Spicejet's Q2FY19 results (Outperformer) - Lower than expected yields; decline in crude prices to provide relief

Q2FY19 result highlights

• SpiceJet reported a net loss of Rs3.9bn for Q2FY19, higher than our estimate of net loss of Rs2.1bn led by lower yields, higher maintenance and fx loss. Maintenance costs came in higher on account of INR depreciation and higher shop visits.
• Passenger traffic grew 5.0%yoy to 4.7m, ASK grew 6.3%yoy to 5.1bn and RPK grew 5.8%yoy to 4.7bn. Average fare declined 1.1%yoy to Rs3,421 /pax.
• RASK (yield) de-grew 2.3%yoy to Rs3.7 (est: Rs4.0) and gross spread declined 23.2%yoy to Rs2.0 (est: 2.4) due to surge in fuel cost and lower yields. Fuel cost/ASKM grew 46.6%yoy to Rs1.7 and CASK (ex-fuel) grew 15.2%yoy to Rs2.8 due to the Fx loss of Rs585m and higher maintenance costs.
• Revenue grew 3.8%yoy to Rs18.8bn and was below our estimate of Rs20.7bn. EBITDA came in at loss of Rs3.2bn as against estimated loss of Rs1.4bn while EBITDAR came in at loss of Rs438m against our estimate of profit of Rs1.6bn led by higher aircraft maintenance costs (Rs3.6bn vs. est of Rs3.1bn).
• Interest expenses grew 87.8% yoy at Rs325m but were only marginally ahead of estimate of Rs302m. Total borrowings increased to Rs13.5bn in Sep-18 from Rs10.1bn in Mar-18.
• Currently, the fleet stands at 65 aircrafts. SpiceJet is set to take deliveries of 10 more Boeing 737 MAX aircrafts and 4 Q400 aircrafts in Q3FY19 and up to 8 MAX aircraft and 4 Q400 aircrafts in Q4FY19

Key positives: Strong load factor at 93.5%

Key negatives: Increase in fuel prices and lower yields.

Impact on financials: Estimate net loss of Rs5.6bn in FY19 from net profit of Rs3.3bn earlier, 62.5% earnings downgrade in FY20E led by lower yields and higher fuel costs.

Valuations & view

Although SpiceJet’s current financials are under pressure due to high fuel costs and a competitive fare environment, it should benefit from the recent crude price correction (down ~20% over last one month). Also, we expect SpiceJet to be better placed to pass on the surge in crude prices (albeit with a lag) due to its niche route strategy. The stock trades at 8.1x FY20E EV/EBITDAR and we value SpiceJet at 8.5x FY20E EBITDAR. We maintain Outperformer with a revised price target of Rs103