With healthy growth in Available Seat Kilometres (ASK) at 33% YoY and ancillary service revenues growing 27.4% YoY, SpiceJet (SJ) had robust YoY revenue growth during Q2FY17. YoY lower Fuel CASK also resulted in strong 85.9% YoY growth in adjusted EBITDAR, which met our expectations. With lower than expected lease rental costs, profit was higher than expectations at Rs589m (PLe: Rs320m), as compared to an adjusted loss YoY.
Passenger Load Factor (PLF) remained high through Q2FY17 for SJ and is expected to continue through FY17. While Q2 is a seasonally sluggish period for the aviation industry, focus on cargo and other ancillary services is expected to provide revenue growth ahead for SJ in H2. We also note that the high PLF should enable SJ some flexibility in pricing action if required in the event of a sharp increase in crude price. We maintain our estimate and target price and re‐iterate a “BUY”.
SJ reported a strong performance in Q2FY17, driven by YoY lower fuel costs and a sustained high PLF. SJ plans to use pricing as one of the levers to increase PLF. The company is also working on ways to improve ancillary revenues ahead.
SJ’s sales growth was 34.6% YoY (on a low base) to Rs14n. ASK was higher by 33% YoY at ~3.8bn km. Domestic ASK increased 26.1% YoY and international ASKM increased 59.5% YoY. The number of domestic passengers carried by SJ increased 24.1% YoY, while the number of international passengers carried increased 53.8% YoY. Revenue per Available Seat Kilometre (RASK) decreased by 7.5% YoY to Rs3.57. SJ’s PLF was ~91.3% in Q2, which was amongst the highest in the industry.
Fuel cost was 30.7% of sales (v/s 32.5% in Q2FY16 and 26.3% in Q1FY17). Other expenses and other operating costs were also lower YoY, which helped adjusted EBITDAR grow from Rs1.8bn in Q2FY16 to Rs3.33bn in Q2FY17 (PLe: Rs3.31bn). EBITDAR margin was 23.8% (v/s 17.2% Q2FY16 and 31.2% Q1FY17).
Passenger revenues were higher 35% YoY to Rs12.3bn, while ancillary revenues were higher 27.4% YoY to Rs1.5bn. Yield was higher 1% YoY. While Fuel Cost per Available Seat Kilometre (CASK) was lower 6.8% YoY, non‐fuel CASK was lower 10.3% YoY.
Lease rentals were higher 21.7% YoY to Rs2.1bn (as a % of sales they were lower 240bps YoY and 160bps QoQ). These could inch up again in H2 is more aircrafts are added to the fleet on a short‐term basis. EBITDA was Rs1.11bn and EBITDA margin was 8% (compared to just 0.2% in Q2FY16).
While depreciation provision was higher 59.6% YoY, interest cost was lower 6.6% YoY and non‐operating income grew nearly 2x. This led to PBT growth of 147.8% YoY to Rs589m (expectation was Rs320m).
While SJ’s H1FY17 performance was robust, we note that there remain three key concerns for the company. (1) An increase in crude price has the potential to result in further EPS downgrades. On existing estimates, a 10% increase in crude price would result in ~12% decrease in EPS. (2) The warrants issue is yet to be resolved and if we factor in full dilution of outstanding warrants, our FY17/18 EPS estimate would be Rs7.2/Rs10, and our price target would then get lowered to Rs86. (3) Price competition had intensified in Q2, but fares should normalise in Q3 during the festival season. If the price competition does not ease in Q3, then it may have an adverse impact on the industry performance.
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