We factor Ind-AS 116 in our analysis of SpiceJet’s (SJet) finances and thus, introduce an ‘on balance sheet’ liability as well as a Right to Use (RoU) asset along with allocation of erstwhile rentals to depreciation and interest expense in the P&L. We now adopt P/E-based valuation methodology (unlike adjusted EV/EBITDAR earlier) in-line with the basic principle of Ind-AS 116. Maintain our BUY rating on the stock with an unchanged target price of Rs175 based on 10.5x FY21E P/E (7x adjusted EV/EBITDAR earlier). 10.5x multiple is post giving 30% discount to 15x to adjust for no taxes paid by SJet.
* Cashflows from OEM include
(1) revenues from incentives booked in FY19 - SJet reported revenue of Rs1.13bn from incentives in FY19 (Rs38mn in FY18). We expect it to be payments related to milestones on receiving MAX aircraft as per contract with Boeing. In the previous years, it would only be due to Q-400 aircraft and as such were small.
(2) Deferred gain on sale and lease-back - SJet has reported another long-term liability of Rs5.4bn in FY19 as deferred gain on sale and lease back (Rs515mn in FY18). We expect these would be SLB profits from 13 MAX aircraft. SJet has also deferred incentive of Rs559mn in FY19 (Rs204mn in FY18) which, we believe, could be due to the ongoing SLB profit adjustments of Q-400.
(3) Expected compensation - SpiceJet is also booking an expected compensation amount due to MAX grounding from Q1FY20. The amount was Rs1.14bn in Q1FY20. Boeing has also started providing for compensation due to airlines.
* SJet has guided for uplift in FY20 revenue profile
driven by introduction of substantial Mumbai-based flights, additional lucrative international flights to Hong Kong, Bangkok, Dubai, Jeddah, Riyadh, and Dhaka from Mumbai and Delhi.
* Higher provision made for maintenance in FY19;
could be higher in FY20. The total maintenance provision increased from Rs3.8bn in FY18 to Rs5.8bn in FY19. The intake of Jet fleet will increase this provision significantly in FY20. However, the net effect of the same will be determined by the contract negotiations with lessors.
* Net debt of Rs12bn in FY19. Out of same, Rs8.5mn is aircraft-related loan.
SpiceJet has availed short term pre-shipment credit foreign currency loan in FY19 of Rs3.2bn (Rs1.4bn in FY18) with a carrying rate interest of 4.47% to 5.90%. This is lower than 12.75% interest rate on working capital loan of Rs1bn taken by the company.
* IND-AS adoption:
SJet has indicated RoU asset of Rs61.8bn against a total liability of Rs64.8bn (lease liability of Rs64bn and redelivery obligation of Rs800mn) as of FY19. As such, equity will be lowered by the balance amount of Rs3bn. The value of RoU asset value and lease liability obligation of Jet aircraft inducted by SJet should be low considering 2-3 years of remaining lease period. However, as MAX inductions start picking pace, the value of RoU and lease liability will increase significantly.
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