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Tuesday, August 7, 2012

SpiceJet Ltd - Indian Aviation Sector on a Roll!

Not many would be aware that SpiceJet has had its humble beginnings as ModiLuft in 1993. In fact, NSE ticker for SpiceJet stock is still listed as MODLUF. ModiLuft was an Indian JV with Lufthansa and maintained high standards and created many firsts for Indian aviation sector. However, ModiLuft brand ceased to exist by 1996 due to JV issues and was renamed as Royal Airlines. By 2004 it was renamed as SpiceJet with a low cost business operating model. By 2008, SpiceJet was India’s second largest low cost operator and still SpiceJet is among the four largest airlines in Indian skies.

Indian Aviation sector was in deep trouble since last couple of years due to government apathy, rising Jet fuel costs, cut-throat competition, abysmally low fares and absolute lack of pricing power for all carriers. There was little service differentiation among various carries, which caused price as the only determinant for a flyer to make a decision. Airlines competed solely on price, and fares were as low as INR 100 on some routes, thus driving airlines into deep losses. Spicejet had five straight quarters of losses. And then things turned around.

Meanwhile, there were other activities happening in this sector, carriers such as Deccan Airlines changed hands and others like Kingfisher have now almost gone bankrupt. Kingfisher is now operating only 10 aircrafts, down from 64 at its peak. Similarly, other carriers such as Indian Airlines have had employee strikes and operational issue.

Net net, reduced seats availability has caused some good things for these carriers. Pricing power has returned to this sector and even Jet fuel costs have sobered down. Tariffs in most sectors are up from 50% to almost 100%. With decline in capacity due to Kingfisher and IA troubles, remaining carriers such as SpiceJet and Jet airlines, which were operationally robust are alive and kicking today to see better days.

SpiceJet has reported profit in its latest quarterly result and currently the stock is almost at a 52 week high. Promoter’s have raised their stake from 43.5% to 48.5% recently and this demonstrates that they have faith in future of this brand. Revenues in recent quarter have seen a robust 30% jump, signaling increased fares and pricing power in hands of carriers.    

SpiceJet stock had seen much better days in recent years with stock touching a high of 93 in Nov, 2010 and since then it has been in a decline. From recent lows of INR 16, stock has now nearly doubled as we speak. Technically speaking, stock may hit a near term resistance at this level and may decline to lower levels. It’s a buy on each decline though. 

Rs 40 to Rs 50 would be a trouble zone for this stock, crossing which a quick Rs 60-70 range is possible. For now, Indian aviation sector is on a roll.

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