After cruising higher for 3 months, will SpiceJet, IndiGo stocks hit turbulence now?

ET Intelligence Group: In the past three months, aviation stocks have caught the fancy of investors on hopes that a recovery in economic activities will improve passenger traffic thereby buoying earnings of the sector badly hit by the pandemic. Shares of SpiceJet and InterGlobe Aviation that owns and operates Indigo have gained 32-82% during the period compared with the 24% gain in the benchmark S&P BSE Sensex. Such a rapid improvement in the sector valuations raises doubts whether they are running ahead of the fundamentals and whether the stock momentum would sustain in the medium term. This is because the market euphoria does not mirror the concerns over the piling debt of the companies amid intense competition.“Aviation is capital-intensive. The industry is likely to report net losses of over Rs 21,000 crore for FY21. Also, airlines are not operating at full capacity,” a senior fund manager of a leading fund house said.The market hopes are pegged on the developments related to mass vaccination and improving passenger traffic in recent months. Some analysts however are not enthused. “There is doubt on complete recovery of corporate traffic (close to 40% of the total passenger traffic) as work from home remains rampant with virtual platforms becoming the new meeting norm,” said ICICI Securities in a sector outlook report. It expects the domestic traffic in FY22 to restore back to FY20 level of 141 million assuming that the average fare remains close to Rs 4,000.It means airlines would not have room to increase fares and may even face a price war when the capacity expands once Jet Airways resumes operations.. In November 2020, leader Indigo’s market share fell to 53.9% from 55.5% in the previous month reflecting rising competition.Another key concern is the sector’s mounting debt. According to rating agency ICRA, the industry’s debt is estimated to be close to Rs 50,000 crore in the current and the next fiscal year. It notes that the sector will require additional funding of Rs 35,000-37,000 crore in the next three years as expenses rise. Given these factors, any improvement in revenue from a recovery in the traffic would be offset by rising expenses resulting in lacklustre earnings growth for at least a year. These factors are likely to weigh on the airlines stocks in the medium term.
Read More

Leave a Comment

Your email address will not be published. Required fields are marked *