Advantages in operations, low debt to keep SpiceJet steady

The steep 42% fall in the SpiceJet stock in the last six months offered an opportunity to its promoters to raise their stake from 48 % to 52.1%, signalling its underlying value.

In the last two quarters, SpiceJet has been plagued by two concerns despite its operational advantages. First, a weak rupee. In the airline industry, lease rentals, aircraft maintenance, pilots' salary and fuel costs are linked to the US dollar. For SpiceJet, these costs form 50% of its total operating costs. Besides, SpiceJet's debt in FY13 soared to 1,429 crore from 650 crore a year ago. However, these concerns may be overblown given the company's ability to gain market share and increase its presence in tier-two and three cities.

In the January-May period, when full service carrier Jet Airways India lost market share from 27% to 22.9%, low-cost carriers such as SpiceJet and Indigo Airlines showed an improvement of 1.7% and 4.1% to 20.3% and 30%, respectively. Thanks to its fleet expansion, SpiceJet was able to cater to the low-cost travel segment and gain market share. Though higher capacity will impact its yield, the airline should be able to maintain its market share in the next few quarters due to operational advantages and relatively lower debt compared to its peers.

What could work in its favour is its market share. A market share of 20%, coupled with a strategy of catering to travellers in tier-two and three cities and towns and a load factor of 80%, places it close to Indigo Airlines. On valuation front, for FY13, SpiceJet is trading at an enterprise value to sales of 0.49 compared to its peer Jet Airways' 0.62. Any stake sale to a global airline should be a good trigger for the stock.