Shares of SpiceJet Ltd. have fallen over 21 percent so far in 2020 but ICICI Securities sees an upside of 59 percent on the stock going ahead.
The brokerage maintained a ‘Buy’ rating on the stock with a target price of Rs 140. The scrip trades at around Rs 88 on the BSE.
“We believe most of the issues faced by SpiceJet are transient in nature and are likely to recover within the next six months. The extreme situation of severe liquidity crunch is unlikely considering benign crude prices and compensation expectations from Boeing,” ICICI Securities said in a report.
The airliner was able to post a net profit of Rs 78 crore in the third quarter of fiscal 2020 on the back of the assumption that it will receive compensation worth Rs 246.4 crore from Boeing for expenses incurred due to the grounding of MAX aircraft.
A total of 13 MAX aircraft of SpiceJet are grounded in India since a global ban on the aircraft in March 2019 following two fatal accidents involving B737 MAX planes.
The airline has assumed that Boeing will pay a compensation of Rs 537.2 crore for the expenses it incurred during the April-December period on "aircraft and supplemental lease rentals and certain other identified expenses relating to the Boeing 737 Max aircraft."
ICICI Securities believes there is a limited balance sheet risk for SpiceJet considering some tangible progress seen in the compensation talks with Boeing and a benign crude price.
The brokerage expects spreads to improve for the airliner in FY21/22E driven by cost efficiency achieved from Max increase in Revenue per Available Seat-Kilometer (RASK) of around 2 percent led by modest supply growth and pickup in demand.
However, the impact of novel coronavirus is a near-term risk that can impact Q4FY20 earnings, the brokerage said.
“Cost performance through impressive has not been able to offset this impact on account of an older fleet in the absence of MAX. Our change in earnings expectations in FY20/21 largely stems from this lower RASK,” the brokerage said.
Going ahead, it does not expect any mismatch between passenger and capacity growth as Passenger load factor (PLF) formed a low base in FY20 which should be maintainable in FY21/22E.
ICICI Securities expects cost ex-fuel to decrease by 4 percent between FY19 and FY22 factoring the return of MAX sometime in FY21.
The fuel bill is set to decrease in-line with the assumption of the crude price of $65 per barrel for FY21/22, higher international mix and efficiency achieved from MAX. The brokerage factors in fuel cost per ASK to decline by 9 percent between FY19 and FY22.
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