HSBC upgrades SpiceJet to buy, raises target price to Rs 80

HSBC has upgraded SpiceJet to buy from reduce and raised target price sharply to Rs 80 from Rs 26.50 as survival risk has abated and second quarter result was better than expected. The brokerage said SpiceJet's shares have suffered mainly due to questions around its survival but now that risk is coming down as the return of Boeing 737 Max gets closer.

The stock was up 5.25% in morning trade at Rs 62.20 on Wednesday.

"The company expects 737 Max to return to operations by Q1 2021. Once 737 Max returns to operations, SpiceJet could start receiving incentives as part of the sales and lease back agreement," said HSBC.

"...its recent deal to lease two A330 gives us some confidence. Boeing might also provide support as SpiceJet’s survival is crucial for Boeing to have a continued presence in India. SpiceJet should also receive compensation from Boeing for the 737 Max grounding, which could be in the range of Rs 10-12 billion," it added.

The no-frill carrier reported a consolidated loss of Rs 105.6 crore for the September quarter but it was less than what was expected by the market.

HSBC said the loss was lower than its expectation of a Rs 380 crore loss, partlydue to forex gains, strong cargo revenue and deferred vendor payments.

It added that the airline has taken the right steps that helped it to remain in business.

"Investors have been questioning the survival risk which is justified given the low liquidity, weak demand and rising debt levels. However, management took a few right steps to remain in business, including deferring vendor payments, cutting costs and focusing more on its cargo business where demand has been much stronger than usual," said HSBC.