SpiceJet and Indigo share prices: HSBC highlights key pointers in the Aviation Sector

SpiceJet and Indigo share prices: Both Spicejet and Indigo, as well as other national and international airlines have been suffering ever since the imposition of corona pandemic linked lockdown. Needless to say, Spicejet share price or that of Indigpo have suffered in tandem with investors being stuck between a rock and a hard place. However, green shots are visible and investors can rejoice a little. HSBC says demand recovery has been slow but declining COVID-19 cases and vaccines could boost demand. The Government of India recently increased the flight capacity limit to 80% which could help the industry reduce losses slightly. This has caused HSBC to lift estimates and it retained a Buy on SpiceJet with target price of Rs 125 from 80. On Indigo, HSBC put out a Reduce call and raised target price to Rs 1490 from Rs 1290.

COVID-19 vaccines, strong catalyst for both SpiceJet, Indigo:

The Indian Aviation industry has seen a gradual recovery in demand. The quarter to end-December is seasonally very busy and yet the traffic is limited at 60% versus last year. However, a decline in the number of COVID-19 cases and news around the availability of a vaccine could result in an increase in demand by Q2 2021. HSBC thinks there is enough demand for leisure, and visiting friends and relatives, to benefit the industry after the vaccine comes.

Capacity addition should reduce losses:

The Government of India’s Ministry of Civil Aviation raised the domestic capacity limit from 70% to 80% on 3 December. HSBC thinks the industry should be able to fly this incremental capacity on its average network load factor albeit at lower fares. Given that the costs of this incremental capacity would be limited to fuel, airports, and part of maintenance and salary, HSBC thinks it could be profit accretive.

HSBC expects potential tailwinds for SpiceJet are over due to the return of 737 Max aircraft, Boeing compensation and potential for a reduction in its ownership cost all of which would be positive in the short to medium term. SpiceJet is trading on a FY22e EV/EBITDA of 4.3x, much below its historical average of 6.6x (HSBC just takes the average of FY16-FY20 since the company was on the verge of insolvency in FY15 and that is when the new promoter bought the business and turned it around). Hence HSBC remains bullish on the company, especially considering that we find multiple near-term catalysts for the stock.

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Forecast changes:

HSBC increases their forecasts for Indigo and SpiceJet as the recent increase in the allowed capacity limit as well as the boost in demand. HSBC also adjusts their yield forecast as we think the overall yield should decline sharply in the next year on a strong base and as some international services resume next year where the yield is significantly low as compared to the domestic network.