Spice jet, going the way of jet airways?
Article published as on Wednesday, 18th
April, 2020 at 10:30 a.m.
Aviation sector works on cut throat competition, it is constantly
into price war and survives on volume of seats sold.
Airlines drop the fare to increase market share, and this sector
has seen huge passenger growth but its sustainability is into question marks.
Coming to spice jet, the most efficient aviation company with
passenger load factor above 90%.
Along with turnaround story after Ajay Singh took charge in late
2014. This company did well, as it was growing market share and surviving in
tough condition which was in itself a thing to cheer and appreciate.
Ajay Singh did a great job turning around the company, spice jet
even launched jet flying with eco fuel which again showed their dedication and
long term vision.
Well what’s wrong now?
Let’s study its competitors first.
Indigo - market leader and has
huge cash reserves to survive in this industry. (It is the JIO of the aviation
sector.)
Go air - owned by Wadia
group, small market share and having backing of promoters with deep pockets.
Vistara and AirAsia- they have small
market share and they both are having Tata’s in their joint ventures.
Tata's again are deep pocket promoters.
Coming to spice jet.
It is owned by Ajay Singh. Very talented and competent person, but
not having deep pockets to burn cash and keep business surviving long enough.
Another main aspect is financials let’s
have a look.
Share price. 46.80 INR
Market cap. 2796.36 crores
FY 2018-19
NETWORTH -350 crores (negative 350 crores)
FY 2019-20 net profit for 9Month ending December
is -127 crores.
Another aspect is its annual interest payments: (figures in INR
crores)
FY16. 102.53
FY17. 33.64
FY18. 39.19
FY19. 44.79
These interest figures are not high for company as big as spice
jet.
The reason is that, spice jet is working on negative
working capital and surviving.
For so many years, investors believed it was a great that company
can survive on negative working capital without raising much debt.
But some day even these current liabilities need to be paid off.
And spice jet is once again running out of cash to pay of its expense, on the
other hand Indigo is in much better position right now.
Let’s look at some of the serious problems spice jet may face.
· Their net worth
is negative from years, but now situation had worsened and they are in very
tight position.
· They have very
little cash on books to pay of the debts.
· Their
profitability is very volatile depending on crude movement.
· Their
profitability may take hit due to lockdown situation.
· They don’t have
deep pocketed promoters to infuse further cash.
· Government
policies and taxation along with high competition are too much of a challenge
for survival in aviation industry.
All these factors are from years but now the situation has
worsened and spice jet is in the weaker spot, and most likely the next airline
that could go for bankruptcy.
Comforting factors and what measures can save them.
· Promoters
experience and capability provide a bit comfort. Well they definitely don’t
want their company to go bankrupt.
· Equity dilution
shall be done, as bringing in more cash is very important for survival. It
would be lifesaving blood for spice jet.
· Its business of
cargo shipment (logistics) provides a diversification from high competition
passenger business.
Conclusion, if any airlines were to go
bankrupt spice jet is in weakest spot and most likely to go bankrupt.
This is not a corporate
governance issue but the case of deteriorating financial condition of the company.
Maybe that is the reason why it is again trading around 47 rupees,
many investors would have feared deteriorating condition and exited this
stocks. Compared to it indigo stock price has reduced but with much less
intensity.
It still has the ability to survive, management is great it just
needs to take right measures. But still Investors should stay cautious with
this particular stock.
Investors shall monitor situation of capital raising, and avoid
spice jet for now.
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