Jet Airways' Q2FY19 results (Underperformer) - Steep losses continue; potential equity infusion a key upside trigger

Q2FY19 result highlights

• Jet Airways (Jet) reported consolidated net loss of Rs12.6bn (est: 11.3bn) in Q2FY19 led by higher fx MTM loss, higher S&D expenses and higher rentals; Excluding the impact of reversal of variable engine rentals of Rs1.1bn, the loss would have been even steeper at Rs13.7bn.
• RASK declined marginally by 0.3% yoy to Rs4.16. Excluding the impact of reversal of engine rentals, RASK declined 2.1%yoy to Rs4.1 and was in line with our est of Rs4.1. Fuel costs grew significantly by 44.4%yoy to Rs1.7, leading to a 18.3%yoy drop in gross spread to Rs2.5 (est: Rs2.5). On a positive note, maintenance costs fell 2.8%yoy to Rs5.6bn.
• Revenue grew 6.9%yoy to Rs63.6bn and was above our estimate of Rs62.9bn due to inclusion of reversal of engine rentals of Rs1.1bn.
• EBITDAR came in at loss of Rs2.7bn against est of loss of Rs2bn led by higher Fx loss (Rs4.4bn vis-à-vis est of Rs3.7bn), higher S&D expenses and higher rentals offset only partly by the reversal of Rs1.1bn in variable engine rentals. CASK-fuel (reported) grew 11.9%yoy to Rs3.3 and on adjusted basis (ex - fx MTM loss of Rs4.4bn) declined 4.2%yoy to Rs2.94 led by lower maintenance costs and cost reduction initiatives.
• Gross debt reduced Rs2.1bn qoq at Rs84.1bn but net debt grew Rs7bn qoq to Rs80.5bn. Jet Airways’ scheduled debt repayment over next 12 months stands at ~Rs20bn.
• Pax traffic grew 2.7%yoy to 7.5m, ASKM grew 7.2%yoy to 15.3bn, RPKM grew 10.5%yoy to 12.8bn and PLF grew 250bp yoy to 84.0%. Average fare/pax grew 2.1%yoy to Rs7,202.

Key positives: Continued efforts at reducing non-fuel costs.

Key negatives: Lower yields and higher fuel costs during the quarter.

Impact on financials: Estimate net loss of Rs40bn in FY19 from net loss of Rs21.4bn earlier, mainly due to lower yields and higher fuel costs.

Valuations & view

While Jet Airways’ profitability remains under severe stress, the recent ~20% correction in crude oil prices offers much needed respite. Meanwhile Jet continues to focus on its non-fuel cost reduction targets. Even after factoring the positive impact of the recent correction in crude prices, Jet’s financials would continue to remain under pressure in the near term due to lower yields. We value Jet Airways at 8x FY20E EBITDAR at Rs235 and maintain our Underperformer rating on the stock. Jet is exploring various strategic initiatives including sale of its Jet Privilege Programme as well as a fresh equity infusion into the company. Any corporate action of this nature can materially alleviate liquidity stress for the Jet Airways and be an upside trigger for the stock.