Aviation Industry At An Inflection Point, HSBC Says

The Indian aviation industry is at a turning point with favourable government policies, sector consolidation, bottoming of yield and depreciating rupee and fuel-efficient fleets offsetting the rise in fuel prices, according to HSBC Global Research.

The brokerage is more bullish on low-cost carriers as compared to full service airlines as they are expected to increase their market share by around 10 percentage points over the next four years to more than 70 percent.

HSBC has initiated coverage on all the three listed Indian carriers, with ‘Buy’ rating on InterGlobe Aviation Ltd. and SpiceJet Ltd., while a ‘Hold’ on Jet Airways (India) Ltd.

Indian domestic aviation market is growing at 20 percent a year and to keep up with that, the airlines, have ordered an additional 1,000 planes, says the brokerage. The aviation industry is entering a sweet spot with traffic expected to grow at a compound annual growth rate of 14.5 percent over the next three years.

Government policies like Udan, which aims to connect regional airports and make flying more affordable, investment in airport infrastructure to boost capacity and tax benefits to India’s maintenance, repair and overhaul industry. The government’s decision to privatise national carrier Air India Ltd. could also lead to significant structural changes depending on who buys it, the brokerage said.

However, the stake sale of the same won’t be easy because of the huge level of debt, seven labour unions threatening strike and the complex corporate structure.

InterGlobe Aviation

Indigo is a leading low-cost airline with nearly 40 percent domestic market share, which is further expected to increase by financial year 2020-2021, with around 450 aircraft on order, according to HSBC.

Currently, Indigo’s unit costs are almost 30 percent lower than Jet Airways and 15 percent lower than SpiceJet, and is further expected to go down with modernisation of its fleet. Unit costs will fall further as the company switches to the A320neo and A321neo aircraft which are 15 percent more fuel efficient than the A320ceo aircraft.

On possible Air India acquisition the brokerage says that the deal could be detrimental to Indigo’s profitability and generate negative market sentiment.

Highlights:

• Strongest balance sheet among peers.
• Strong free cash flow generation.
• Attractive dividend payout of 60 percent to continue.
• Expect net profit to grow at CAGR of 37 percent over FY17-20.

SpiceJet

The fourth largest airline carrier in India has seen its turnaround since the new management team took charge. The company has not only turned profitable, but has also managed to reduced its debt drastically. The brokerage expects the company negative equity to turn positive in financial year 2017-18 and the company will turn debt free by financial year 2018-19.

Highlights:

• Traffic to grow at a CAGR of 18.5 percent over FY17-20
• Bulk order for 200 aircraft to help regain market share
• Expect net profit to grow at CAGR of 45 percent over FY17-20

Jet Airways

International operations of is the only reason to ‘Hold’ shares in Jet Airways, says HSBC. The company is the second largest airline company in India both in domestic and international front. It has close to 18 percent domestic market share and 15 percent international market share. The company has been losing domestic market share to other low-cost players as it is become more reliant on fragmented international market.

Jet Airways has a highly leveraged balance sheet and its thin profit margins and lower cash generation has restricted its ability to repay debt. The company’s negative equity is expected to continue for the next 3-4 years, limiting its ability to pay dividends, according to the brokerage.

Highlights:

• Jet Airways is growing its international operations away from the weak Gulf market.
• Expansion on other international routes to help increase margins.
• Expect net profit to grow at a CAGR of 9 percent over FY17-19.