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Spicejet's Q3FY19 results (Outperformer) - Yields remain stable…

Q3FY19 result highlights

• SpiceJet’s Q3FY19 profit stood at Rs551m and was sharply ahead of our estimate of net loss of Rs2bn due to higher yields and inclusion of cash incentives on sale and leaseback of MAX-8 aircrafts in revenues. Indigo carries these incentives in balance sheet and amortizes them over the lease period of the aircrafts.
• Passenger traffic grew 8.3%yoy to 5m, ASK grew 16.4%yoy to 5.8bn and RPK grew 12.1%yoy to 5.2bn. Average fare grew sharply by 10.2%yoy to Rs4,302 /pax (up 25.8% qoq).
• RASK (yield) grew 2.7%yoy to Rs4.3 (est: Rs4.0) while adjusted RASK (ex-incentives) declined 0.9% yoy to Rs4.2. Gross spread declined 10.1%yoy to Rs2.6 (est: 2.3) due to the sharp surge in fuel costs. Fuel cost grew 31.9%yoy to Rs1.7 and CASK (ex-fuel) grew 3.9%yoy to Rs2.5 due to higher maintenance costs and higher engine rentals.
• Revenue grew 19.4%yoy to Rs24.9bn and was above our estimate of Rs22.9bn. EBITDA came in at Rs1.1bn as against estimated loss of Rs1.3bn while EBITDAR came in at Rs4.6bn against our estimate of Rs2.2bn led by higher yields and cash incentives.
• Interest expenses grew significantly by 26.6% yoy to Rs407m (est: Rs350m) as it included provision for interest on certain delayed payments. Debt is largely at similar levels of Sept-18 of Rs13.5bn.
• As on Dec-18, the fleet stands at 74 aircrafts. SpiceJet added 12 new planes (9 Boeing 737 Max-8 and 3 Q400s) in Q3FY19.

Key positives: Strong load factor at 90.4% and higher yields.

Key negatives: Increase in fuel costs and higher interest costs.

Impact on financials: Estimate net loss of Rs4.6bn in FY19 vs. net loss of Rs5.6bn earlier, 9.3% earnings upgrade in FY20E led by higher yields.

Valuations & view

SpiceJet’s current financials are under stress due to higher fuel costs. However, due to recent fall in crude prices, the domestic ATF prices have declined by 23.3% from peak levels and the yields of airlines too have started to improve. 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. We value SpiceJet at 8.5x FY20E EBITDAR. We maintain Outperformer with a revised price target of Rs100.