Capacity expansion, market share make IndiGo owner top pick among airlines
ET Intelligence Group: The stocks of InterGlobe Aviation, SpiceJet and Jet Airways have gained 20-50% in the past three months. Factors such as falling crude oil prices, which reduces the cost of fuel for airlines, and buoyant passenger traffic are attracting investors towards aviation stocks.
In the coming quarters, crude oil prices are least expected to increase given the oversupply from oil producing nations. Fuel costs contribute 3540% to total cost of airlines. A weak trend in crude oil price, therefore, augurs well for aviation stocks. On the demand side, India's air passenger traffic is estimated to grow five times in the next 20 years. In such a situation in which costs are under control and demand is favourable for all airlines, a crucial question for investors is which stock to buy . Key factors that determine investors' choice are market share, ability to fund capacity expansion and strong cash flow generation that will fund working capital requirements.
Based on these factors, InterGlobe Aviation (Indigo Airline's holding company) looks well placed to take advantage of the future opportunities. It currently has 39% market share. It ordered 430 aircraft in 2011, of which every year a few new aircraft replace the old ones. It had a cashflow of Rs 3,000 crore in FY16.
Investors may also consider SpiceJet, which has managed costs, placed a bulk order for 205 planes. It has keenly followed the strategy of one brand aircraft fleet and replacing old fleet with new fuel-efficient planes. With close to 13% market share, most analysts believe SpiceJet is fit to grow amid intense competition.
Jet Airways, on the other hand, has shown relatively lower aggression in capacity addition with an order of 75 planes. Also, it has lost market share domestically, which at present is 18.1%. However, in relative terms, investors may keep a watch on valua tions of aviation stocks. Investors may want to consider Jet if valuations of SpiceJet and Indigo seem to be stretched in the current uptrend.
At present, InterGlobe's stock attracts a higher valuation among aviation stocks. Its enterprise value (EV) is 7.5 times it operating profit before depreciation (EBITDA). The stocks of SpiceJet and Jet Airways trade at EV EBIDTAR of 6.1 and 6.7, respectively.
In the coming quarters, crude oil prices are least expected to increase given the oversupply from oil producing nations. Fuel costs contribute 3540% to total cost of airlines. A weak trend in crude oil price, therefore, augurs well for aviation stocks. On the demand side, India's air passenger traffic is estimated to grow five times in the next 20 years. In such a situation in which costs are under control and demand is favourable for all airlines, a crucial question for investors is which stock to buy . Key factors that determine investors' choice are market share, ability to fund capacity expansion and strong cash flow generation that will fund working capital requirements.
Based on these factors, InterGlobe Aviation (Indigo Airline's holding company) looks well placed to take advantage of the future opportunities. It currently has 39% market share. It ordered 430 aircraft in 2011, of which every year a few new aircraft replace the old ones. It had a cashflow of Rs 3,000 crore in FY16.
Investors may also consider SpiceJet, which has managed costs, placed a bulk order for 205 planes. It has keenly followed the strategy of one brand aircraft fleet and replacing old fleet with new fuel-efficient planes. With close to 13% market share, most analysts believe SpiceJet is fit to grow amid intense competition.
Jet Airways, on the other hand, has shown relatively lower aggression in capacity addition with an order of 75 planes. Also, it has lost market share domestically, which at present is 18.1%. However, in relative terms, investors may keep a watch on valua tions of aviation stocks. Investors may want to consider Jet if valuations of SpiceJet and Indigo seem to be stretched in the current uptrend.
At present, InterGlobe's stock attracts a higher valuation among aviation stocks. Its enterprise value (EV) is 7.5 times it operating profit before depreciation (EBITDA). The stocks of SpiceJet and Jet Airways trade at EV EBIDTAR of 6.1 and 6.7, respectively.
