Time for investors in airline stocks to press exit

For investors who have held on for long to their investments in airline stocks, which appreciated over 45% during the past three months, it may be time to take a reality check.

Airline stocks, which have rallied in anticipation of foreign carriers buying into some local ones, offer little scope for a significant upside, considering that their valuations are now on a par with their peers in emerging markets.

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That is, if a foreign carrier acquires stake in an Indian carrier, it would be at close to the current market price.

Considering the erratic financial performance of airlines, due to seasonality of the business, we have taken enterprise value to sales (EV/Sales) as the basis for weighing the stocks.

According to Bloomberg data, the average EV/Sales of aviation companies across emerging markets -- including companies from China, Indonesia, Hong Kong, Philippines, Thailand and India -- is 1.



The data shows that Garuda Indonesia, one of the largest Indonesian airlines, is the cheapest in terms of enterprise value to sales.

Interestingly, in comparison to its emerging market peers, SpiceJet is the second cheapest company in terms of enterprise value to sales. Jet Airways India, on the other hand, is one of the most expensive, ranked third in the list.

Jet and SpiceJet are now quoting at an enterprise value to sales of 0.94 and 0.65, respectively.

Jet’s premium valuation is justified considering its size and international operations. What makes airlines in India less attractive is the tough operating environment.

High taxes on airline turbine fuel (ATF) and high airport tariffs, especially at new privately-run airports, make a dent in airlines’ profitability in India. In such a scenario, the current market price of local airlines appears fairly valued.

Another interesting factor about Jet and SpiceJet is the promoter holding in them. With a promoter holding of close to 80%, a foreign investor may hardly have any say in operations at Jet Airways. But SpiceJet, with a promoter holding of close to 48%, may be an attractive target for investors hoping to gain control.