SPICEJET a mispriced opportunity MARKET MIND

Note these points about SPICEJET.

One, the company reported a 146 per cent increase in profit after tax for the second quarter of the current financial year, compared to a year before. Based on relevant annualisation, the company is possibly selling at a singledigit discounting.

Two, the air carrier reported its best-ever second quarter, an index of how it transformed costs into surpluses, maintained a high operating efficiency and raised average fares five per cent, even as others were discounting.

Three, SPICEJET represents superior bottom line quality, no sale of assets subsequently leased back, which could have replaced high interest and depreciation with moderate lease rentals. When you comb INDIGO’s fine print for the quarter, an evidently handsome profit before tax of ~176 crore transforms into a staggering operating loss after you deduct ~133 crore on account of sale and lease back (engineering credit) and ~160 crore for ‘other income’.

Four, INDIGO is four times SPICEJET by fleet, and eight times by market capitalisation, though the latter reported ~176 crore more in adjusted pre-tax profit.

Five, INDIGO reported a relatively modest 82 per cent load factor for the second quarter, compared to SPICEJET’s 92.3 per cent, a case of a smaller airline working harder. SPICEJET has been a consistent outlier; it has recorded load factor of 90 per cent-plus every single month since April 2015. Load factor of 92.3 per cent during the second quarter was the highest in 19 months. Even in the high-ness, SPICEJET’s story is getting incrementally better (cancellation rate 0.5 per cent, against an industry average that is possibly twice this number), with every incremental percentage translating into an attractive bottom line increase.

Six, SPICEJET is a mid-sized company run like an insecure start-up that has been motivated into sustained aggression by the spectre of a larger competitor. Result: Shrinking ground times, enhanced aircraft availability, declining cost per available seat km and aggressive contract renegotiations, the value of which are not reflecting faithfully in the market cap.

Seven, once debt-heavy, it has repaid ~1,800 crore of its total debt of ~2,300 crore in less than two years, a clear glimpse of how profitable this business truly is. SPICEJET now possesses a net liability of only ~200 crore and should turn net worth-positive this financial year.

So, why is SPICEJET extensively discounted? Could be because it almost closed shop two years ago and could be because of the uncertainty related to the previous promoter’s warrants pending conversion into equity (unlikely to transpire but the market needs certainty).

Let me leave you with a thought. After SPICEJET has cleared its liabilities, what will it do with the cash? Buy aircraft, of course. So, let us assume it places an order for 100 aircraft, puts these to field and then does a sale and lease back (with only a marginal reduction in load factor). It might, then, be interesting to look at its numbers (everything else remaining the same).

And, then, the mother of all arguments: If the two per cent of India’s population that flies adds 100 basis points, established brands like SPICEJET could be laughing all the way to their digital wallets.