SpiceJet: Maintain ‘hold’ with target price of Rs 85

SpiceJet (SJet) reported loss of Rs 12.5billion in FY21 (ex-forex), in line with expectations. Balance sheet position is weak with negative equity of Rs 26billion and gross borrowing without lease liability of Rs 44 billion as at FY21-end. We now estimate revenues at Rs 73.6 billion/Rs 136 billion and PAT at Rs (-)8.9 billion/+4.7 billion for FY22E/FY23E. We value SJet at Rs 85 (15x FY23E earnings adjusted for 25% tax rate since it does not pay any tax, which translates to a multiple of 11x). Recapitalisation remains the key. Maintain ‘hold’ on the stock and target price of Rs 85.

FY21 performance — gross liabilities reduced in FY21 (cash burn is lower than IndiGo): Ex-forex, SJet’s losses were at Rs 12.5 billion in FY21 (~Rs 58 billion for IndiGo). Other income continued to include Boeing compensation at a quarterly run-rate of Rs 1.4billion — in addition to Rs 1.2 billion in FY21 from rental concessions.

Cargo becomes the main narrative as it is planned to be hived off: SJet’s cargo revenues increased by 518% YoY to Rs 11.2 billion in FY21 (Rs 4.17 billion in Q4FY21). Cargo net profit was Rs 1.3 billion for FY21 against loss of Rs 1.34 billion in FY20. Company is operating a fleet of 20 freighters including eight wide-bodied.

Dedicated cargo initiative is commendable, but the cargo momentum can slow down with return of belly space. Driven by cargo business, SJet’s ancillary revenues grew from Rs 13 billion in FY20 to Rs 19.5 billion (estimated) in FY21 despite 58% drop in ASK.

SJet has approved fund raise of up to Rs 25 billion through issue of eligible securities to qualified institutional buyers. If this happens through fresh equity, the shareholding of the current promoter will fall from 60% to 40%.

SJet has a competitive cost structure, but balance sheet remains an overhang: SJet’s Cost per ASK (CASK), with depreciation and interest expenses, is competitive (average Rs 3.92 between FY16-FY20 and Rs 6.2 in FY21) vs Rs 3.42/4.84 for IndiGo in a similar comparison. SJet’s RASK was better than IndiGo’s by an average of 9% over FY16-FY20 and 35% higher in FY21 because of better PLFs. However, balance sheet remains a big overhang for SJet.

Risks include: 1) Rising crude prices; 2) covid-related disruptions or delayed recovery in traffic; 3) delay in, or less than expected, Boeing compensation (SJet has accounted Rs11bn till date); 4) possible cash outgo in pending litigations and vendor renegotiations; and 5) delay in recapitalization.