistically and improving operational efficiency. We expect healthy Absolute Rating BUY
passenger traffic growth and improving utilisation supplemented by lower Investment Characteristics Value
fuel price benefits to lend impetus to profitability. This, coupled with
retiring of high‐cost debt will spruce up its balance sheet quality. With
lowering of our oil price assumptions, we have raised our FY16E/FY17E MARKET DATA (R: JET.BO, B: JETIN IN)
earnings. We value JAL at 7.0x FY18E EV/EBITDAR and maintain ‘BUY’ with CMP : INR 561
a target price of INR750. Target Price : INR 750
52‐week range (INR) : 796 / 248
Share in issue (mn) : 113.6
Consolidation underway, expanding opportunistically
M cap (INR bn/USD mn) : 64 / 1,001
We believe JAL is capitalising on the benign oil prices and healthy growth environment to
Avg. Daily Vol. BSE/NSE (‘000) : 3,780.9
consolidate its operations – phasing out JetLite brand by merging it with itself and no
significant expansions in near term. The company is focused on improving operational
efficiency and expanding only opportunistically. It has reported strong improvement in
SHARE HOLDING PATTERN (%)
aircraft utilisation by increasing the number of flying hours to 12.8hrs/day (11.9hrs/day Current Q2FY16 Q1FY16
earlier) YoY, thereby enhancing capacity deployed on the routes, flipping assets between Promoters * 51.0 51.0 51.0
MF's, FI's & BKs 33.8 10.0 10.3
domestic and international routes and deploying wide body aircraft on high traffic routes
like Mumbai‐Delhi during peak slots. The 75 Boeing aircraft order expected to be FII's 4.1 4.1 5.2
Others 11.1 34.9 33.5
delivered towards beginning of 2018 is well timed and will ensure that JAL is better
positioned 2 years hence for growth.
* Promoters pledged shares : NIL
(% of share in issue)

Focus on retiring high‐cost debt PRICE PERFORMANCE (%)
As on H1FY16, JAL had net debt of INR111.7bn (76% USD denominated at cost of ~6% BSE Midcap
Stock
Stock over
and balance INR loan at ~13% cost). Aircraft related debt stood at INR50.9bn and the Index Index

balance was working capital related. JAL raised completely unsecured NCDs at coupon 1 month (8.5) (20.9) (12.5)

rate of 20.64% during Q2FY16. The company is focussed on retiring much of its high‐ 3 months (6.3) 33.4 39.7
cost non‐aircraft debt from internal cash flow generation. 12 months (3.6) 14.0 17.6

Outlook and valuations: Cleanup underway; maintain ‘BUY’
We expect JAL to deliver healthy profits given healthy passenger growth, low oil prices
and focus on improving operational efficiency. Further, focus on consolidation and
retiring high‐cost debt will improve balance sheet quality. With lowering of our oil

price assumptions, we have revised our FY16E/FY17E PAT by 18%/6%. We value JAL at

7.0x FY18E EV/EBITDAR to arrive at our TP of INR750 (INR518 earlier). We maintain

‘BUY’.

Financials (INR mn)

Net revenue 209,656 225,629 238,966 254,697
EBITDAR 18,141 41,194 47,806 50,208
Adjusted PAT (13,481) 8,160 12,668 14,236
Santosh Hiredesai
Diluted EPS (INR) (117.6) 71.2 110.5 124.2 +91 22 6620 3027
Diluted P/E (x) NA 7.9 5.1 4.5 santosh.hiredesai@edelweissfin.com
EV/EBITDAR (x) 17.3 7.6 6.5 5.8
ROACE (%) (7.1) 29.3 31.7 33.8 February 03, 2016
Aviation

Table 1: Valuation
INR mn INR/share
Standalone FY18e EBITDAR 47,861 421
Jet Lite EBITDAR 2,492 21.9
Consol EBITDAR 50,352 443
EV/EBITDAR (x) 7.0
EV 3,52,466 3,103
Aircraft lease rentals capitalised at 7x 1,81,784 1,600
Net debt 85,519 753
Equity value 85,163 750
Change in Estimates
FY16E FY17E
New Old % change New Old % change Comments
Net Revenue 225,629 226,964 (0.6) 238,966 245,468 (2.6)
EBITDAR 41,194 37,541 10.0 47,806 45,101 6.0 Owing to revised fuel price
assumptions
EBITDAR Margin 18.3 17.6 20.0 19.2
Adjusted Profit 8,160 6,879 18.6 12,668 11,934 6.2
After Tax
Net Profit Margin 3.6 3.0 5.3 4.9
Capex 2,300 2,300 0.0 2,400 2,400 0.0
Jet Airways (India)

Company Description
Jet Airways (JAL) is one of India’s largest private sector airlines with market share of ~24% in
domestic market. JAL was incorporated as an air taxi operator in April 1992. It began its
commercial airline operations in May 1993 and international operations in March 2004. It
acquired Sahara Airlines (rebranded as Jet Lite, JLL) in April 2007. JAL in May 2009
introduced Jet Airways Konnect (JAK), an all economy service to serve routes where the
traffic is predominately price sensitive and demand for high service oriented product is
limited.

JAL received an investment of INR 20,580mn from Etihad Airways in 2014 for 24% equity
stake. Etihad Airways invested an additional amount of INR 8,590mn for 50.1% equity
investment in JetPrivilege, JAL’s Frequent Flyer Program. Partnership with Etihad will enable
JAL to have combined network of more than 130 routes and would bring additional feeder
traffic to Jet.

JAL as of FY 15 has a fleet of 116 aircrafts of which 10 aircrafts are subleased to Turkish
Airlines (3) and Etihad Airways (7). As of FY15 JAL flew to 51 domestic destinations (includes
flights operated by JLL) and 22 international destinations. In FY15, international operations
contributed ~53% to the total revenues.

Investment Theme
Low oil prices: Low crude oil prices would improve margins due to low Aviation Turbine Fuel
(ATF) prices. Fuel expenses accounted for ~35% of total revenues in FY15.

Demand‐ supply mismatch: Demand growth is expected to outpace the supply growth
leading to better yields. Domestic traffic in India is expected to increase at CAGR of 11%,
while international passenger traffic is expected to increase at CAGR of 7.5% over the next
decade. The growth of supply is expected to be lower as currently there is oversupply in
market.

Aircrafts on operating lease: JAL sells some of its own aircrafts and takes back those aircrafts
on and operating lease basis after 5‐7 years of their operations. This not only releases equity
from sale of aircraft but also adds to bottom‐line as depreciation over the period of
operations is higher than drop in realizable value of aircraft.

Key Risks
Strong capacity addition: Capacity addition by other airlines especially low cost carrier could
pose a risk for increase in market share. Currently there is over capacity in the market
however growth in capacity addition is expected to lag demand growth.

Passenger traffic growth: Growth in passenger traffic is expected to be high single digit/low
double digit for international/ domestic traffic over next decade. Any slowdown in growth of
traffic will impact profitability.

Leverage: JAL has negative reserves of INR 64,384mn as of FY15. Though JAL’s leverage has
improved post investment from Etihad and borrowings have decreased in FY15, its forward
sales have increased substantially leading to increase in current liabilities.
Aviation


Key Assumptions Income statement (INR mn)
Macro Net revenue 209,656 225,629 238,966 254,697
GDP(Y‐o‐Y %) 7.2 7.4 7.9 8.3 Aircraft fuel expenses 73,656 57,750 56,306 63,717
Inflation (Avg) 5.9 4.8 5.0 5.2 Employees Costs 24,191 26,211 28,669 30,561
Repo rate (exit rate) 7.5 6.8 6.0 6.0 Selling and Dist. Exp. 21,244 26,015 27,033 28,838
USD/INR (Avg) 61.1 65.0 67.5 67.0 Operating expenses 72,425 74,459 79,153 81,373
Company Total operating expenses 191,515 184,435 191,160 204,489
Domestic EBITDAR 18,141 41,194 47,806 50,208
ASKMs (mn) 41,769 47,300 50,909 54,471 Aircraft Lease Rentals 21,725 22,824 25,490 25,969
RPKMs (mn) 34,423 39,374 42,484 46,313 Depreciation 7,653 7,767 8,078 8,318
PLF (%) 82 83 83 85 EBIT (11,237) 10,603 14,238 15,921
Fuel rate (INR/lt) 51.7 37.1 33.9 36.0 Add: Other income 6,961 6,996 7,141 6,527
SG&A exp. as % of rev. 10.4 11.8 11.5 11.5 Less: Interest Expense 9,205 9,439 8,711 8,213
Other op. exp.(INR/ASKM) 1.6 1.5 1.5 1.4 Profit Before Tax (21,014) 9,185 12,668 14,236
Financial assumptions Extraordinary item (7,532) 1,025 ‐ ‐
Employee exp. (%yoy inc) 18.1 9.5 10.0 7.0 Reported Profit (21,014) 9,185 12,668 14,236
Other inc. as % of Cash 44.0 27.6 21.7 18.1 Exceptional Items (7,532) 1,025 ‐ ‐
Forward tickets % rev. 15.9 14.5 14.0 14.0 Adjusted Profit (13,481) 8,160 12,668 14,236
Debtor days 26 26 26 26 Shares o /s (mn) 115 115 115 115
Inventory days 17 18 18 18 Adjusted Basic EPS (117.6) 71.2 110.5 124.2
Payable days 112 111 100 100 Diluted shares o/s (mn) 115 115 115 115
Interest Exp (% of Debt) 7.9 7.5 7.4 7.9 Adjusted Diluted EPS (117.6) 71.2 110.5 124.2
Dep. (% gross block) 4.7 4.7 4.8 4.9 Adjusted Cash EPS (50.9) 139.0 181.0 196.8

Common size metrics
Aircraft fuel expenses 35 26 24 25
EBIT margins (5.4) 4.7 6.0 6.3
Net Profit margins (6.4) 3.6 5.3 5.6

Growth ratios (%)
Revenues 10.1 7.6 5.9 6.6
EBITDAR Growth 687 127 16 5
Adjusted Profit ‐ ‐ 55.2 12.4
EPS ‐ ‐ 55.2 12.4

Jet Airways (India)

As on 31st March FY15 FY16E FY17E FY18E Year to March FY15 FY16E FY17E FY18E
Share capital 1,136 1,136 1,136 1,136 Operating cash flow 7,416 15,119 17,308 27,209
Reserves & Surplus (64,384) (55,199) (42,531) (28,295) Investing cash flow (2,207) 4,696 4,741 4,127
Shareholders' funds (63,248) (54,063) (41,395) (27,159) Financing cash flow 1,396 (10,230) (14,783) (30,980)
Short term borrowings 52,954 53,616 55,602 41,138 Net cash Flow 6,604 9,585 7,267 357
Long term borrowings 66,073 64,620 56,561 48,259 Capex (17,105) (2,300) (2,400) (2,400)
Total Borrowings 119,027 118,236 112,164 89,397
Long Term Liabilities 14,220 14,808 14,869 14,943 Profitability and efficiency ratios
Sources of funds 69,998 78,981 85,638 77,181 Year to March FY15 FY16E FY17E FY18E
Gross Block 160,938 163,238 165,638 168,038 ROAE (%) 25.7 (13.9) (26.5) (41.5)
Net Block 92,216 86,749 81,071 75,152 ROACE (%) (7.1) 29.3 31.7 33.8
Capital work in progress 194 194 194 194 Inventory Days 35 46 17 17
Intangible Assets 128 128 128 128 Debtors Days 23 23 24 24
Total Fixed Assets 92,538 87,071 81,393 75,474 Payable Days 209 257 82 77
Non current investments 6,697 6,697 6,697 6,697 Cash Conversion Cycle (151) (188) (42) (37)
Cash and Equivalents 21,628 31,213 38,480 38,837 Current Ratio 0.7 0.9 1.0 1.0
Inventories 9,635 10,529 11,206 11,958 Gross Debt/EBITDA (33.2) 6.4 5.0 3.7
Sundry Debtors 13,911 15,011 16,041 17,134 Gross Debt/Equity (1.9) (2.2) (2.7) (3.3)
Loans & Advances 26,593 27,596 29,200 31,087 Adjusted Debt/Equity (3.2) (3.7) (4.7) (6.3)
Current Assets (ex cash) 50,140 53,136 56,447 60,180 Net Debt/Equity (1.5) (1.6) (1.8) (1.9)
Trade payable 57,879 55,603 52,224 55,871 Interest Coverage Ratio (1.2) 1.1 1.6 1.9
Other Current Liab 43,125 43,533 45,154 48,136
Total Current Liab 101,004 99,136 97,378 104,007 Operating ratios
Net Curr Assets‐ex cash (50,864) (46,000) (40,931) (43,827) Year to March FY15 FY16E FY17E FY18E
Uses of funds 69,998 78,981 85,638 77,181 Total Asset Turnover 3.0 3.0 2.9 3.1
BVPS (INR) (551.9) (471.8) (361.2) (237.0) Fixed Asset Turnover 2.1 2.5 2.8 3.3
Contingent Liability 80,526.7 80,526.7 80,526.7 80,526.7 Equity Turnover (4.0) (3.8) (5.0) (7.4)

Free cash flow (INR mn) Valuation parameters
Reported Profit (21,014) 9,185 12,668 14,236 Adj. Diluted EPS (INR) (117.6) 71.2 110.5 124.2
Add: Depreciation 21,725 22,824 25,490 25,969 Y‐o‐Y growth (%) ‐ ‐ 55.2 12.4
Interest (Net of Tax) 9,205 9,439 8,711 8,213 Adjusted Cash EPS (INR) (50.9) 139.0 181.0 196.8
Others (2,501) (26,329) (29,561) (21,208) Diluted P/E (x) (4.8) 7.9 5.1 4.5
Less: Changes in WC (2,208) 4,276 5,008 (2,970) P/B (x) (1.0) (1.2) (1.6) (2.4)
Operating cash flow 7,416 15,119 17,308 27,209 EV / Sales (x) 1.5 1.4 1.3 1.1
Less: Capex 17,105 2,300 2,400 2,400 EV/EBITDAR (x) 17.3 7.6 6.5 5.8
Free Cash Flow (9,689) 12,819 14,908 24,809

Peer comparison valuation
Market cap Diluted P/E (X) EV / EBITDAR (X) ROAE (%)
Name (USD mn) FY16E FY17E FY16E FY17E FY16E FY17E
InterGlobe Aviation (IndiGo) 4,463 16.6 12.7 8.8 7.6 165.6 131.2
Jet Airways (India) 1,001 7.9 5.1 7.6 6.5 (13.9) (26.5)
SpiceJet Ltd 742 16.4 8.3 9.3 7.3 (31.9) (79.2)
Aviation
Additional Data
Directors Data
Naresh Goyal Chairman, Non‐executive Promoter Director Javed Akhtar Director
I M Kadri Director Aman Mehta Director
Gaurang Shetty Director James Hogan Director
James Rigney Director Dinesh Kumar Mittal Director

Diwakar Gupta Director Anita Goyal Director

Auditors ‐ Deloitte Haskins & Sells, Chaturvedi & Shah
Holding – Top 10
Perc. Holding Perc. Holding
Birla Sun Life Asset Management 3.23 Bnp Paribas Investment Partners 2.43
Reliance Capital Asset Mgmt Ltd 1.82 Tata Asset Management Ltd 0.71
Bnp Paribas Asset Management Ind 0.70 L&T Investment Management Ltd 0.26
L&T Mutual Fund 0.25 Vanguard Group Inc 0.25
Van Eck Associates Corp 0.21 Shinhan Bnp Paribas Asset Mgt/Kr 0.11
Bulk Deals
22 Jan 2016 Smc Global Securities Ltd. Sell 70845 617.42
13 Jan 2016 SMC Global Securities Ltd. Buy 67506 774.02
30 Oct 2015 Rare Enterprises Buy 1195000 422.76
Insider Trades

No Data Available
RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
InterGlobe Aviation (IndiGo) BUY SO H Jet Airways (India) BUY None None
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Aviation
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: research@edelweissfin.com
Nirav Sheth
Head Research
nirav.sheth@edelweissfin.com

Coverage group(s) of stocks by primary analyst(s): Aviation
InterGlobe Aviation (IndiGo), Jet Airways (India), SpiceJet

`
Recent Research
Date Company Title Price (INR) Recos
22‐Jan‐16 Interglobe Turbulent quarter; expect a 968 Buy
Aviation safe landing;
Result Update
16‐Dec‐15 Go Airlines Switching gears; Unlisted
Visit Note
10‐Nov‐15 InterGlobe A sky full of opportunities; 765 Buy
Aviation Initiating Coverage
(IndiGo)
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation

Rating Expected to
Buy Hold Reduce Total
Rating Distribution* 145 54 15 214 Buy appreciate more than 15% over a 12‐month period
* stocks under review
Hold appreciate up to 15% over a 12‐month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12‐month period
Market Cap (INR) 147 61 6
(INR) (INR)
0
20
40
60
80
100
500
700
900
1,100
1,300
1,500
Feb‐15 Nov‐15
Feb‐15
One year price chart
Mar‐15
Apr‐15
May‐15
Dec‐15
Jun‐15
Jul‐15
Aug‐15
SpiceJet
Aug‐15
51
Jan‐16
Sep‐15 Interglobe Aviation
Oct‐15
Nov‐15
Dec‐15
Jan‐16 Jan‐16
Feb‐16
(INR)
0
200
400
600
800
1,000
Feb‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
Jun‐15
Jul‐15
Aug‐15
Jet Airways
Aug‐15
Sep‐15
Oct‐15
Nov‐15
Dec‐15
Jan‐16
Jet Airways (India)
Feb‐16
Aviation
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SECTOR UDPATE

Jet Airways SpiceJet IndiGo

126 142 129

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

3.8 6% discount 4.6

4.0 4.0 0.34 0.52

2.0 4.14 4.00 2.0 4.06 4.24

Unbundling fares, in house functions strategy boosting high margin

Pax Revenues Ancillary Revenue Anc Rev. as % of total

Others Chennai Kolkata Delhi (Dial)

‐5.0% 4,280 2,995 1,924 853 (1,289)

2.71 2.78 2.78

Revenue EBITDAR YoY Rev growth (RHS)

Australia Yes Routes determined via engagement with

Germany Yes Routes tendered out and subsidies allocated

Balance sheet (INR mn) Cash flow metrics

ROACE (%) (7.1) 29.3 31.7 33.8 February 03, 2016

Company Absolute Relative Relative Company Absolute Relative Relative

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to

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