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Recapitalisation remains the key

SpiceJet (SJet) reported loss of Rs12.5bn in FY21 (ex-forex), in line with expectations. Balance sheet position is weak with negative equity of Rs26bn and gross borrowing without lease liability of Rs44bn as at FY21-end. We now estimate revenues at Rs73.6bn/Rs136bn and PAT at Rs(-)8.9bn/+4.7bn for FY22E/FY23E. We value SJet at Rs85 (15x FY23E earnings adjusted for 25% tax rate since it does not pay any tax, which translates to a multiple of 11x). Recapitalisation remains the key. Maintain HOLD on the stock and target price of Rs85.

FY21 performance – gross liabilities reduced in FY21 (cash burn is lower than IndiGo).

Ex-forex, SJet’s losses were at Rs12.5bn in FY21 (~Rs58bn for IndiGo). Other income continued to include Boeing compensation at a quarterly run-rate of Rs1.4bn – in addition to Rs1.2bn in FY21 from rental concessions.

Cargo becomes the main narrative as it is planned to be hived off.

SJet’s cargo revenues increased by 518% YoY to Rs11.2bn in FY21 (Rs4.17bn in Q4FY21). Cargo net profit was Rs1.3bn for FY21 against loss of Rs1.34bn in FY20. Company is operating a fleet of 20 freighters including 8 wide-bodied. Dedicated cargo initiative is commendable, but the cargo momentum can slow down with return of belly space. Driven by cargo business, SJet’s ancillary revenues grew from Rs13bn in FY20 to Rs19.5bn (estimated) in FY21 despite 58% drop in ASK.

SJet has approved fund raise of up to Rs25bn through issue of eligible securities to qualified institutional buyers.

If this happens through fresh equity, the shareholding of the current promoter will fall from 60% to 40%.

SJet has a competitive cost structure, but balance sheet remains an overhang.

SJet’s Cost per ASK (CASK), with depreciation and interest expenses, is competitive (average Rs3.92 between FY16-FY20 and Rs6.2 in FY21) vs Rs3.42/4.84 for IndiGo in a similar comparison. SJet’s RASK was better than IndiGo’s by an average of 9% over FY16-FY20 and 35% higher in FY21 because of better PLFs. However, balance sheet remains a big overhang for SJet.

Risks include:

1) Rising crude prices;

2) covid-related disruptions or delayed recovery in traffic;

3) delay in, or less than expected, Boeing compensation (SJet has accounted Rs11bn till date);

4) possible cash outgo in pending litigations and vendor renegotiations; and

5) delay in recapitalization.

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