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Aviation sector ready to fly, stock valuation expensive, says Elara Capital

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Aviation sector ready to fly, stock valuation expensive, says Elara Capital

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The brokerage, therefore, expects an EBITDA recovery of 77-98 percent in aviation stocks to pre-COVID level by FY23E.

Aviation sector ready to fly, stock valuation expensive, says Elara Capital
After the resumption of domestic flights since May 25, the aviation stocks namely InterGlobe Aviation and SpiceJet have seen a sharp upmove of around 70 percent. This was followed by improving passenger load factor and increased capacity allowed by the government. However, sector analysts expect domestic demand to reach pre-COVID levels after 18 months.
Elara Capital is of the view that the focus of airline companies has shifted from growth to cash conservation. This was underscored by the InterGlobe Aviation Q2FY21 earnings call during which management said measures to improve liquidity would continue and fleet size would reduce.
The brokerage, therefore, expects an EBITDA recovery of 77-98 percent in aviation stocks to pre-COVID level by FY23E. However, a successful COVID-19 vaccine before mid-2021 would lead to accelerating earnings recovery, it said in a report.
InterGlobe Aviation, the brokerage said, "is trading near its historical high of 16.2 EV/EBITDA in FY22E, given strong balance sheet (Rs 156 billion net cash by end-Q2FY21) and market expectations of major capacity reduction by smaller competitors."
It noted the fact that the company’s market share already has increased from 48 percent in January to 56 percent in October, which implies competitors are more focused on saving cash at the expense of losing market share.
On the other hand, the US Federal Aviation Administration (FAA) has cleared resumption of Boeing 737-Max flights, which would benefit SpiceJet in India as it is 15-20 percent fuel efficient and with 220 seats would lower unit and maintenance cost and offer sales & leaseback cash funding.
“However, in the current low crude price environment, we expect the benefits of fuel efficiency to be lower. We also expect sales & leaseback cash funding to be lower at $1 million on a decline in the value of aircraft. Similar to the industry trend, we assume airline’s fleet size also will decline by 20 percent,” the brokerage house said.
It expects SpiceJet to return most of 42 Boeing-737 aircraft by H1CY21 that were used by Jet Airways when its lease would conclude and gradually replace them with Boeing 737-Max aircraft.
Elara Capital has revised its rating on InterGlobe Aviation and SpiceJet to ‘Accumulate’ from ‘Buy’ as it believes that valuation has mostly factored in benefits of recovery in demand and improving cash position, which is subject to control over the COVID-19 pandemic.
The brokerage also raised the target price for InterGlobe Aviation to Rs 1,802 per share from Rs 1,107 earlier based on 8.0x (from 6.0x) FY23E EV/EBITDA. It increased the target for SpiceJet to Rs 77 from Rs 67 on 5.0x (unchanged) FY23E EV/EBITDA.
Elara Capital lowered FY22E EBITDA of IndiGo by 54 percent and SpiceJet by 43 percent on an anticipated delay in recovery of demand until FY23. It introduced FY23E EBITDA, which is expected to increase by 98 percent YoY for IndiGo and by 77 percent YoY to SpiceJet on demand and margin recovery.
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