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Debt-ridden SpiceJet may see beginning of a turnaround

Ace investor Rakesh Jhunjhunwala may have seen the beginning of a structural turnaround for debt-ridden SpiceJet when he bought 1.4% stake in the airline for about Rs 13.41 crore on Friday. The Kalanithi Maran-promoted airline that reported five consecutive quarterly losses has been unsuccessfully trying to raise fresh capital for much of this year.

It reported Rs 310 crore loss in the quarter ending September as against Rs 560 crore in the year ago period. The airline is now operating 26 Boeing 737 jets down from a fleet of 35 earlier this year. But the operational environment for the airline seems to be changing now with the dramatic fall in crude oil prices coming along with stable rupee and reviving economy. So the airline expects to fly 50 jets by second half of the next year.

“Despite concerns over negative net worth, the operating environment has now turned favourable over the past two months,” says Rashesh Shah, analyst with domestic brokerage ICICI Securities. “With over 10% reduction in ATF prices  and improving demand, we expect healthy margin expansion, going ahead,” he says.

YE Net Worth Total Debt Net Sales Operating Profit Net Profit
March 2009 -429.45 488.81 1689.45 -325.97 -352.57
March 2010 -344.08 438.29 2181.08 86.84 61.45
March 2011 321.11 85.00 2876.97 146.11 101.15
March 2012 -147.23 1008.58 3943.26 -520.74 -605.77
March 2013 -224.45 1802.19 5600.68 9.34 -191.08
March 2014 -1019.48 1708.92 6304.23 -715.64 -1003.24
1st Half -1493.04 1506.77 3114.44 -282.39 -434.55
Compiled by BS Research Bureau    

Brent crude prices have declined to average of $ 78.4 per barrel in November from a high of an average of $ 101.98 per barrel in August. This has led to gradual decline of 14.4% in the ATF prices to Rs 59,943 per kilolitre in December from Rs 70,044 in August in Delhi. The ATF prices is expected to further decline to about 20% lower than the August prices as Brent crude is expected to be around $ 75 a barrel in the near term.

With ATF accounting for about 50% of domestic carriers operating costs it is expected to cut down SpiceJet’s losses sharply for 2015-16.  Further sales tax rationalisation is expected at key airports in next 6 to 12 months which will further improve cost inputs. Besides rupee has now become much firmer against the US dollar which is one of the influencing factors with nearly 75% of total operating costs are linked to it. This will help bring down the operating costs.

“Based on expected fall in ATF prices, further cost rationalisation and sensible revenue management post recapitalization, it is possible to see SpiceJet’s  turnaround in next 12-18 months,” says Kapil Kaul, chief executive officer (South Asia) at Centre for Asia Pacific Aviation (CAPA).

As per Director General of Civil Aviation (DGCA), there was 8.6% growth in number of passengers carried by domestic airlines to 55.06 million in January to October period. This is  expected to further accelerate as the GDP growth rate is expected to reach 6% in 2015-16 from 5.3 reported in quarter ending September.

SpiceJet succeeded in increasing market share to 18.1% in 2013-14 from 12.9% five years ago by expanding its fleet and keeping its prices low. But a high cost environment led by currency weakness and demand slowdown in the past two years led to heavy losses. The company reported Rs 1,003 crore loss 2013-14 up from Rs 191 crore in the previous year.

However, given the company’s negative net worth of over Rs 1000 crore and loan liability of Rs 1500 crore, funding the operations, going forward remains a key concern. But with the change in operating environment the company is hopeful to find an investor soon.

“As of now, CAPA expects SpiceJet to survive but it will struggle without adequate funding. It is likely to stabilize post recapitalisation,” says Kaul. As per his estimates  SpiceJet requires about Rs 1550 crore out of this about Rs 1000 crore is  required immediately.

A request sent by Business Standard for a comment didn’t get any response from SpiceJet.


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