In depth analysis of Jet airways - Ethihad deal

winstonn

Well-Known Member
#1
Dear member,

before getting lurked by the market gossip of Jet - Ethihad deal, kindly read this full research report which covers-

Why you should avoid investing in airline stocks
Why in particularly Jet Airways is weak candidate for long term as of now.
Facts about the deal gossip
Shorterm Trading opportunity

I hope it proves helpful to some of you!

Regards
Winston Dsouza



In depth analysis of Jet airways - Ethihad deal
 

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winstonn

Well-Known Member
#2
The long term weekly moving averages yet do not signify that a bullish trend has began. For this to happen, the stock must undergo various tests of Support and form Higher highs and higher lows. However the stock has closed over it’s 200 weekly EMA signifying a lot attention from higher institutions and other large players. In my technical view, the stock will move in a range from 400 on lower side to 600 on upper side before continuing any significant bullish or bearish long term moves. The stock has been well accumulated form Jan 2012 till last week of October 2012 which thus formed a basing pattern. Now the interesting thing will be to see if the professionals are upto marking it up still higher or distributing to the retailers in the name of “SO Called Stake Sale Deal “ The CCI oscillator has been breaked to extreme levels of 500 which is signally a very expensive price to buy right now. On the whole the stock is a wait and watch right now and can be traded for short term if it comes in the 400 to 410 price zone for a quick profit of 18 to 20%.
But,Fundamentally for long term it is a very big no as of yet and this is all explained in depth below.
Is this time to buy , exit or wait?


On Monday, 26th Novemeber,2012 the stocks of both Jet Airways and SpiceJet rallied in single trading session, with Jet Airways shares flying high by 13.57 percent at Rs.574.40 from its previous close of Rs.505.75.SpiceJet's scrip was also up 15.01 percent at Rs.45.20 from its previous close of Rs.39.30.
It is learnt from a government official that some Indian private airlines are gearing towards a deal with foreign carriers for sale of stakes that could happen very soon. The official further said that the talks are on with airlines based in Southeast Asia and Middle East. More clarity and finalization could happen in a month or two. Since the time our government opened the gates for forign airlines to pick up the shares upto 49% in domestic carriers, the possible sales of stake has been a buzz around the street.
This sent the scrips of two of the most eligible private airlines for FDI −− Jet Airways and SpiceJet soaring. This is pumping the stock prices of private airlines which are eligible for FDI- Jet Airways and SpiceJet. The Indian civil aviation sector has been going through a challenging environment as high fuel and interest costs have hurt it. The government expects that this will help bring in more funds to the airlines who have been cold shouldered by banks.
Often at such times the retail investor is lured with greed of multiplying his money and the constant fear in his mind of the opportunity getting vanished. This leads in impulsive buying of the stock at higher levels and often weakens the psychology and wealth of the retail investor. History is evident that many a times such rumors are made for the unloading of the stock by Big boys like Directors, Fund houses and huge private stake holders. Hence I am conducting in depth fundamental and technical based research for the true evaluation of the situation so that if there is an opportunity, then you can make gold out of it!

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winstonn

Well-Known Member
#3
Background of Indian Aviation Industry
The Indian Aviation Industry has been going through a dark and depressive phase over the past several years and has been facing multiple obstacles like the rising oil prices and limited pricing power contributed by industry wide over capacity and periods of subdued demand growth.
While in the beginning of 2008-09, the sector was impacted by sharp rise in crude oil prices, it was the decline in passenger traffic growth which led to severe underperformance during H2, 2008-09 to H1 2009-10. The operating environment improved for a brief period in 2010-11 on back of recovery in passenger traffic, industry-wide capacity discipline and relatively stable fuel prices. However, elevated fuel prices over the last three quarters coupled with intense competition and unfavorable foreign exchange environment has again deteriorated the financial performance of airlines. Thus we can see that Pricing of Fuel is one of the most key considerations for the aviation industry and particularly in India. Besides these factors, intense Intra-competition has further deteriorated the profit margins of the domestic airline carriers.
In my opinion, there are two key challenges: i) aviation economics is currently not favorable in India resulting in weak financial performance of airlines and ii) Internationally, too airlines are going through period of stress which could possibly dissuade their investment plans in newer markets. Besides, foreign carriers already enjoy significant market share of profitable international routes and have wide access to Indian market through code-sharing arrangements with domestic players. Given these considerations, foreign airlines are likely to be more cautious in their investment decisions and strategies are likely to be long drawn rather than focused on short-term valuations. Hence, though the government has allowed the FDI up to 49% in domestic carriers, the stake sale talk going right now around the streets seems to evaporate in near time.
Historically, the Indian aviation sector has been a laggard relative to its growth potential due to excessive regulations and taxations, government ownership of airlines and resulting high cost of air travel. However, this has changed rapidly over the last decade with the sector showing explosive growth supported by structural reforms, airport modernizations, entry of private airlines, adoption of low fare - no frills models and improvement in service standards. Like elsewhere in the world, air travel is been transformed into a mode of mass transportation and is gradually shedding its elitist image.
 

winstonn

Well-Known Member
#4
Possible reasons for FDI interest in Indian aviation industry

Indian aviation industry promises huge growth potential due to large and growing middle class population, favorable demographics, rapid economic growth, higher disposable incomes, rising aspirations of the middle class, and overall low penetration levels (less than 3%). The industry has grown at a 16% CAGR in passenger traffic terms over the past decade. With advent of LCCs and resultant decline in yields, passenger traffic growth which averaged 13% in the first half has increased substantially to 19% CAGR during 2006-2011. Despite strong growth, air travel penetration in India remains among the lowest in the world. In fact, air travel penetration in India is less than half of that in China where people take 0.2 trips per person per year; indicating strong long term growth potential. A comparative statistic in United States, the worlds largest domestic aviation market stands at 2 trips per person per year. We expect passenger demand to remain stable and grow between 12-15% in the medium term, assuming a no major weakness in GDP growth going forward.

Why the domestic airlines have still low credit profile?

Despite reforms, the domestic aviation sector continues to operate under high cost environment due to high taxes on Aviation Turbine Fuel (ATF), high airport charges, significant congestion at major airports, dearth of experienced commercial pilots, inflexible labor laws and overall higher cost of capital. While most of these factors are not under direct control of airline operators, the problems have compounded due to industry-wide capacity additions, much in excess of actual demand. Intense competitive pressure from Low cost carriers (focusing on maximizing load factors) and national carrier (looking to regain lost market share) have constrained yields from rising in-sync with the elevated cost base. Besides, aggressive fleet expansions (LCCs have added aircrafts mainly on long-term operating leases; FSCs have purchased aircrafts debt financed, most often backed by guarantees from the US EXIM Bank or Europes ECA) to leverage upon the anticipated robust growth and to support international operations have significantly impacted the capital structure and weakened the credit profile of most domestic airlines. The Indian aviation sector was exposed to intense competition with the advent of a low-cost airline - Air Deccan back in 2003. The success of Air Deccan spurred the entry of other LCCs like SpiceJet, Indigo, Go Air and subsequently low fare offerings from Jet airways and Kingfisher airlines. As a result, the sector which was completely dominated by full-service airlines till a decade ago is now dominated by low-cost airlines. However, longer term viability of LCCs models in India remains to be seen (Kingfisher exited the segment recently) as airport charges are same for FSCs and LCCs in India. Besides, the fuel costs forms a larger proportion of overall costs as compared to international standards due to higher central and state government levies (viability of direct ATF imports remains to be seen due to lack of supporting infrastructure) and high congestion at major airports (half an hour hovering at major airport could increase fuel costs by Rs.60,000 to Rs. 115,000 depending on aircraft, besides impacting aircraft utilizations). These constraint can be resolved only if there significant improvement in infrastructure such that LCCs could operate on secondary airports.
 

winstonn

Well-Known Member
#5
What could you expect when there is more spending than earning? Even a kid can answer this spontaneously!

Let us see the earnings for airline carriers
Revenue based :Domestic revenues are largely INR denominated; Robust pax traffic growth, but yields out of sync with cost structures due to intense competition, government support to national carrier and customer preference for LCC models .Airlines with international operations generate part of revenues in foreign currency; foreign carriers dominate in the longer haulage and premium service offerings

Other income based: Earnings from aircraft sub-leases (dry or wet) are mostly in $ terms, helps rationalize capacities. Low contributions from cargo and auxiliary revenue due to their modest adoption level

Non-operating income::With capacity constraints at global aircraft manufacturers & rising commodity prices, market value of successful aircraft models often exceed book values making sale and lease back (conversion of Financial Lease to Operating Lease) an attractive option to book non-operating incomes, generate free cash flows and deleverage the balance sheet


Now let us see the expenditure

ATF costs contributes 30-45% of overall operating costs for Full Service Carriers (FSCs) & 40-55% for Low cost carriers (LCCs) Domestic ATF prices are linked to fluctuation in crude oil prices and movement in INR vs. $ High central and state levies translates into a 60-70% higher ATF prices in India over the global average Significant congestion at major domestic airports increases fuel costs considerably Given the fact that Indian airlines have been in aggressive expansion phase, dearth of experienced pilots require airlines to employee foreign pilots which command higher salaries and are often paid in foreign currency Most airlines follow an operating lease model for large part of their capacity; Lease rentals are also denominated in foreign currency thereby exposed to fluctuation in forex movement; Depreciation costs mainly for owned aircrafts (Financial Lease)Significant rise in interest expenses due to deterioration in the capital structure, cash losses and increased working capital requirements besides overall rise in interest rates
Hence, With combined impact of 1) moderating pax growth 2) lower yields due to excessive competitive 3) rising ATF prices 4) steep rupee depreciation and 5) rising debt levels and interest costs, the profitability margins of the airlines industry have been severely impacted.


Origin of the FDI plan by government

With Banks unwilling to enhance their exposure to the industry, recast their loans or pick up equity stakes without viable business plans, industry needs to come out with strong equity infusion plans. Hence, the government is mulling allowing foreign carriers to pick strategic stakes in domestic airlines to help them stay afloat in these difficult times, besides bringing global expertise and best industry practices over the medium term.


How will FDI improve the overall scenario of the weakened Indian aviation industry?
1) The FDI would directly relieve the weakened domestic airlines with flush of liquidity and help bring global expertise and best industry practices over the medium term.
2) It will not just provide entry into one of the fastest growing aviation market globally but also an opportunity to establish India as their hub for connections between US/Europe and South-East Asian countries.
Difficulty in attracting FDI though allowed by the government makes the sale stake chances a low probability thing.
The Global Airline industry is itself currently going through a tough phase (Bloomberg World Airline index down 22%, Asia-Pacific Airline index down 25% in last one year), due to below trend economic growth across advanced economies and high crude oil prices ($100-125/Barrel). Besides, aviation economics currently remain unfavorable in India due to intense competition, mandatory route dispersal guidelines, higher taxes on ATF, airport related charges and inadequate airport infrastructure. For example, airlines like Air Asia (citing high infrastructure costs) & American Airlines (parent facing financial stress) have recently withdrawn from India. Lastly, foreign carriers already enjoy significant market share of profitable international routes and have wide domestic access through code sharing agreements. Given these considerations, I believe, attracting investments from foreign airlines may not be easy.
 

winstonn

Well-Known Member
#6
Analysis of Jet airways

Jet airways India ltd.

Background of this Indian Giant

Jet Airways (India) Limited provides passenger and cargo air transportation services. The company also leases aircrafts. It operates flights to 76 destinations in India and internationally. As of June 20, 2012, the company operated a fleet of 103 aircrafts comprising 10 Boeing 777-300 ER aircrafts, 12 Airbus A330-200 aircrafts, 61 next generation Boeing 737-700/800/900 aircrafts, and 20 modern ATR 72-500 turboprop aircrafts. Jet Airways (India) Limited was founded in 1993 and is based in Mumbai, India.
Naresh Goyal, the founder Chairman of Jet Airways, Indias premier airline, has over 4 decades of experience in the Civil Aviation industry.In addition to his responsibilities at Jet Airways, Mr. Goyal was also appointed Chairman of Jet Lite (India) Limited in 2007, following the acquisition and subsequent re-branding of the erstwhile Sahara Airlines Limited.
Mission of Jet airways
Jet Airways will be the most preferred domestic airline in India. It will be the automatic first choice carrier for the travelling public and set standards, which other competing airlines will seek to match.Jet Airways will achieve this pre-eminent position by offering a high quality of service and reliable, comfortable and efficient operations.Jet Airways will be an airline which is going to upgrade the concept of domestic airline travel - be a world class domestic airline.Jet Airways will achieve these objectives whilst simultaneously ensuring consistent profitability, achieving healthy, long-term returns for the investors and providing its employees with an environment for excellence and growth.
 

winstonn

Well-Known Member
#7
Risk analysis

Promoter Holding:

A larger share of promoter holding indicates the confidence of people who run the company. I believe that a greater than 45% promoter holding indicates safety for retail investors.The promoter holding in Jet Airways stands at 80% as of now. I have assigned a risk rating of 2 to the stock on a scale of 1 to 10 and 10 being highest potent risk. Hence the Promoter holding looks promising.

Sales: Jet Airways has posted consistent increase in sales from FY08 to FY12. The Company is expected to generate about 15% increase in sales amounting to Rs 17500 Cr. in FY13.On this basis, I would rate it 5 out of 10 and 10 being the maximum potent risk.

EPS:
The earnings per share is constantly worsening from -29.21 in FY08to -143.18 in FY12. This is a big alert for the company as it is not able to create shareholders value. On the Risk Scale, I would rate it 10 i.e. the maximum potent danger.

Current Ratio:
Jet airways average current ratio during the period FY08 to FY12 is estimated to be around 0.69 times, indicating the company's inability to pay up short-term obligations. A ratio under 1 suggests that the company is unable, at that point, to pay off its obligations if they came due. I assign a high-risk rating of 8 to the stock.

Debt to equity ratio:
A highly leveraged business is the first to get hit during times of economic downturn, as companies have to consistently pay interest costs, despite lower profitability. I believe that a debt to equity ratio of greater than 1 is a high-risk proposition. Jet airways debt to equity ratio has ridiculously gone from 4.57 in FY08 to 60.91 in FY12. It is beyond the scope of risk scale i.e. high potential energy for a financial collapse.

These are the three Key ratios which are potentially dangerous for the stock in my view. The Company has posted a net loss of Rs. (996.70) million for the quarter ended September 30, 2012 as compared to net loss of Rs. (7136.00) million for the quarter ended September 30, 2011. Total Income has increased from Rs. 33320.70 million for the quarter ended September 30, 2011 to Rs. 41947.00 million for the quarter ended September 30, 2012.
Hence we wont go very deep into the financials of Jet Airways since we would not like to buy right now.

My Take:
On the whole the global Aviation industry also seems to be distressed. And given weakening conditions in Indian Aviation industry, I would not invest right now even in a decently good company in this sector. When we talk of Jet airways, putting even a single penny is out of question. We would wait for the deal to develop between Jet Airways and Ethihad.Even if it turns out to be profitable and conducive to long term growth, I suggest you to wait for some time, observe noticeable changes in company management, Revenues, government policy regarding AFT direct imports, OMCs monopoly and then invest at right time probably when the entire market corrects deeply. But for now, it is a Big NO. This is my personal view that if the deal is cancelled, it would result in huge load of stocks offloading by professionals to retail segment and the company would be on safer side since it has not officially declared the deal.
 

winstonn

Well-Known Member
#9
Disclaimer

These recommendations are based on the theory of technical analysis and Fundamental analysis and also personal observations. This does not claim for profit. I am not responsible for any losses made by traders. It is only the outlook of the market with reference to its previous performance. You are advised to take your position with your sense and judgment. I am trying to consider the fundamental validity of stocks as far as possible, but demand and supply affects it with vision variations. If any other company also giving same script and recommandation then I am not responsible for that. We have no position in our given script.