SpiceJet IC Ideas1st Oct 22 10 Final VI - Ideas...

A Qualitative Equity Research Company

Analyst: Lovelesh Manocha [email protected]

Anirudh Attal anirudh.attal

SpiceJet is one of the fastest growing and second largest low cost carrier (LCC)

Indian airline with a passenger market share of around 13% and revenue

passenger kilometre (RPKM) market share of about 15.5%. The company which

started its operations in May 2005 with a fleet of just three aircrafts currently has

a fleet of 22 Boeing 737 aircrafts with about 145 daily flights, connecting 20

domestic and two international destinations. The company plans to double its

fleet size by 2013. SpiceJet has recently been approved to fly international

routes and has become the first LCC and the third Indian private airline after Jet

Airways and Kingfisher to do so. With the company’s strong fundamentals and

the positive outlook for the sector, we believe SpiceJet is poised for growth. We

recommend a Strong Buy on the stock.

Valuation

Even though the airline’s sales grew by CAGR of about 50% for the last five

years, we have been very conservative in assigning multiples and our

projections over the coming years We project the company’s sales to grow at a

CAGR of 31% between FY10 & FY13E while EBITDA to grow at astonishing

130% during the same period much because of fast improving dem

scenario & high operating ratio. Based on the FY11E projections, at the current

price the airline trades at an EV/Sales multiple of 1.0, EV/Passenger revenue

multiple of 1.1 and EV/EBITDAR multiple of 3.8. The respective ratios for the

company for FY12E stand at 0.77, 0.78 and 2.3. The average TMT multiples for

the domestic airlines Jet Airways & Kingfisher stand at 1.8, 1.8 & 7.3 while for

international LCCs Tiger Airways & Ryan Air they are 2.5, 3.1 and 10.9

respectively. Using weighted average multiples we value SpiceJet at Rs.168

per share. The company scores a 4 (out of 5) on our star matrix and has been

assigned the low risk-high return rating.

October 22

Investment Rationale

Given return of pricing power to sector owing to strong pickup in demand and

calibrated capacity expansion, SpiceJet stands to benefit the most because of

few structural changes in the company including planned fleet addition, focused

long term promoter at helm, option to expand globally coming at most

opportune time. Other factors like stable crude prices, easy access to capital,

poor financial condition of the competition, strong track record, sound company

fundamentals and inexpensive valuations make SpiceJet amongst the best

companies to invest in. Company’s topline stands to be

fleet addition taking place in the backdrop of humongous growth in demand and

limited sector level capacity addition because of poor financial condition of the

key competitors. This in turn would also help the company in increase i

factor thereby resulting in a disproportionate boost to the bottom

high operating leverage of the industry.

Earnings Estimates (INR Crs) & Financial Ratios

FY11E

Revenue 2872.9

EBITDA 348.7

PAT 266.1

EPS 6.6

P/E (x) 11.4

P/Sales (x) 1.1

EV/EBITDAR (x) 3.8

EV/Sales (x) 1.0

ROE (%) -

ROCE (%) 120%

[email protected]

[email protected]

DII20%

Others27%

SpiceJet is one of the fastest growing and second largest low cost carrier (LCC)

Indian airline with a passenger market share of around 13% and revenue

passenger kilometre (RPKM) market share of about 15.5%. The company which

started its operations in May 2005 with a fleet of just three aircrafts currently has

aircrafts with about 145 daily flights, connecting 20

domestic and two international destinations. The company plans to double its

fleet size by 2013. SpiceJet has recently been approved to fly international

d Indian private airline after Jet

Airways and Kingfisher to do so. With the company’s strong fundamentals and

the positive outlook for the sector, we believe SpiceJet is poised for growth. We

CMP (INR) Target

81.85

Risk Return Matrix

0

50

100

150

200

250

Jet Airways

Shareholding Pattern (

Relative Performance

Even though the airline’s sales grew by CAGR of about 50% for the last five

ry conservative in assigning multiples and our

projections over the coming years We project the company’s sales to grow at a

CAGR of 31% between FY10 & FY13E while EBITDA to grow at astonishing

130% during the same period much because of fast improving demand

scenario & high operating ratio. Based on the FY11E projections, at the current

price the airline trades at an EV/Sales multiple of 1.0, EV/Passenger revenue

multiple of 1.1 and EV/EBITDAR multiple of 3.8. The respective ratios for the

E stand at 0.77, 0.78 and 2.3. The average TMT multiples for

the domestic airlines Jet Airways & Kingfisher stand at 1.8, 1.8 & 7.3 while for

international LCCs Tiger Airways & Ryan Air they are 2.5, 3.1 and 10.9

les we value SpiceJet at Rs.168

The company scores a 4 (out of 5) on our star matrix and has been

October 22, 2010

BSE NSE

500285 -

Face Value (INR)

Book Value (INR)

52 -week range (INR

M cap (INR Crs)

12-mnth Avg. Daily Vol.

Shares Outstanding Equity

Free Float (%)*

* Pursuant to the share purchase agreement dated June 12, 2010

considering KAL Airways’s majority holding as promoter stake

Market Data

Given return of pricing power to sector owing to strong pickup in demand and

calibrated capacity expansion, SpiceJet stands to benefit the most because of

few structural changes in the company including planned fleet addition, focused

long term promoter at helm, option to expand globally coming at most

like stable crude prices, easy access to capital,

poor financial condition of the competition, strong track record, sound company

fundamentals and inexpensive valuations make SpiceJet amongst the best

companies to invest in. Company’s topline stands to benefit immensely with its

fleet addition taking place in the backdrop of humongous growth in demand and

limited sector level capacity addition because of poor financial condition of the

key competitors. This in turn would also help the company in increase its load

factor thereby resulting in a disproportionate boost to the bottom-line given the

Crs) & Financial Ratios

FY12E FY13E

3856.2 4991.1

700.8 1056.0

546.7 826.1

13.5 20.4

5.5 3.7

0.8 0.6

2.3 1.7

0.8 0.6

73% 58%

93% 73%

1

Promoter38%

FII15%

Target (INR) Rating

168

Risk Return Matrix

Kingfisher SpiceJet Sensex

Shareholding Pattern (E)

Relative Performance

SpiceJet Ltd.

Initiating Coverage

BLOOMBERG REUTERS

SJET IN SPJT.BO

: 10

: -0.84

INR) : 82.60/32.40

: 3,153

mnth Avg. Daily Vol. : 37,27,373

Shares Outstanding Equity (Crs)* : 40.45

: 62.3

* Pursuant to the share purchase agreement dated June 12, 2010 &

Airways’s majority holding as promoter stake

SpiceJet Ltd.

Initiating Coverage

2 October 22, 2010

Table of Contents

Key Investment Rationale ......................................................................................... 3

Overview ................................................................................................................... 6

Investment Rationale ................................................................................................ 9

Key Concerns ........................................................................................................... 24

Valuation ................................................................................................................. 26

Annexure ................................................................................................................. 28

Financials ........................................................................................................... 28

References & News Articles ............................................................................... 29

Glossary .............................................................................................................. 36

SpiceJet Ltd.

Initiating Coverage

3 October 22, 2010

Key Investment Rationale

Best Proxy for India’s Growth

Spicejet stands to benefit by being the fastest growing listed airline in one of the fastest growing

sectors in the second fastest growing country. The airline sector demand & growth has an

implicit correlation with a nations GDP growth, increasing as it’s multiple. As the per capita

income crosses the threshold levels, more and more people prefer to travel by air not only

because it is more comfortable but also cheaper considering the opportunity cost of time saved.

Given India’s increasingly favourable demographics with growing young population, rising

incomes and burgeoning middle class, the country is expected to grow faster than China did

over the last 20 years. It is inevitable for the country to grow without the aviation sector

matching pace. This can be seen from the fact that the air travel demand in India grew at a

CAGR of 19% or about 2.5 times its GDP growth between 2003 & 2008.

With the expected capacity expansion & international foray and given its low cost model, we

believe SpiceJet would be one of the key beneficiaries from the robust demand from first time

travelers anticipated over the coming years.

Return of Pricing Power

With the Indian economy spryly recovering from the temporary slowdown, air travel is

experiencing strong demand from both ex and first time travelers. However the downturn in

demand seen during FY09 has made both the Industry & the lenders cautious and now while

the demand is growing over 25%, capacity addition has been limited to a mere 5%-7%. Further

the aviation industry is facing a severe infrastructural bottleneck, making capacity addition

difficult.

With demand outpacing supply, we see the pricing power clearly returning to the sector.

Moreover it is encouraging to note that unlike in 2007 & 2008, the demand growth this time

around is not generated from low fares and rather it has grown irrespective of relatively higher

fares. Given the high operating leverage, the pricing power along with improving load factor

would significantly boost margins for companies in the sector.

International foray to boost Margins

After being well positioned as LCC in domestic market for more than five years, SpiceJet has

got approval for flying to international destinations. This gives an option to the company to even

further improve on its aircraft utilization during the off peak hours and seasons, which no other

Indian LCC company has. Additionally, company would also be saving in fuel cost in

international flights as applicable taxes on fuel are higher in domestic markets. Further the

international routes are anticipated to increase its average trip distance per departure over the

years, implying decreasing costs with increasing revenues.

SpiceJet can be expected to benefit tremendously from India’s increasingly favourable demographics & growth given its positioning & branding as a LCC With supply constrained due to infrastructural bottlenecks & burgeoning demand, pricing power is bound to return in hands of airlines International operations will improve aircraft utilization & boost top & bottom-line

SpiceJet Ltd.

Initiating Coverage

4 October 22, 2010

Operational Excellence

SpiceJet is one of the best run airlines in the country and the only operationally profitable listed

airline. The airline has one of the lowest costs on a per seat basis while having amongst the

highest yields in the industry. Single fleet type and high personnel efficiency helps the airline to

control costs while increasing passenger load factor and higher utilization of aircrafts imply

higher revenues. Other efficiencies, like having the longest average domestic trip distance per

departure further helps to reduce costs.

Strong & aggressive management

With a clear focus and foresight, the management has been able to increase revenues &

expand operations while keeping costs under tight control. The ability to be cash positive when

all other airlines were is huge losses, ability to raise capital when required and regularly

increase market share even though there was no single promoter backing or easy access to

capital unlike other airlines, shows the skills set of SpiceJet’s management.

Planned fleet expansion to further increase company’s market share

Supported by strong balance sheet, SpiceJet’s plans to sensibly expand its fleet & routes to

exploit the burgeoning demand, without taking unwarranted risks. The airline plans to

responsively add about 12 aircrafts by FY12, with a target to double its present fleet by CY2013.

The addition of aircrafts over the current and next year can be expected to increase the

company’s revenues by more than a third by FY12.

Further with the addition of new aircrafts at a much higher rate than industry average, we expect

the airline’s passenger market share to increase substantially, from an average of 13.6% for last

five months to over 20% by FY16E. Moreover the industry standard to measure the market

share is based on the number of passengers flown on an airline relative to total passengers

flown in the period while we believe calculating market share based on RPKM to be a better

indicator of the true market share. Based on RPKMs, SpiceJet holds an average of about 16.2%

for last five months as compared to 13.6% based on passengers carried. We expect the RPKM

market share of SpiceJet to cross 20% by FY16E.

Higher load factors to disproportionate drive earnings

Limited capacity addition and strong growth in demand airline load factor are reaching all time

high. For June 2010, SpiceJet had a load factor of over 90%. Given high operational leverage of

the business, any increase in load factor has disproportionately positive impact on the bottom-

line.

SpiceJet is one of the best run airlines with one of the best operating statistics in the industry SpiceJet has a strong & aggressive management

The addition of aircrafts over

the current & next year

expected to increase airline’s

revenues by about a third

each year

Higher PLFs coupled with high operating leverage will boost the bottom-line

SpiceJet Ltd.

Initiating Coverage

5 October 22, 2010

Kalanithi Maran’s coming in as a single largest shareholder

Sun TV promoter, Mr Kalanithi Maran’s has acquired controlling stake of 38% in SpiceJet from

US investor Wilbor Ross and Kansagra family and has made the mandatory open offer to buy

another 20 percent from the public. Mr. Maran's entry into SpiceJet can be hugely positive for

the company, as earlier its shareholding was very fragmented resulting in little management

control. Further unlike earlier, where there was a lack of focused long term promoter, now the

decisions would be taken keeping long term interest of the company rather than boosting short

term Moreover, SpiceJet stands to tremendously benefit from Mr. Maran’s deep pockets and

proximity to political landscape.

Most Resilient Airline

The resilience and agility displayed by SpiceJet makes it stand out distinctly amongst its

competitors. While the top three industry players by market share are crumbling under their debt

burden, with bleeding financials, SpiceJet not only managed to survive downturn but was also

the only profitable listed airline as per FY2010 results.

SpiceJet’s strong cash reserves, positive cash flow from operations and negligible debt to equity

ratio would make it easier for the airline to access capital, enabling it to undertake aggressive

expansion and benefit from high growth in demand.

Low market value of free float stock

With only three listed airlines in the sector, the total free float available is less than 4,000 Cr or

not even a billion US dollars. Further the free float of SpiceJet is less than Rs.2,000 Cr. Given

the limited size of the sector, and its importance to a fast growing economy any new interest by

even a couple of institutional investors would be at a substantial premium to the current market

prices.

Listing of Indigo is expected to revalue SpiceJet

As per 04 Oct, 2010 news article, Indigo, the biggest LCC in India, has announced plans to hit

the capital markets soon to raise $500 million, close to the market cap of Spicejet. Given the

fact that both are pure LCC with similar market share and growth trend, the listing of Indigo is

expected to boost the valuation of SpiceJet upwards, which is available at fractional cost

compared to Indigo.

Strong backing of Mr.Maran

with both financial and

political clout

SpiceJet was not only glided

through the downturn but

was the only profitable listed

airline in FY10

Market value of free float

stock of entire industry is

under a Billion USD

Listing of Indigo is expected

to bring in higher & truer

valuations

SpiceJet Ltd.

Initiating Coverage

6 October 22, 2010

Overview

Airline is one of the few sectors perennially considered to be a bad investment by many

globally. In addition, given the limited players in this segment in India, it is one of the least

researched sectors. That’s why we believe that only a few have been able to identify the

potential that the sector offers. After a period of successive losses faced by the industry, things

seem to have turned around for good. With demand outpacing supply, the pricing power is

returning to the sector. Given the high operating leverage, the pricing power along with

improving load factor would significantly boost margins for companies in the sector.

India’s huge market size, its booming economy, rising disposable income, huge & fast growing

middle class – almost the size of US and increasing business opportunities in small towns, all

make us confident about the demand for air travel.

However we believe the strong entry barriers like lack of easy access to capital and

infrastructure bottleneck would keep supply under check. The downturn in demand seen during

FY09 has made the industry wiser and now while the demand is growing over 25%, cautious

outlook, both from the Industry & the lenders has limited capacity addition to mere 5%-7%, a

trend expected to continue for a few more years. The industry is also facing a severe

infrastructural bottleneck, especially for a few critical airports, a concern voiced by the Civil

Aviation Minister Praful Patel himself clearly stating that we have almost come to a stage where

no more flights in and out of Mumbai can be allowed. This would further aggravate demand

supply growth mismatch resulting in even higher load factors and air fares.

Because of the aforesaid reasons, we believe the Airline Industry has big surprises in store for

the hoary industry sceptics & would offer exceptional returns over medium term.

Amongst the listed space, we specifically find SpiceJet to be grossly undervalued. Given that

the majority of the new demand for air travel over the next decade would be from first time

travellers and given the value conscious mentality of Indian consumers we believe SpiceJet to

benefit tremendously from its positioning and branding. SpiceJet’s strong financials, aggressive

management and increasing operations further corroborates our stance.

SpiceJet Ltd.

Initiating Coverage

7 October 22, 2010

Industry

The last decade has seen the Indian economy grow rapidly, with its GDP expanding at a CAGR

of 8.4% over 2003-2008. And it was during this rapid growth phase when the Indian aviation

sector has seen a new beginning.

Starting 2003, with the fast growing GDP, India’s per capita income and discretionary spending

too have increased substantially. This growth, coinciding with the launch of new airline

operators and the introduction of low cost carriers, sent the demand for air travel soaring.

Increasing competition and capacity also insured that the air fares remained low. The sector has

grown at a CAGR of 19.14% between 2003 & 2008, at a multiple of approximately 2.5 to the

GDP. During 2008-2010 the sector demand had been absolutely flat. That’s when India’s GDP

has grown by over 15% in real terms. With the economy moving back to a high growth path and

individuals & business doing well, we believe that the latent demand of earlier years will result in

high growth over next couple of years, similar to FY07 & FY08 where the industry grew by

phenomenal 44% & 24% respectively.

Moreover the Indian Aviation Industry is still in a very nascent stage. India’s air passenger per

capita at 0.09 is still abysmally low as compared to 0.30 in China, 5.63 in Australia and 4.69 in

US. With a peak annual average of less than 3.75 trips per 100 people, we feel it is this low

base that offers a huge upside potential in the sector.

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Bil

lio

ns

ASKM RPKM

High economic growth

coinciding with launch of

new airlines & introduction of

LCC sent air travel demand

soaring

Domestic ASKM & RPKM

Source: DGCA, Ideas1st Research

SpiceJet Ltd.

Initiating Coverage

8 October 22, 2010

Company

SpiceJet, erstwhile Royal Airways (erstwhile Modiluft) started its operations in May 2005 with a

fleet of three aircrafts. Today it is one of India’s leading low cost carrier (LCC) with a fleet of 22

Boeing 737 aircrafts and about 145 daily flights, connecting 20 domestic and two international

destinations. With a market share of around 13.2%, it is one of the fastest growing airlines in the

aviation industry. The airline plans to further increase its market share by doubling its fleet size

by 2013.

SpiceJet recently completed the mandatory five years of domestic operations, making it eligible

to fly on international routes. The airline has launched its international operations on two routes,

Delhi to Kathmandu starting October 7, 2010 and Chennai to Colombo from October 9, 2010,

making it the third Indian private airline after Jet Airways and Kingfisher to fly on international

routes.

The airline was promoted by Kansagara family and further saw investments by Dubai based

Istithmar PJSC and US based PE investor Wilbur Ross. In June 2010, media baron & SUN TV

promoter, Mr. Kalanithi Maran bought the stake of all the three former investors. Mr.Maran

along with his holding company, KAL Airways, holds 37.7% in the airline.

Fleet Size (As on 31st March) Nos. 21

ASKM Millions 8760

RPKM Millions 6713

No. of passengers carried Nos. 5,692,049

Scheduled Aircraft Depatures Nos. 44609

Scheduled Aircraft Hours Flown Nos. 74242

Market Share in Sch. Passenger Traffic (%) 12.6

Growth Rate in Sch. Passenger Traffic (%) 38.80

Average Pax. Load Factor (%) 76.60

Operational Snapshot 2009 – 10


SpiceJet Ltd.

Initiating Coverage

9 October 22, 2010

Investment Rationale

Best proxy for India’s growth story

The airline sector demand & growth has an implicit correlation with a nations GDP growth,

increasing as it’s multiple. As the per capita income crosses the threshold levels, more and

more people prefer to travel by air not only because it is more comfortable but also cheaper

considering the opportunity cost of time saved.

Given India’s increasingly favourable demographics with growing young population, rising

incomes and burgeoning middle class, the country is expected to grow faster than China did

over the last 20 years. It is inevitable for the country to grow without the aviation sector

matching pace. This can be seen from the fact that the air travel demand in India grew at a

CAGR of 19% or about 2.5 times its GDP growth between 2003 & 2008.

Further bulk of this new demand would come from first time travelers as increasingly more

people cross the thresh hold level, presently estimated to be between incomes (opportunity

cost) of Rs.1,500 – 2,000 per day. This demand from first time flyers would be more in favour of

LCCs than FSCs & can be corroborated from the success of low cost model in the country. The

market share of LCC’s in India has grown multiple times from ~17% in FY06 to more than 44%

currently.

With the expected capacity expansion & international foray and given its success as a low cost

carrier, we believe SpiceJet would be one of the key beneficiaries from this robust demand

growth.

0

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Bil

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ASKM RPKM

Given that bulk of new

demand would come from

first time flyers, LCCs are

poised to benefit more than

FSCs from the demand

growth

Demand for air travel, i.e.

RPKM can grow over 2.25

times of the GDP growth

Increasing Domestic ASKM & RPKM


SpiceJet Ltd.

Initiating Coverage

10 October 22, 2010

Pricing power to return to airlines due to huge implicit entry barriers

Even though the airline sector will continue to see double digit growth over next few decades in

India, we anticipate the supply addition to be constrained at about 5 – 7% over the next few

years with limited number of new players. The saturating aviation infrastructure, lack of easy

capital availability and stringent regulations make it extremely difficult for new players to enter

the segment. While other issues can be addressed in short to medium term, it would take

atleast a couple of years before adequate infrastructure can be created.

These entry barriers along with the cautious capacity addition by incumbent players in face of

the recent crisis would ensue in limited supply growth while demand is growing rapidly. With the

narrowing demand-supply gap, we clearly see the pricing power returning in the hands of the

companies and anticipate higher revenues & margins per ticket going forward.

Infrastructure bottleneck

The lack of adequate airport infrastructure is one of the major barriers to the airline industry and

has remained relatively unnoticed until recently. Execution can be a major hurdle for a new

entrant, due to a host of these infrastructure issues. Further as commonly believed, airlines do

not have “Mobile Capacity”. Airlines are understood to be able to move their capacity, airplanes,

literally over night. However, owed to the lack of infrastructure, such capacity shifts from low

demand markets to higher demand destinations is easier said than done in India.

The aviation infrastructure growth in the country hasn’t kept pace with the growth in air traffic.

While fleet size has increased manifolds, from just 184 aircrafts in 2005 to around 420 aircrafts

currently with scheduled operators, not much infrastructure has been added. This has resulted

in big takeoff and landing queues at the major airports. Limited airport facilities and lack of

parking bays is not only leading to congestion or delays but also forcing airlines to park their

aircrafts in far flung places.

At most major airports, slots i.e. the landing and takeoff rights, are saturated at peak hours, with

the possibility of new flights coming in only during off peak or odd hours. These slots are an

important consideration for an entrant as peak timed slots register higher passenger load

factors as compared to other slots. We anticipate these capacity constraints and inefficiencies

to act as a strong entry barrier for new entrants, providing incumbent players considerable

pricing power.

Luckily, lately, the sector and its infrastructure constraint is being given the due focus that it

deserves. The Minister for Civil Aviation, Praful Patel, himself has recently voiced the foresaid

concerns at several forums (refer annexure for supporting articles). While steps have been

taken for restructuring of the aviation sector, these reforms would take several years to show

colour. Unlike other industries, capacity in the aviation sector cannot be immediately augmented

in face of rising demand.

While metro airports are going through capacity up gradation process, we believe that all

airports, other than Delhi will take at least 2-3 years for implementing any substantial addition in

their capacity intake. Given improving expected demand we believe that this gap will continue to

increase in major trunk routes even after these up gradations.

With demand supply gap

narrowing, we clearly see

pricing power returning in

the hands of the airline

companies

Severe infrastructural

bottlenecks would limit

capacity addition in the

industry

Limited availability of free

slots for new aircrafts on

major trunk routes during

peak hours provide

incumbent players

considerable pricing power

SpiceJet Ltd.

Initiating Coverage

11 October 22, 2010

Access to Capital

The airlines sector is a highly capital intensive industry with high fixed & constant costs and

variable revenues. Fixed costs include costs like aircraft acquisition cost, rental cost of leased

planes, maintenance cost, crew & administrative staff salaries; that have to be incurred even if

the flight is cancelled. Constant costs, which cease if the flight is cancelled but are invariant to

the volume of traffic carried, are also high. Example of constant costs are ATF, landing fees,

which do not depend on the number of passengers, but will not be incurred if the flight is

cancelled. While majority of the costs are fixed, the industries revenues are variable, resulting in

high operating leverage.

That said, we believe that even at higher capital costs, existing and new players would find it

very challenging to raise any funds. However, fortunately for SpiceJet, unlike it’s so called

‘legacy’ competitors that are buried neck deep in debt and have incurred heavy successive

losses over the last few years, raising capital shouldn’t be difficult.


ratio makes us believe the airline to have easy access to capital, enabling it to undertake

aggressive expansion and grow inorganically.

Regulatory & other barriers

Regulatory barriers are another stumbling block that may discourage new participants in the

industry. There are some inherent policies that may discourage competition in the sector and

may ensue in a loose form of oligopoly type of market structure.

Some regulations that may prove as barriers to domestic operations include regulations

governing minimum fleet size, minimum equity requirements, route dispersal guidelines et al.

The regulation governing minimum fleet & experience requirements for international operations

in a way strengthens the incumbents’ position. Further the exclusive right to National carriers to

fly to Gulf Routes et al is highly discriminative.

Other barriers like mandatory coverage of certain routes that may offer high passenger loads

may act as a burden for the new players.

Operational Excellence

SpiceJet is one of the best run airlines in the country and the only operationally profitable listed

airline. The airline has one of the lowest costs on a per seat basis while having amongst the

highest yields in the industry. Single fleet type and high personnel efficiency helps the airline to

control costs while increasing passenger load factor and higher utilization of aircrafts imply

higher revenues. Other efficiencies, like having the longest average domestic trip distance per

departure further helps to reduce costs.

Contrary to common belief,

the airline industry has huge

invisible entry barriers

SpiceJet Ltd.

Initiating Coverage

12 October 22, 2010

Increase in block hours

Block hours are the industry standard measure of aircraft utilization. It is the time from the

moment the aircraft door closes at departure of a revenue flight until the moment the aircraft

door opens at the arrival gate following its landing.

SpiceJet has been able to utilize its aircrafts more efficiently than most of its competitors. One

of the key reasons is the company’s quicker aircraft turnaround. While legacy carriers on an

average use the aircrafts for 10 hours a day, SpiceJet has recorded an average of about 12

hours, which translates to one additional flight a day per aircraft.

Higher Passenger Load Factor

On an average, SpiceJet has enjoyed greater PLF as compared to most of its competitors. Also

going further we expect the company to enjoy relatively higher PLF given the company’s image

as a ‘value for money’ airline and the robust demand in the low cost segment.

Single fleet type

The present fleet of SpiceJet consists of 17 Boeing-737-800 aircrafts and five Boeing-737-

900ER aircrafts. The new aircrafts the company plans to add to its fleet are also of Boeing-737’s

series. Having similar make and type of aircrafts not only helps to reduce the recurring

operational & maintenance costs but also ensures faster turnaround time implying higher

aircraft utilization and block hours per day.

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95

FY07 FY08 FY09 FY10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 FY11E

Go Air Indigo Jet Lite Spicejet

SpiceJet’s higher aircraft

utilization means about one

additional flight over legacy

carriers

SpiceJet has amongst the

best PLF’s in the industry,

with the PLF dropping

recently mainly due to

capacity additions

PLF for Domestic LCCs


SpiceJet Ltd.

Initiating Coverage

13 October 22, 2010

Personnel Statistics

The personnel efficiency for SpiceJet has improved substantially over the years. While there

were 213 employees per aircraft in 2005, the ratio improved to 115 employees per aircraft in

FY09. This cost saving directly adds to the bottom-line of the company. Also SpiceJet utilizes its

staff better than most airlines.

213

151

122 115

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t

Sp

ice

Jet

Go

Air

Ind

igo

Jet

KF

Pa

ram

ao

un

t

Sp

ice

Jet

FY08 FY09

SpiceJet’s employee

utilization is expected to

improve further

With just 115 employees per

aircraft SpiceJet has

amongst the best ratio in the

industry

SpiceJet’s Decreasing Ratio of Employees Per Aircraft

Ratio of Employees Per Aircraft Across Private Airlines



SpiceJet Ltd.

Initiating Coverage

14 October 22, 2010

Efficient Management & Cost Structure

SpiceJet is one of the best managed and most effectively run company in the industry. It has

been able to keep tight control over its costs and claims to be one of the lowest cost service

provider on a per seat basis. The cost savings can directly been seen boosting the company’s

bottom-line.

13.1

17.0

10.812.0

15.8

9.2

11.5

13.6

8.3

0

2

4

6

8

10

12

14

16

18

Jet KF SpiceJet Jet KF SpiceJet Jet KF SpiceJet

FY08 FY09 FY10

15.9

13.0 12.8 13.2

20.1

11.312.5

21.4

11.3

0

5

10

15

20

25


FY08 FY09 FY10

Employee costs as a

percentage for SpiceJet is

not only the best amongst

the listed players but is

decreasing each year

SpiceJet has been able to

keep tight control over its

costs

Employee Cost as % of Sales

Selling & Administration Expenses as % of Sales

Source: Capitaline, Ideas1st Research


SpiceJet Ltd.

Initiating Coverage

15 October 22, 2010

Sale & Lease Back Strategy

The sale & lease back strategy used by SpiceJet to maintain and expand its fleet has paid off

very well for SpiceJet. While Kingfisher and Jet Airways own most of their aircrafts, SpiceJet

follows an asset light model and its entire fleet is currently leased. The strategy has helped the

airline to keep its debt levels to minimum, avoiding debt burden. Kingfisher and Jet Airways had

borrowed aggressively to increase their fleet and are currently buried under debt. The graph

below shows the consolidated lease & interest charges as a percentage of sales for the airlines

across the years. While Jet has been able to keep its lease & interest charges under control,

there is a clear uptrend owed to the burgeoning debt & interest charges. Similar trend can be

seen with Kingfisher. Contrary to them, SpiceJet has been able to maintain its interest & hire

charges to about 20 – 23% of sales.

21.8

31.0

21.423.9 23.6

22.3 21.523.5

21.5

0

5

10

15

20

25

30

35


FY08 FY09 FY10

0

5

10

15

20

25

30

35

40

45

FY06FY07FY08FY09FY10FY06FY07FY08FY09FY10FY06FY07FY08FY09FY10

Jet KF SpiceJet

SpiceJet has been

successful with its sale &

lease back strategy – while

interest & hire charges are

increasing for its

competitors, SpiceJet has

been able to maintain them in

a range of 20-23%

Other Operating Expenses as % of Sales

Interest & Aircraft Lease Expenses as % of Sales


Source: Capitaline, AR, Ideas1st Research

SpiceJet Ltd.

Initiating Coverage

16 October 22, 2010

Average fuel consumption

SpiceJet records amongst the lowest fuel consumption per ‘KM flown’ in the industry. This can

be attributed to the company’s pilots who have been trained to fly at optimum speed & height

and follow most efficient takeoff and landing techniques. Though the difference looks small on a

per KM basis, the difference is substantial – about Rs.8.3 Lacs per million KMs flown on Jet and

SpiceJet.

Average trip distance per departure

Longer trip distances per departure imply lower CASK while generating higher revenue per

RSKM. SpiceJet enjoys the highest average trip distance amongst all domestic airlines followed

closely by Indigo. Even comparing it to the consolidated average trip distances for airlines with

international operations, SpiceJet fairs very well.

With the airline commencing two international routes and expected to add further international

destinations to its network, the average trip distance can be expected to improve further for the

airline.

182.38

208.94

181.55

165

170

175

180

185

190

195

200

205

210

215

Jet Airways Kingfisher Spicejet

962 1002

758

919

685609

1008

0

150

300

450

600

750

900

1050

Though the difference looks

small on a per KM basis, the

difference is substantial –

about Rs.8.3 lacs per million

KMs flown on Jet and

SpiceJet

Longer trip distances per

departure imply lower CASK

while generating higher

revenue per RSKM

Average Fuel Consumption Per KM Flown (INR)

Average Trip Distance Per Departure in KMs (Domestic)

Source: AR, DGCA, Ideas1st Research


SpiceJet Ltd.

Initiating Coverage

17 October 22, 2010

Passenger load factor

SpiceJet has seen consistent improvement in its PLF. Higher PLF implies not just higher

revenues but much higher margins as any additional revenue gets directly added to the bottom-

line . Over the next few years we anticipate the PLF for the airline to improve further owed to the

relatively cautious capacity addition in the industry, the robust demand for air travel specifically

in the low cost segment from first time fliers and the image of SpiceJet as ‘value for money’

airline.

The combined effect of higher load factors and increase in flights resulted in an increase in unit

revenue per ASKM & per flight by about 6%.

1332

918

787

1008

0

200

400

600

800

1000

1200

1400

Jet Jet Lite Kingfisher SpiceJet

390

459489

0

100

200

300

400

500

600

Even after considering longer

international routes for its

competitors, SpiceJet has

reasonably high average

domestic trip distance per

departure

Average Trip Distance Per Departure in KMs (International + Domestic)

SpiceJet – Increasing Revenue Per Flight (INR ‘000)


Source: AR, DGCA, Ideas1st Research

SpiceJet Ltd.

Initiating Coverage

18 October 22, 2010

2.15

2.34

2.49

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2.6

0

10

20

30

40

50

60

70

80

90

100

Go Air Indigo Jet Lite Spicejet

Any increase in the revenues

directly adds to the bottom

line. In addition to revenue

increase owed to fleet

addition, SpiceJet is

expected to continue to

increase its revenues per

ASKM

SpiceJet’s PLF decreased in

August mainly owed to fleet

addition towards end of the

period

SpiceJet – Increasing Revenue per ASKM (INR)

Recent PLF for Domestic LCCs

Source: AR, DGCA


SpiceJet Ltd.

Initiating Coverage

19 October 22, 2010

International foray

After being well positioned as LCC in domestic market for more than five years, SpiceJet has

got approval for flying to international destinations. This will help company to further improve on

its aircraft utilization during the night time. Additionally, company would also be saving on fuel

cost in international flights as applicable taxes on fuel are higher in domestic markets. Lastly,

international flights would imply longer average trip distance, which means more efficient fuel

consumption and lower CASK with higher revenues per ASKMs.

SpiceJet recently commenced international operations on two routes, Delhi to Kathmandu

starting October 7, 2010 and Chennai to Colombo from October 9, 2010.

Increasing fleet

SpiceJet plans to double its fleet over the next three years to exploit the anticipated air travel

demand surge and to capture maximum possible market share. We believe the addition of new

aircrafts would boost the company’s top line and also see the bottom line grow more than

proportionately. The company is expected to get deliveries of six aircrafts by January 2012 in

addition to which it plans to lease another six aircrafts. The company has placed orders for

another 30 aircrafts deliveries of which are anticipated to start from 2013. We believe most of

the fleet expansion would be through sale & lease back, in line with the company’s present

strategy.

Higher Market Share

Using the industry standard to measure the market share, based on the number of passengers

flown on an airline relative to total passengers flown in the period, SpiceJet on an average for

last 5 months holds about 13.6% of the domestic market share. However while the market

share measured using number of passengers flown gives one a fair idea, we believe calculating

market share based on RPKM to be a better indicator of the true market share of an airline. It is

worth nothing that SpiceJet enjoys a much higher market share at about 16.2% calculated

xxxxxxxx

5

11

19 19 2126

32

38

44

52

0

10

20

30

40

50

60

International foray will result

in disproportionately lower

increase in expenditure than

revenues owed to higher

aircraft utilization & lower

fuel costs

SpiceJet – Historic & Projected Fleet Size


October 22, 2010

based on average RPKMs

using number of

With the addition of new aircrafts at a higher rate than most of its peers, we expect the

SpiceJet’s market share based on RPKM’s to increase substantially, from the current share of

15.5% to over 20% by FY16E.

Against the industry

standard to use number of

passengers carried to

calculate market share, we

believe using RPKM gives a

truer picture. Market share of

LCCs are substantially higher

using this metric

Market Share as Per Passenger Carried

Market Share as Per RPKM

Source: DGCA, Ideas1st Research*- Operations discontinued

Source: DGCA, Ideas1st Research*- Operations discontinued

based on average RPKMs for last five months as compared to

using number of passengers carried.



15.5% to over 20% by FY16E.

Go

6.0%

JetLite

8.1%

Kingfisher

21.5%

Paramount*

0.3%

SpiceJet

13.6%

Nacil

13.8%

Go

6.1%

JetLite

8.3%

Kingfisher

17.7%

Paramount*

1.1%

SpiceJet

16.2%

Nacil

13.1%

Market Share as Per Passenger Carried

Market Share as Per RPKM

Source: DGCA, Ideas1st Research Operations discontinued

Source: DGCA, Ideas1st Research Operations discontinued

SpiceJet Ltd.

Initiating Coverage

20

for last five months as compared to the market share computed



Indigo

17.1%

Jet

19.7%

Indigo

19.7%

Jet

17.7%

SpiceJet Ltd.

Initiating Coverage

21 October 22, 2010

Strengthening Balance Sheet & Resilience

The resilience and agility displayed by SpiceJet makes it stand out distinctly amongst its

competitors. While the top three industry players by market share are crumbling under their debt

burden, with bleeding financials, SpiceJet not only managed to survive downturn but was also

the only profitable listed airline as per FY2010 results.

SpiceJet has over the years improved its financial position and posted its first full year profits in

FY10 and is expected to report a profit of Rs.376 crs in the current financial year. It is amongst

the few airlines in the industry to have strong cash reserves and a positive cash flow from

operations. The airline’s ability to stay cash positive during worst of the time shows its resilience

to withstand toughest of the conditions.


ratio would make it easier for the airline to access capital, enabling it to undertake aggressive

expansion and benefit from high growth in demand.

15.3 15.817.1

17.7 18.319.1

20.1

0

3

6

9

12

15

18

21

0

2

4

6

8

10

12

14

16

Jet Kingfisher SpiceJet

Th

ou

san

d C

rs

Fleet addition & increasing

demand by first time flyers

would increase in market

share of SpiceJet

substantially over the next

few years

SpiceJet is expected to have

no or negligible debt on its

books by end of FY11

Told Debt as of March 2010 (INR Crs)

SpiceJet Market Share based on RPKM (%)


Source: AR, Capitaline, Ideas1st Research

SpiceJet Ltd.

Initiating Coverage

22 October 22, 2010

Increasing load factors to boost earnings

With cautious capacity addition by the Industry and strong growth in air travel demand, the

airline load factor is reaching all time high. SpiceJet has recorded an average PLF of more than

81% for the first five months of this year, which are traditionally the leanest months. Though

recently the PFL appears to have dropped abruptly, the drop was due to addition of an aircraft

towards the end of the period. It is worth noting that despite several aircraft inductions

anticipated over the coming months, we expect SpiceJet to maintain reasonable load factors

and report increasingly higher RPKMs. Given the high operational leverage of the business, any

increase in load factor has huge positive impact on the bottom-line.

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

Jet Airways Kingfisher SpiceJet

Hu

nd

red

Crs

0

200

400

600

800

1000

1200

1400

Crs

SpiceJet is expected to

record operating profit of

about Rs.350 Crs in FY11E

Net Profit for FY10 (INR)

Projected RPKMs for SpiceJet

Source: ARs, Capitaline


October 22, 2010

Kalanithi Maran

Sun TV promoter, Mr

from US investor Wilbor Ross and Kansagra family and had made the mandatory open offer to

buy another 20 percent from the public. Mr. Maran's entry into SpiceJet can be hugely positive

for the company,

control. Moreover, SpiceJet stands to tremendously benefit from Mr. Maran’s deep pockets and



With only t

not even a billion US$. Further the free float of SpiceJet is less than Rs.2,000 Cr. Given the

dependence on aviation sector for success of any country & huge inte

players for India, , any new interest from an institutional buyer would send the sector soaring.


As per 04 Oct, 2010 news article, Indigo, the biggest LCC in India, has anno



expected to boost the valuation of SpiceJet

compared to Indigo.

aggressively over the last two years, boosting its market share. With Mr. Maran coming in as a

single largest promoter,

addition,

planned IPO price of Indigo

Strong backing of Mr.Maran

with both financial and

political clout

Market value of free float

stock of the Indian airline

industry is currently less

than Rs.4,000 Crs or a billion

USDs

Market Value of Free Float Stock (INR Crs)

Source: BSE, Ideas1st Research* - Pursuant to the share purchase agreement dated June 12, 2010 & considering KAL Airways’s

Kalanithi Maran’s coming in as a single largest shareholder

Sun TV promoter, Mr Kalanithi Maran has acquired a controlling stake of 37.7% in SpiceJet



for the company, as earlier its shareholding was very fragmented resulting in little management




With only three listed airlines in the sector, the total free float available is just about 4,000 Cr or


dependence on aviation sector for success of any country & huge inte



As per 04 Oct, 2010 news article, Indigo, the biggest LCC in India, has anno



expected to boost the valuation of SpiceJet upwards, which is available at fractional cost

compared to Indigo. Also due to a focused management Indigo was able to add aircrafts


single largest promoter, SpiceJet is expected to be able to undertake similar aggressive

addition, if not more, and doesn’t deserve to be at much discount to Indigo as suggested by

planned IPO price of Indigo.

SpiceJet*

1,813

Market Value of Free Float Stock (INR Crs)

Source: BSE, Ideas1st Research Pursuant to the share purchase agreement dated June 12, 2010 & considering

KAL Airways’s majority holding as promoter stake

SpiceJet Ltd.

Initiating Coverage

23

’s coming in as a single largest shareholder

has acquired a controlling stake of 37.7% in SpiceJet



as earlier its shareholding was very fragmented resulting in little management


hree listed airlines in the sector, the total free float available is just about 4,000 Cr or


dependence on aviation sector for success of any country & huge international interest of global


As per 04 Oct, 2010 news article, Indigo, the biggest LCC in India, has announced plans to hit



upwards, which is available at fractional cost

Also due to a focused management Indigo was able to add aircrafts


be able to undertake similar aggressive

and doesn’t deserve to be at much discount to Indigo as suggested by

Kingfisher

706

Jet Airways

1,361

Pursuant to the share purchase agreement dated June 12, 2010 & considering

SpiceJet Ltd.

Initiating Coverage

24 October 22, 2010

Key Concerns

Macro

Double Dip

With most of the developed economies still struggling to get back on their feet, fears of a double

dip or at least a long period of slow growth have been lingering around. Though we see more

positive foretokens than negatives, we believe such a dip would be only temporary with little or

no effect on India and the domestic air travel demand.

Crude prices

As compared to international players, Indian airlines have a higher proportion of fuel costs in

total operating costs due to the higher ATF tax structure in the country. Further the proportion is

higher for LCCs when compared to FSCs. In India, expense on crude forms ~ 40% of the total

expenditure of LCCs. Any increase in crude without proportionate increase in revenue would

impact the bottom-line of the company.

Unfavorable exchange rate movement

As over two thirds of the total expenditure of SpiceJet is directly linked to the USD and with little

international or dollar revenue, the company has high negative USD exposure and any

appreciation in USD vs INR would directly impact its bottom-line. However as the contribution to

revenues from the international operations increase over the next few quarters, we can expect

the negative USD exposure to come down reasonably.

Industry Specific

Inordinate Capacity addition by the Industry

Rise in competition within the industry can lead to a tariff wars resulting in reduction in the yield

from the current level. Also inordinate capacity addition by the airlines may lead to lower load

factors. Both these mis-happenings can adversely impact company’s top & bottom-line.

Load Factor

Given high operating leverage, decrease in load factor due excessive capacity addition or

reduction in demand has higher impact on bottomline.

Reduction in Yields - As cost structure of the company is fixed, any reduction in yield because

of aforementioned reasons would directly hit the bottomline.

Regulatory - Adverse regulatory and policy amendments like higher airport, ATF or other taxes,

more stringent norms for carrying on operations et al can impact the sector’s growth negatively.

SpiceJet Ltd.

Initiating Coverage

25 October 22, 2010

Company Specific

Slower than expected capacity addition

Slower than anticipated fleet and routes additions may impact the company’s projected

revenues and market share with a downward basis, impacting its bottom-line.

Personnel Attrition

Given the high growth in the sector, any short fall in qualified personnel may lead to high

attrition within the industry leading to higher recruitment & training costs. Alternatively in order to

retain its staff, airline companies may have to offer higher compensation, reducing the bottom-

line of the companies.

International foray

The company currently has plans for short haul to better utilize its aircraft. Any shift in focus will

mean higher investment and given that the international markets are far more competitive, it

may lead to reduction in overall margins.

Change in Management

With the recent change in the company’s shareholding and management, any changes in the

positioning, branding or name of the company may adversely impact its market share and the

revenues.

SpiceJet Ltd.

Initiating Coverage

26 October 22, 2010

Valuation

Multiple

Price Based on Domestic Multiples Price Based on International

Multiples Price Based on Weighted Multiples (Domestic .75 & International .25)

Industry Average Multiple

FY11E FY12E FY13E Industry Average Multiple

FY11E FY12E FY13E Industry Average Multiple

FY11E FY12E FY13E

EV/Total Sales 1.8 144.1 203.7 277.8 2.5 192.5 268.7 362.0 1.9 156.2 220.0 298.9

EV/Passenger Revenue

1.8 147.2 208.6 284.9 3.1 234.9 327.0 438.5 2.2 169.1 238.2 323.3

EV/EBITDAR 7.3 159.6 266.5 384.3 10.9 229.7 381.5 545.7 8.2 177.1 295.2 424.6

Average Price - 150.3 226.3 315.7 - 219.1 325.7 448.8 - 167.5 251.1 348.9

TMT Multiples

Domestic Airlines International Airlines

SpiceJet Kingfisher

Airlines Jet Airways

Tiger Airways*

Ryan Air

EV/Total Sales 1.3 1.9 1.7 2.1 2.8

EV/Passenger Revenue

1.4 1.9 1.7 2.6 3.6

EV/EBITDAR 6.2 - 7.3 10.5 11.3

Sales CAGR (Last 5 yrs)

48.7% 40.5% 19.4% 28.6% 15.3%

* - Sales CARG calculated as growth over FY09 & FY10

India is a country of saving oriented masses, where the basic ideology is value for money. With

per capita income growing by over 15% annually and increased mobility of over 300 million

middle class Indian, LCC is a key enabler for the success of the country. Not surprisingly, the

sector has grown by leaps and bounds over last 5 years. Given that India has just started

moving on this growth trajectory which many experts and economist believe should continue for

decades, the sector should maintain its high growth momentum for next several decades.

Within the sector, given strong revival in demand, high market share of the company, strong

track record, sound company fundamentals and inexpensive valuations, SpiceJet is amongst

the best stocks to invest in. We have used multiple approaches to value Spicejet. While using

the comparative multiples SpiceJet fair value is at an average price of Rs.168 per share, using

discounted cash flows it comes at Rs. 212 per share.

Comparative Multiples

Due to negative earnings for the other airlines listed in the country and in absence of any listed

airline in the low cost segment we have used the average TMT multiples for similar LCCs listed

on international stock exchanges. Further the limited financial and listing history for Indian

carriers and the absence of any listed airline in the low cost segment makes it difficult to arrive

at a valuation for SpiceJet purely based on Indian carriers.

As can be inferred from table below, despite the robust growth shown by the Indian airlines over

the last five years and the double digit growth expected over the next couple of decades, the

Indian airline sector is grossly undervalued as compared to international standards. While

SpiceJet has predominantly been a domestic airline, given its robust growth and with

commencement of international operations, we expect the company to have an appreciable

component of international revenues and hence believe the airline deserves to be benchmarked

against its international competitors. Therefore, we have valued SpiceJet based on weighted

average TMT multiples for domestic airlines (75%) and international low cost carriers (25%) –

Tiger Airways & Ryan Air.

Given SpiceJet’s CAGR of

about 2.5 times its

international counterparts &

the double digit domestic

industry growth, we believe

we have used very

conservative multiples to

value SpiceJet

SpiceJet Ltd.

Initiating Coverage

27 October 22, 2010

To overcome the differences due to fares in different markets and revenues from sources other

than passenger revenue we have used both EV/Total Sales and EV/Passenger Revenue

multiples. Further to account for the fleet acquisition strategy, i.e. owned aircrafts v/s leased

aircrafts we have used EV/EBITDAR multiple; offsetting the interest burden for owned fleet

against the aircraft rentals.

Amongst the three multiples, we believe EV/EBITDAR to give the best picture on a standalone

basis. Unlike the EV/Sales & EV/Passenger Revenue multiples, EV/EBITDAR not only adjusts

for the debt burden against rentals but also for the fare & costs differentials. It gives a clearly

picture of the actual profitability of the airline. EV/EBITDAR gives us a higher fair value of

Rs.177 per share on a standalone basis, compared to the average value of Rs.168.

Again, given the robust sales CAGR for SpiceJet and for the Indian airline industry as a whole,

and the potential of double digit annual growth rate over the next two decades, we believe we

have been very conservative in assigning a weight of 25% to international average while

arriving at the multiples. Based on the growth potential we see the Indian airline sector to be

grossly undervalued to global standards & expect the valuations to at least match them if not

trade at a premium. Using only international multiples as a benchmark, gives us an average

value of Rs.219 per share for SpiceJet.

Discounted Cash Flow - FCFF

We have also discounted the projected cash flows for SpiceJet to arrive at a fair price. Unlike

comparative valuation, DCF will capture the additional revenue that would be generated from

the rapid expansion and reflects the intrinsic worth of the share. Based on our DCF approach,

we have fundamentally valued the company at Rs.212 per share.

Risk Free Rate 8%

Beta 1.17

Equity Risk Premium 8%

Cost of Equity 17%

Cost of Debt (pre tax) -

Tax rate -

Total Long Term Debt / Equity Ratio -

WACC 17%

Growth Phase I - 5 yrs 15%

Growth Phase II - 5 yrs 13%

Growth Phase III - 10 yrs 10%

Terminal Growth 3%

However we have been very conservative in our WACC calculations, valuing SpiceJet on the

lower end. We have assumed the company to be debt free perpetually, resulting in a much

higher WACC at 17%. Considering a long term debt / equity ratio of 1, with a WACC of 13%,

gives us a much higher fair value of Rs.362 per share.

WACC Calculation & Assumptions

SpiceJet Ltd.

Initiating Coverage

28 October 22, 2010

Annexure

Income Statement FY08 FY09 FY10 FY11E FY12E FY13E

Total Income 1438.6 1813.5 2242.1 2872.9 3856.2 4991.1

Total Expenditure 1548.1 2139.5 2155.3 2524.2 3155.4 3935.1

EBIDTA -109.6 -326.0 86.8 348.7 700.8 1056.0

Depreciation 7.8 7.3 7.6 7.4 9.5 13.3

Interest & financial expenses 13.7 16.0 11.4 9.0 8.5 11.0

PBT -131.1 -349.3 67.8 332.4 682.8 1031.7

PAT -133.5 -352.6 61.5 266.1 546.7 826.1

Balance Sheet FY08 FY09 FY10 FY11E FY12E FY13E

Shareholders Funds 28.0 -429.5 -342.2 471.6 1018.3 1844.4

Share Capital 240.7 241.0 241.9 404.5 404.5 404.5

Reserves Total -212.7 -676.5 -584.1 67.2 613.9 1440.0

Loan Funds 531.6 488.8 438.3 - - -

Total Sources of Funds 559.6 59.4 96.1 471.6 1018.3 1844.4

Net Block 564.0 252.8 391.9 411.2 446.0 483.7

Net Current Assets -4.8 -193.5 -295.8 60.4 572.4 1360.7

Total Assets 559.6 59.4 96.1 471.6 1018.3 1844.4

Cash Flow Statement FY08 FY09 FY10 FY11E FY12E FY13E

PBT -131.1 -349.3 67.8 332.4 682.8 1031.7

(Inc)/Dec in WC -112.0 -329.3 80.5 392.4 564.7 850.4

CF from Operations -67.7 -432.1 325.5 248.0 725.7 1053.7

CF from Investments 251.9 304.7 -146.6 -26.7 -44.2 -51.1

CF from Fin. Activity 62.7 -163.7 -36.1 100.4 -8.5 -11.0

Inc/Dec of Cash 246.9 -291.1 142.8 321.7 673.0 991.7

Add: Beginning Balance 352.7 599.5 308.0 450.7 772.4 1445.4

Closing Balance 599.7 308.5 450.8 772.4 1445.4 2437.0

Financials (INR Crs)

SpiceJet Ltd.

Initiating Coverage

29 October 22, 2010

Budget airlines race to meet demand in Asia

By Kevin Brow n in Singapore | September 20 2010 18:12 | www.ft.com

Asia’s V-shaped recovery from the global financial crisis has triggered a boom among budget

airlines in the region as carriers position to meet forecasts for rising traffic.

With growth in gross domestic product in emerging Asia now forecast by the Asian

Development Bank to reach 7.9 per cent this year, airlines are rushing to add enough capacity

to meet predicted demand.

Activity is most intense in south-east Asia, where Cebu Pacific of the Philippines last week

announced an initial public offering to raise up to $730m to buy new aircraft.

Tiger Airways, the low-cost carrier part-owned by Singapore Airlines, last week said it planned

to buy nine new Airbus A320 aircraft, increasing its fleet to 26. The airline has already

announced plans to launch a subsidiary in Thailand in a joint venture with Thai Airways

International. Tiger also runs a subsidiary in Australia.

Meanwhile, Malaysia-based AirAsia, the region’s largest low-cost carrier, recently unveiled

plans for a joint venture in Vietnam, alongside its existing operations in Thailand and Indonesia.

Cebu Pacific would not comment on its planned IPO, for which Citigroup, Deutsche Bank and

JPMorgan are joint global lead managers.

However, a person with knowledge of the transaction said the airline was expected to raise at

least $500m to expand its domestic network, the largest in the Philippines, and add to its south-

east Asian international destinations.

Boeing, the US aircraft manufacturer, is forecasting growth of 8.3 per cent a year for the next 20

years in route passenger kilometres – a key measure of airline traffic – flown within south-east

Asia.

That compares with 7.1 per cent for the Asia Pacific region, 4.1 per cent for Europe and just 2.8

per cent for North America.

In addition to rapid economic growth, south-east Asia is also benefiting from the run-up to the

implementation in 2015 of an “open skies” deal among the 10 countries of the Association of

South East Asian Nations.

The countries have a combined population of 600m and an economy the size of India’s.

“All the airlines are positioning themselves for this because instead of bilateral deals limiting

them to flying between city pairs, the agreement will open a huge market into second and third-

tier cities that hasn’t been tapped,” said the person with knowledge of the Cebu Pacific IPO.

Elsewhere in Asia, IndiGo, India’s biggest low-cost carrier, has announced plans to acquire 150

new aircraft, and is said by bankers to be preparing for an initial public offering in Mumbai

aiming to raise about $400m. The company said recently, however, that an IPO was not

imminent.

References & News Articles

SpiceJet Ltd.

Initiating Coverage

30 October 22, 2010

All Nippon Airways, the full-service Japanese carrier, is launching a budget subsidiary in a

partnership with First Eastern Investment Group of Hong Kong, and Garuda, the Indonesian

flagcarrier, is buying 20 new Boeing aircraft and preparing for an IPO to raise about $300m.

The expansion plans are causing significant strains, however. Some airlines, notably Philippine

Airways, have had to cancel flights because of a shortage of pilots – many of whom have been

attracted to Gulf airlines, such as Dubai-based Emirates, by higher salaries and benefits.

Emirates said recently that it plans to hire 250 pilots this year and 500 in 2011. Boeing forecast

last week that Asia will be at the forefront of staff requirements over the next 20 years, with

China alone needing an extra 70,600 new pilots and south-east Asia 42,000.

SpiceJet Ltd.

Initiating Coverage

31 October 22, 2010

Parking facility: A revenue generation potential, for Nagpur airport

The Economic Times, September 17, 2010

Among the various revenue generation streams at MIHAN, one that is proving to hold

substantial potential is the night parking slots for low cost carriers. Mihan India Private Ltd

(MIPL) project manager, Abid Ruhi, explains that domestic airlines (including Jet Airways and

Indigo) have evinced interest to avail of the night parking facility being offered by MIPL, at

Nagpur airport.

With Mumbai and New Delhi airports becoming congested, there is not a single night parking

slot available for airlines at these locations. Hence, airlines are opting for Nagpur airport.

Consequently, MIPL is promoting this option, as one with minimum charges and maximum

facilities, adds Ruhi. The MIPL authorities started working on such proposals, after taking over

operations at Nagpur airport. In case JetLite and Indigo plan to shift their aircraft base here, as

proposed, Nagpur airport could generate additional revenue during off-peak hours too, adds

Ruhi.

The airport has so far been earning revenue only during peak hours (from 7am to 11pm), from

the few domestic flights and an international flight. Now, it plans to provide eight parking slots

during the day and four new slots to private airlines during off-peak hours (12 midnight to 6am).

Last year, international airlines, like Belgium based Sabena Airlines and US-based Goodrich

Air, which are planning to start India operations, had sought night parking slots for their aircrafts

at Nagpur airport. Another US based airline had asked for stop-over parking at Nagpur, as well.

“A few other international airlines have also conducted a survey of Nagpur airport, to use the

night parking facility,” reveals Ruhi.

SpiceJet Ltd.

Initiating Coverage

32 October 22, 2010

Civil aviation sector to be in world's top five: Patel

PTI, Jul 4, 2010, 06.38pm IST

AHMEDABAD: India's civil aviation sector will be among the top five in the world in the next five

years, Civil Aviation Minister Praful Patel said in Ahmedabad on Sunday.

"In the last six years we have been successful in bringing a revolution in India's civil aviation

sector, I do not mind saying that," Patel said after inaugurating the new domestic-cum-

international terminal at the Sardar Vallabhbhai Patel International (SVPI) Airport here, which is

likely to become operational from August 15.

"In 2004-05, we were considering our civil aviation sector as big, but at world level it was not

much recognised. In just six years, India's civil aviation sector is ranked ninth in the world.

"In the next five years, India's civil aviation sector will be among the top five in the world," Patel

said.

Patel, who had laid the foundation of the building in 2007, said inauguration of the new terminal

at the Ahmedabad airport was a rare occasion. "It is a rare occasion when a minister lay the

foundation of a building and inaugurates it too."

The Aviation Minister also expressed the need for more air services in Gujarat, looking at the

development.

"There should be increase of air service in Gujarat be it Ahmedabad, Surat, Rajkot, Vadodara,

or Bhavnagar. Central Civil Aviation ministry would support all projects for Gujarat and we

assure you there would be no discrimination," he said.

When Patel requested the Gujarat government to consider the viability gap funding (VGF)

model of the Centre, chief minister Narendra Modi said, "In the VGF model for north eastern

states, it is the Central government which is funding the gap for airline connectivity. If this is

given to Gujarat, I will adopt it right now."

SpiceJet Ltd.

Initiating Coverage

33 October 22, 2010

Mumbai airport won’t be able to take more flights

DNA / Sindhu Bhattacharya / Saturday, July 3, 2010 1:07 IST

It may soon become difficult to allow new flights into and out of Mumbai, given congestion at the

international airport and delays in building a new one at Navi Mumbai.

Slamming the environment ministry for delaying clearance to the Navi Mumbai project, Union

civil aviation minister Praful Patel said on Friday, “We are reaching a point where we have to

think whether new flights can be permitted or not.

After the current upgradation, Mumbai international airport’s peak capacity will reach 40 million

passengers annually, but more is needed. In 24 hours, we are using peak airport capacity for 15

hours every day.”

Patel said objections from the ministry of environment and forests over the Navi Mumbai project

were beyond comprehension. “We can’t be overly obsessive about environmental issues. We

can’t give priority to 50-100 acres of degradation over a large infrastructure project.”

The new airport has been planned near Panvel, but Union environment minister Jairam Ramesh

has raised concerns over the project destroying about 400 acres of forest.

A Mumbai International Airport Ltd spokesperson pointed out that there were currently 32

aircraft movements per hour.

But when the traffic reaches 40 million passengers, there will be 40 an hour.

“The airport will soon reach saturation point. We handled 26 million passengers in 2009-10 on a

land area of 1,849 acres as against Delhi, which handled almost the same number of

passengers at more than double the land area available at 5,200 acres.

Even Hyderabad, which handles about seven million passengers a year, has 5,400 acres at its

disposal.”

He said Mumbai airport was constrained in terms of land, and therefore in critical areas such as

runways, aircraft parking bays and terminal expansion.

SpiceJet Ltd.

Initiating Coverage

34 October 22, 2010

It’ll hurt. We are reaching capacity in Mumbai & new airport is stuck: Patel

July 5, 2010, www.economictimes.indiatimes.com

Civil Aviation Minister Praful Patel is in favour of allowing foreign carriers to own stakes in

domestic ones. That’s one way the aviation industry, which he describes as India’s ``new

sunrise sector,’ can get a part of the capital it badly needs to keep pace with the growth in

demand that’s bound to be unleashed, he says. `If only 10% of us flew, the Indian civil aviation

industry would still need to become six times its present size,’’ he says. In a walkabout interview

with ET NOW’s Andy Mukherjee at New Delhi’s gleaming, new, state-of-the-art Terminal 3,

Patel spoke about a host of issues, including making India an aviation hub for Asia, the

turnaround of Air India and his concerns over the dithering in building a new airport at Navi

Mumbai because of environmental concerns. Excerpts from the interview, which plays on ET

NOW on Tuesday at 6:30 pm and 11 pm.

Is it time to revisit the issue of allowing foreign carriers to invest in domestic airlines?

The entire government has to take a call on this. But yes, there is a case. Since the aviation

sector is now turning around, and the growth and the volumes are coming, there will be a

requirement of huge capital expenditure and a lot of investments. So I think there is a possibility.

At an IATA conference you perhaps jokingly said that by 2050, of the 12 surviving global airline

brands, three will be from India.

I mean it. When I said in 2004 that India’s aviation will grow and will arrive on the world scene, I

am sure not many people would have believed it and I do not think four years back anybody in

India would have ever thought that we could have an airport terminal as big and grand as this.

Let’s not underestimate India. With its huge population, geography and growing economic

strength, India will be able to demonstrate all that I have said in Berlin. By 2050, if there are 12

carriers flying, three will come from India and three from China.

What about the losses at Air India?

I am happy that a lot has changed in Air India since last year. The losses have started coming

down and the outlook is good.

But we are still talking about some 22,000 crore rupees of expensive longterm debt that Air

India has taken because of the new aircraft orders that it has placed?

Well that is unfortunately a thing which happened because we did not have a capital

expenditure programme for 20 years. So when you have a large induction of aircraft, these

kinds of issues will certainly be a factor which they will have to contend with, but as I said,

things are looking better.

With T 3 operational, will India at least be a contender for the position of an aviation hub in this

part of the world?

SpiceJet Ltd.

Initiating Coverage

35 October 22, 2010

In fact, that is what it’s precisely meant to be. It’s a game changer for India’s aviation. This

airport will establish Delhi as a major hub for most of Asia. So this, I think, is a defining moment.

The vision document which we have internally in the ministry is to make, to begin with, Delhi,

Mumbai, Kolkata, Chennai, Bangalore and Hyderabad as the six major hubs of India. And if we

are on course, I can assure you that aviation in India will also be on course. The strength of the

airlines will be to be able to, say, bring a passenger from Paris into Delhi and to be taking the

passenger from Delhi to, say, Hanoi or Shanghai or to any other city. All the carriers — right

from Air India to Jet Airways to Kingfisher and in future all the other airlines which will start flying

internationally — will take advantage of these kinds of airports. So an airport is not just a facility

that looks big, grand and comfortable.

Will the Mumbai Airport also look as nice as the new airport in Delhi?

The Mumbai Airport, when completed, will be absolutely on the same scale and size and

grandeur. But what worries me about Mumbai is not whether the existing Chhatrapati Shivaji

International Airport will be as grand or great like this; it will be. What worries me is that it’s a

constrained airport, it has one major runway, one cross runway which is like a half runway, and

if the second airport at Navi Mumbai — which I am very concerned about — is not coming up in

the next five years, it will affect the economy of Mumbai because I have almost come to a stage

where no more flights in and out of Mumbai can be allowed. It is coming to a stage where

passenger capacity may exist in the terminals, but the number of aircraft movement in and out

of Mumbai cannot happen, and that is why Navi Mumbai must be cleared at the earliest.

Unfortunately it has been held up due to some environment concerns. I am not against

addressing concerns. After all, we all have to ensure a good and a clean world. But in a country

like ours where development and the aspirations and the needs of the Indian economy and the

population have to be addressed, I think we will have to strike the right balance. So if 100 acres

or hectares of some mangroves are an issue, well I think that’s a larger call (for the

government). But one thing is certain.

Mumbai used to be the No.1 airport in India until just two years ago, and Delhi has overtaken it.

It means that over the years Delhi will be the premier airport of India and that should be a

concern. It isn’t that I come from Mumbai and it worries me because of I look at it from a

parochial perspective, but Mumbai is the commercial capital of the country.

And what affects commerce in Mumbai will hurt India …

It’s so unfortunate that Mumbai has a constrained airport. Pune, which could have had a

satellite airport, has still not been able to find consensus on where to build the second airport.

Navi Mumbai is stuck. I do not know what is going to happen. If tomorrow we have to put a ban

on new flights in and out of Mumbai, what chaos it will create, that’s for everybody to see.

SpiceJet Ltd.

Initiating Coverage

36 October 22, 2010

Aircraft Utilization

Measure of aircraft productivity, calculated by dividing aircraft block hours by the number of

aircraft days assigned to service on air carrier routes. Typically presented in block hours per

day.

Available Seat Kilometers (ASKMs)

A common industry measurement of airline output that refers to one aircraft seat flown one

kilometer whether occupied or not. An aircraft with 100 passenger seats, flown a distance of

100 kilometers, generates 10,000 available seat kilometers.

Block Hour

Time from the moment the aircraft door closes at departure of a revenue flight until the moment

the aircraft door opens at the arrival gate following its landing. Block hours are the industry

standard measure of aircraft utilization

Cost per Available Seat Kilometer (CASK)

Measure of unit cost in the airline industry. CASK is calculated by taking all of an airline’s

operating expenses and dividing it by the total number of available seat kilometers produced.

Passenger Load Factor

The number of Revenue Passenger Kilometers (RPKMs) expressed as a percentage of

ASKMs, either on a particular flight or for the entire system. Load factor represents the

proportion of airline output that is actually consumed. To calculate this figure, divide RPKMs by

ASKMs. Load factor for a single flight can also be calculated by dividing the number of

passengers by the number of seats.

Passenger Revenue

Revenue received by the airline from the carriage of passengers in scheduled operations.

Revenue Passenger Kilometers (RPKMs)

This is the basic measure of airline passenger traffic. It reflects how many of an airline's

available seats were actually sold. For example, if 200 passengers fly 500 kilometers on a flight,

this generates 100,000 RPKMs.

Glossary

SpiceJet Ltd.

Initiating Coverage

37 October 22, 2010

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