Airlines Deals

We expect Jet’s earnings to remain under pressure given high fuel prices and continued pressure on yields and are downgrading FY07 and FY08 estimates by 47% and 32% respectively. The acquisition of Air Sahara has fallen through on technical grounds and we view this as positive. However, Jet may have to write-off about Rs 2 billion invested in working capital of the company. Further Rs 20 billion is stuck in escrow account and advances to promoters of Sahara and recovery of the same may be delayed in the event of a protracted legal battle. Recommend Underperform with a price target of Rs 600. Downgrading estimates for FY07 and FY08.”

Downgrading estimates for FY07 and FY08

“We are downgrading estimates for FY07 and FY08 by 47% and 32% respectively primarily due to high fuel costs. Jet’s average fuel cost per litre for 1QFY07 is up 12% QoQ and 25% YoY. Our assumption of average jet fuel prices for FY07 at USD 65 per barrel remains conservative considering present prices of USD 72-75 per barrel. Yields are also under pressure, both in domestic and international operations and we expect them to decline by 2-3% in FY07. We estimate that over the next 3 years the capacity in India skies will increase by 136% based on the capacity addition plans of various players. For the system to achieve a capacity utilization of 75%, traffic will have to grow at a Cagr of 42% for the next 3 years.”

1QFY07 results: Forecast 76% decline in net profit

“Jet’s domestic market share has declined from of 41% in Jun-05 to 35% in Apr-06. Yields during 1QFY07 are about 5% below 4QFY06 even after the fuel surcharges levied since May- 06 as over 60% of its passengers travel on discounted tickets - a sign of intense competition, which is unlikely to abate. For 1QFY07, we expect revenues to increase by 17.4% yoy and net profit to decline by 76.3% yoy. Cost savings are coming through as online ticket sales increase (10% at present and up from 2% last year). The reported numbers likely to be higher since Jet is planning to sell and lease back four aircrafts.”

Jet backs-off from Air Sahara acquisition

“Jet’s proposed acquisition of Air Sahara has fallen through on technical grounds. We view this as positive since integration issues, Sahara’s cost structure and poor profitability would have meant significant challenges for Jet. Numerous media reports have indicated that decline in Jet’s stock price and delay in raising funds also resulted in Jet doing a rethink. Jet has already invested over Rs 2 billion into Sahara’s operations besides Rs 5 billion paid as part consideration to Sahara’s promoters and Rs 15 billion deposited in an escrow account. A protracted legal battle in court will mean delay in recovering the money for Jet. An out of court settlement will mean higher than expected write-offs for Jet.”

Valuations still expensive

“Jet’s debt-equity is presently over 200%. Jet intends to raise USD 800 million (combination of FCCB and GDR) at an opportune time to deleverage its balance sheet. With the stock trading at 24.0xFY07CL, we believe there is still downside even after the recent correction (33% since May-10). Our price target of Rs 600 is at an EV/ Ebitdar of 6.0xFY08CL.”