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SpiceJet (MODLUF)

Jet set go … SpiceJet is one of the focussed low-cost carriers (LCC) in India. We believe the airline is best positioned to breakeven given its low costs and improving yields in a changing industry scenario. It plans to ramp up its fleet size, a move that would help it manage costs more effectively. We initiate coverage on the company with an OUTPERFORMER rating.

LCCs transform industry dynamics The advent of low-cost carriers (LCCs) has revolutinised Indian aviation. The Centre for Asia Pacific Aviation (CAPA) has predicted the domestic traffic, currently at 35.3 million passengers, would grow at 25%-30% annually until 2010, taking the overall market to more than 70 million passengers.

Lowest cost among peers SpiceJet follows the pure LCC model. This has helped it achieve the lowest cost in the industry – its per unit cost is 20% lower than peers in the LCC segment, and 40% lower than players in the full-service carrier (FSC) segment. We believe this would help it achieve breakeven ahead of others in an improving yield scenario.

Fleet expansion to help achieve breakeven We expect the company to post profits at the net level by FY09E as an optimal fleet size is achieved, and fixed costs are absorbed over a higher capacity (ASKM). It has unveiled a phased capacity expansion plan which will see the addition of 15 aircrafts by FY10E, and another 8 in FY11-12E, taking its total fleet size to 34 aircrafts.

Valuations Globally, LCCs trade at a premium over FSCs because of the sustainability of their business model, and greater reach among masses. SpiceJet is currently in a growth phase and yet to achieve an optimal size. We believe the company is set for a turnaround given the growth in the Indian aviation sector and its cost leadership. We value the stock at 4.5x it FY09E EV/EBIDTAR with a 12-15 months price target of Rs 68, an upside potential of 33%.

Exhibit 1: Key Financials Year to March 31 FY06 FY07* FY08E FY09E

Net Sales (Rs crore) 419.62 640.44 1340.09 2140.34 Net Profit (Rs crore) -47.29 -67.38 -5.94 69.78 EPS (Rs) -2.57 -2.80 -0.25 2.90 P/E (x) -19.88 -18.22 -206.66 17.59 Price/Book (x) -73.64 6.65 6.87 4.94 EV/EBIDTAR (x) 116.30 -47.75 7.53 3.10 EV/EBIDTA (x) -38.53 -23.25 195.66 12.38 NPM (%) -11.27 -10.52 -0.44 3.26 RoNW (%) 370.41 -36.50 -3.32 28.09 RoCE (%) -10.25 -10.07 -0.38 14.09

Source ICICIdirect Research, *FY07 10 months year, FY06 ending 30-June

Initiating Coverage

ICICIdirect | Equity Research

November 13, 2007| Aviation

Sales & EPS trend

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Net Sales EPS (RHS) Stock metrics Promoters holding 12.91% Market Cap Rs 1,227 crore 52 Week H/L 68 / 36 Sensex 18,908 Average volume 494,811 Comparative return metrics

Stock return 3 M 6M 12M SpiceJet -11% 15% 20% Deccan Airlines 8% 33% 38% Jet Airways 13% 14% 33%

Price trend

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Potential upside 13% Time frame 12 months Time frame 12 months

OUTPERFORMER

Current price Rs 51

Target price Rs 68

Potential upside 33%

Time Frame 12-15 months

Siddhartha Khemka siddhartha.khemka@icicidirect.com Ember Pereira ember.pereira@icicidirect.com

Absolute Sell

Target Price

Absolute Buy

Analyst Name

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Exhibit 2: Global LCC model (Common size statement)

Company Background SpiceJet is the second largest low-cost airline in India. The company was originally promoted by the SK Modi Group under the name ModiLuft. It was acquired by Royal Holding Services (Kansagra family) in 2000 and re-started operations in May 2005. SpiceJet flies a single aircraft type fleet (Boeing 737), which allows for greater efficiency in maintenance, and supports its low-cost structure. Currently, it has a fleet of 14 Boeing 737-800 aircrafts in single-class configuration with 189 seats. It flies to 15 destinations, and plans to include two more by next month. The airline’s new fleet of aircraft is backed by cutting-edge technology, and infrastructure. It has maintenance support from KLM and state-of-the-art technology from world leaders like Star Navigation, Russel Adams and Tech Log. SpiceJet has a partnership with Navitaire, the world’s renowned low-cost support system for reservations and revenue management for providing e-booking and e-ticketing services.

Source: Respective company filling, ICICIdirect Research

Shareholding pattern Shareholder % holding Promoters 12.91 Institutional investors 28.44 Other investors 42.34 General public 16.31 Promoter & Institutional holding trend

16.9 12.9 12.9 12.9

24.4 24.3 25.7 28.4

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10 15 20 25 30

Q3FY07 Q4FY07 Q1FY08 Q1FY08

Promoters (%) Institutional investors (%)

Southwest RyanAir EasyJet SpiceJet Year ending 31-Dec-06 31-Mar-07 30-Sep-06 31-Mar-07 31-Mar-08 31-Mar-09 Passenger revenue 96.30 83.81 91.89 94.57 94.34 93.90 Ancillary revenue 3.70 16.19 8.11 5.43 5.66 6.10 Revenue 100.00 100.00 100.00 100.00 100.00 100.00 Staff costs 33.59 10.13 18.78 13.35 8.73 8.49 Fuel & Oil 23.53 31.00 23.44 54.56 47.38 45.56 Airport & handling charges 5.45 21.14 23.94 9.39 8.25 7.26 Maintenance, materials & repairs 5.15 1.88 6.76 10.49 8.72 7.81 Marketing, distribution & other costs 14.59 5.75 9.89 16.49 14.96 13.07 Total Cost 82.31 69.89 82.81 104.28 88.04 82.19 EBITDAR 17.69 30.11 17.19 -4.28 11.96 17.81 Aircraft rentals 1.74 2.60 8.23 21.35 17.97 15.26 EBITDA 15.95 27.50 8.96 -25.62 -6.01 2.55 Depreciation 5.67 6.42 1.69 0.91 0.61 0.55 Interest expense 1.41 3.70 1.49 0.67 0.32 0.14 PBT & Other Income 8.87 17.38 5.79 -27.20 -6.94 1.86 Other Income -0.18 2.78 2.19 16.31 6.47 1.91 PBT 8.69 20.16 7.98 -10.89 -0.47 3.77 Tax 3.20 0.69 2.17 0.16 0.09 0.50 PAT 5.49 19.47 5.81 -11.05 -0.56 3.26

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INDUSTRY OVERVIEW Boom in Indian travel industry India is one of the fastest growing tourism destinations in the world. The World Travel & Tourism Council has estimated that India's tourism economy will emerge as the world’s 3rd fastest growing over 2007-16, growing at over 8% per annum in real terms. Robust economic growth, higher disposable incomes, and growth in tourism & business travel, are the major demand drivers. LCCs transform industry dynamics The advent of low-cost carriers (LCCs) has revolutionized the Indian aviation industry. Corporate travellers have historically formed the majority of the domestic air travel market in India. However, the emergence of LCCs has resulted in middle-income people and self-employed shifting from premium class travel in trains to air travel.

The number of domestic air passengers grew at a healthy 38.5% with 35.3 million passengers flying in FY07 against 25.5 million in FY06. The Centre for Asia Pacific Aviation (CAPA) has predicted that the domestic traffic would grow at 25%-30% annually until 2010, taking the overall market to more than 70 million passengers. Aircraft manufacturer Boeing has raised its 20-year market forecast for Indian commercial aircraft purchases to $86 billion from $72 billion last year.

Exhibit 3: Domestic air passengers increasing (in millions)

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Source: CMIE, CAPA, ICICIdirect Research

Domestic passenger traffic, which increased at a CAGR of 4% over FY97-04, has moved into high growth trajectory with a 30% CAGR during FY04-07. We expect a 26% CAGR in demand for domestic air travel over the next 5 years.

CAPA has predicted domestic passenger traffic would grow at 25%-30% annually until 2010

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LCCs – best positioned to capture the growth LCCs operate on a distinct low-cost model, without any frills or additional services, which allows them to charge low fares compared to a full-service carrier (FSC). Besides the veritable ‘no-frill’ cost benefit, LCCs also use other cost efficient techniques like single passenger class, standardised fleet and direct ticketing (selling directly to customers via Internet and/or call center).

Exhibit 4: LCC v/s FCS Features LCC FSC Advantage SpiceJet Jet airways

Fleet type Standardised fleet (B737-800s)

Mix of turboprops, narrow-body & wide-body aircraft (ATRs, B737-400/700/800/900, A330, B777)

Maintenance, training and service is simpler and cheaper

Number of seats per aircraft

189 economic class

B737-800 (dual) 28 seats in business class & 126 seats in economy class

Higher yield per aircraft

Turnaround time 20-25 minutes 30-45 minutes

Flying hours per day 12 hrs per day 10.7 hrs per day

High aircraft utilization, higher revenues per aircraft, High yields

Flights per day per aircraft 8 flights 6.5 flights Fixed cost distributed

over more flights

Avg. employees per aircraft

146 176 Lean structure – lower personnel cost

Ticket form 100% e-tickets Paper and e-ticket (74%) Lower cost ($2 as compared to $8 for paper ticket)

Distribution model

Focus on direct distribution avoiding agents

Primary use of agents for ticket distribution Lower commission cost

Source: Company, Jet Airways filings, ICICIdirect Research

A LCC is able to contain costs in areas that are under the control of the airline. Things like fuel ciost, airport handling & navigation, and maintenance charges are beyond the control of an airline. The ability of LCCs to offer tickets at lower prices has made them popular in India, where consumers are very price sensitive.

LCCs are set to benefit from the high growth in the Indian aviation sector

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Consolidation to result in increase in fares and yields Recently there has been a consolidation in the domestic aviation sector. From a fragmented sector with more than 10 players, today there are 3 major players, and a couple of other smaller players in the LCC space. These three together have a combined market share of around 80%.

Exhibit 5: Competitive scenario

Market share

(%) Fleet size Jet + JetLite 29.4 86 (66 + 14) Kingfisher + Deccan 28.9 75 (31 + 44) Air India + Indian 19.8 132 (77 + 55) Indigo 8.4 12 SpiceJet 8.3 13 Others 5.2 14 Source: Market share – DGCA, fleet – Industry, ICICIdirect Research

We believe consolidation would help the industry, which was hitherto plagued by low yields and excess capacity. These large groups have already initiated a route–rationalisation exercise, which will help in pulling out excess capacity from sectors that are susceptible to heavy discounting. Consolidation has also triggered rationalisation of fleet expansion plans. We expect average yields in the industry would go up by around 5%-10% over the next few quarters, which will help pure LCCs like SpiceJet to achieve early breakeven.

Infrastructure development to aid growth The key challenge to sustain growth is infrastructure. The government has taken a number of measures to boost airport infrastructure for the country. India allows 100% foreign direct investment (FDI) in green-field airport projects. It has opted for a Public-Private partnership (PPP) model, and has already started for restructuring and modernization of the airports at Delhi and Mumbai, and for setting up green-field airports at Bangalore and Hyderabad. Further, a modernisation plan for 35 non-metro airports has also been unveiled.

The anticipated investment in airport development during the 11th Five Year Plan (2007-11) is over Rs 40,000 crore.

Exhibit 6: Airport development program

Particulars Airport Indicative cost

(Rs crore) Delhi, Mumbai 15,000 Restructuring/ Modernisation for

world class airports Chennai, Kolkatta 5,000

Greenfield airports Bangalore, Hyderabad, Goa, Pune,Navi Mumbai, Nagpur (Hub) &Greater Noida

10,000

Upgradation 25 selected airports 7,000 Modernisation / Improvement 55 airports 3,000 Source: Committee on Infrastructure, Govt. of India We feel that these initiatives would structurally benefit the industry in the long-term though medium term concerns regarding infrastructure would persists.

The top three players together have a combined market share of around 80%

Government plans to invest Rs 40,000 crore during the 11th five-year plan to improve airport infrastructure in India

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INVESTMENT RATIONALE Focused player in the LCC segment SpiceJet re-commenced operations in May 2005. It follows a pure LCC model – single aircraft type, point-to-point service, and quick turnaround time for higher asset utilisation – which has been successful globally. It has positioned itself as a niche player focusing on profitability rather than chasing market share. Low-cost airlines like Southwest Airlines (based in Dallas, Texas, US), RyanAir (Europe's largest LCC, headquartered in Dublin, Ireland) and EasyJet (based in London) have shown sustained profitability over the years.

Exhibit 7: Profitable LCCs Southwest RyanAir EasyJet Year ending 31-Dec-06 31-Mar-07 30-Sep-06 RoE 7.6 15.8 10.1 Load factor 73.1 82.0 84.8 EBITDAR Margin 17.7 30.1 17.2 Net Margins 5.5 19.5 5.8 Source: Respective company filling, ICICIdirect Research

Focus on profitable routes SpiceJet operates most of its flights between profitable metro routes to optimise its load and yield (average revenue per passenger). It currently operates from 16 destinations with more than 700 flights a week. 56% of these flights originate from Delhi, Mumbai, Hyderabad and Bangalore. During FY07, Delhi and Mumbai accounted for around 40% of the total domestic air traffic in the country.

Exhibit 8: SpiceJet’s top destinations

Airport Number of flights

per week Delhi 136 Mumbai 98 Hyderabad 83 Bangalore 77 Ahmedabad 57 Chennai 56

Source: Company, ICICIdirect Research

LCCs like Southwest Airlines, RyanAir & EasyJet have shown sustained profitability

56% of its flights originate from Delhi, Mumbai, Hyderabad and Bangalore

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Rationalised operations SpiceJet focuses on a few destinations, and maximises frequencies between them. This helps the company amortise the fixed costs of setting up bases at airports over a larger number of seats. At present, the airline operates from16 airports, and plans to increase the number to 18 by the end of FY08E, and further to 22 by FY09E.

Exhibit 9: Number of destinations to increase

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Source: Company, ICICIdirect Research

Phased capacity expansion SpiceJet has unveiled a phased capacity expansion plan to meet its growth objectives. It started operations with a fleet of 3 aircrafts, which it has now increased to 14. It plans to add another 12 by FY10E, which will take the total to 26. During the time when the domestic market was mired by over capacity and fierce competition, SpiceJet was able to increase its market share, while maintaining its load factor. With an average age of 2 years, its fleet is also among the youngest in the country.

Exhibit 10: Planned fleet expansion

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SpiceJet plans to expand its fleet significantly

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Pure LCC model -- helps achieve lowest cost per unit SpiceJet follows the pure LCC model used globally. This has helped it in achieving the lowest cost in the industry.

Its per unit cost is 20% lower than other LCC competitors, and 40% lower than players in the FSC segment. Going ahead, we expect the cost per unit to reduce further on account of fleet expansion, which would absorb the high fixed cost over a larger base.

Exhibit 11: Cost comparison with domestic peers SpiceJet Deccan Jet Airways Year ending 31-Mar-07 30-Jun-07 31-Mar-07 Revenues (Rs crore) 640.44 1774.55 7057.78 Total Operating Expenses (Rs crore) 667.85 2049.11 6434.67 ASKM (crore) 310.97 757.80 1759.80 Revenue per ASKM (Rs) 2.06 2.34 4.01 Operating Cost* / ASKM (Rs) 2.15 2.70 3.66 Operating Cost* / ASKM (ex fuel) (Rs) 1.02 1.41 2.28 Source: Respective company filling, ICICIdirect Research (* excludes lease rentals) Exhibit 12: Global peer cost comparison Southwest RyanAir EasyJet SpiceJet Year ending 31-Dec-06 31-Mar-07 30-Sep-06 31-Mar-07 Revenue per ASKM (Rs) 2.69 2.5 3.76 2.06 Operating Cost*/ASKM (Rs) 2.21 1.75 3.11 2.15 Operating Cost*/ASKM (ex fuel) (Rs) 1.58 0.97 2.21 1.02

Source: Respective company filling, ICICIdirect Research (* excludes lease rentals) SpiceJet’s model SpiceJet’s strategy is to provide safe, reliable travel at low cost from point-to-point by maximising the efficiency of all resources, keeping processes simple, and without incurring expenditure on components which do not support the basic function of travel.

Single aircraft type The airline has a single aircraft type fleet, the Boeing 737-800, which allows for greater efficiency in maintenance, and supports its low-cost structure. The airline has a fleet of 14 new-generation Boeing 737-800 aircrafts with advanced technology and added features like blended winglets.

The 737-800 is the most technologically advanced airplane in the single-aisle market. With a new wing and more powerful engines, the 737 can fly higher, faster and farther than previous models. The advanced-technology ‘Blended Winglets’ allows the airline to save on fuel, extend range, carry more pay-load and reduce engine maintenance costs.

A standardised aircraft fleet helps the airline reduce costs incurred on maintenance, spares inventory, pilots training, engineering, and supervisory activities. The 737-800s can spend more hours flying, as the new jets do not need to spend much time in maintenance.

Cost leadership gives it an edge over peers

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High seat density

SpiceJet’s aircraft are configured in a single economy class having 189 seats, which is among the highest in the industry. This is possible as the airline focuses on maximum space utilisation for generating more revenue per aircraft. SpiceJet accommodates 21% more seats than a dual (business and economy) configuration. With costs like fuel, lease, maintenance remaining same per aircraft, its per-seat costs comes down by around 20%.

Exhibit 13: General seat configuration among airlines in India Number of seats

Airline Aircraft type Class Business Economy Total Jet Airways B737-800 Dual 28 126 154 Single 175 175 Kingfisher A320 Dual 20 114 134 Single 174 174 Indian A320 Dual 20 125 145 Deccan A320 Single 180 180 Indigo A320 Single 180 180 Go Air A320 Single 180 180 SpiceJet B737-800 Single 189 189 Source: Respective company’s website, ICICIdirect Research

Direct distribution of tickets The airline sells its tickets via the Internet or call centre route. This helps it by-pass travel agents who work on commissions, and expensive GDS (global distribution system) employed by FSC for ticket reservations. The mechanism also helps in reducing working capital requirements as the company receives the money in advance prior to travel. There are no receivables, and also controls bad debts. Overall it helps the company cut its distribution costs by 10% of the revenues.

High aircraft utilisation A carrier aiming for the lowest possible cost of operation has to develop a schedule that would give a high annual utilisation of each aircraft in its fleet. Such a policy will lower cost as the fixed costs of the aircraft ownership or lease rentals can be spread over higher quantity of output (ASKM).

Exhibit 14: Highest aircraft utilisation (hours)

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Source: Respective company filling, ICICIdirect Research

Highest seating capacity among any domestic carrier

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SpiceJet has been consistently reporting high aircraft utilisation (around 12 hours a day), in line with international benchmarks. This is possible because of its high on-time performance (82% within 15 minutes) and a low turnaround time of 20-25 minutes as compared to 40-45 minutes takes by FSC. No loading of meals or complex cargo and faster check-in system helps in reducing turn around time. Overall it reduces fixed cost absorption by 15-20%.

Consolidation to result in stabilisation of yields The Indian aviation industry has undergone through a major consolidation with the market leader Jet Airways acquiring Sahara Airlines, Kingfisher taking a stake in Deccan Airlines, and the government-owned Air India and Indian Airlines merging. Post consolidation, these three together have a combined market share of around 80%.

Earlier, airlines used to sell huge inventory of tickets at low or near zero prices (Re 1/- to Rs 9/- base fare per ticket) to attract traffic and gain market share. With consolidation, the large players have shifted their focus on profitability from market share. As a result, the yields per ticket have been improving and the practice of heavy discounting has declined. SpiceJet, which has the lowest cost in the industry, will be the first beneficiary, when the yields start improving.

We expect the yield (average revenue per passenger) for SpiceJet to stabilise at the current levels of Rs 2,430 for this financial year, and improve to around Rs 2,700 in FY09E. This will bring in the break-even at EBIDITA levels.

Exhibit 15: Sensitivity to yields

Yields fall by 10%

Base Estimate Yields rise by 10%

FY08E Yield assumption Rs 2185 Rs 2429 Rs 2670 EBITDAR (Rs crore) 40.1 160.3 266.4 EBITDAR margin (%) 3.4 12.0 18.0 PAT (Rs crore) (127.9) (7.5) 98.8 EV / EBIDTAR 38.7 8.9 4.9 FY09E Yield assumption Rs 2430 Rs 2700 Rs 2970

EBITDAR (Rs crore) 195.0 381.1 567.2 EBITDAR margin (%) 10.1 17.8 24.1 PAT (Rs crore) (96.1) 69.8 235.7 EV / EBIDTAR 7.6 3.4 2.0

Source: ICICIdirect Research

Average yields set to improve from Rs 2,430 per passenger in FY08E to Rs 2,700in FY09E

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Load factor to be maintained above industry average Ever since its launch, SpiceJet has maintained the highest load factor in the industry. In FY06, the company achieved a PLF (passenger load factor) of 86%, which declined to 78% in FY07. Heavy discounting by airlines led to this decline, even as SpiceJet continued to sell fewer tickets at very low prices. Addition of new fleet by the company and increase in the overall industry capacity also laid pressure on load factor. Going forward, we expect the company to maintain PLF in the range of 74%-75% relatively higher than industry levels of 65%.

Exhibit 16: Sensitivity to passenger load factor (PLF)

PLF fall by 400

bps Base Estimate PLF rise by 400

bps FY08E PLF assumption 70% 74% 78% EBITDAR (Rs cr) 93.9 160.3 216.5 EBITDAR margin (%) 7.4 12.0 15.4 PAT (Rs cr) (60.4) (7.5) 48.8 EV / EBIDTAR 15.9 8.9 6.3 FY09E PLF assumption 72% 76% 80% EBITDAR (Rs cr) 283.2 381.1 479.0 EBITDAR margin (%) 13.9 17.8 21.3 PAT (Rs cr) (17.5) 69.8 157.0 EV / EBIDTAR 4.9 3.4 2.5

Source: ICICIdirect Research Crude price hike offset by fuel surcharge Airline companies in India have adopted the internationally-tested method of passing on the cost of rising fuel prices to customers through fuel surcharge. SpiceJet has also been pro-actively increasing its surcharge in line with the industry to pass on the effect. This not only helped the company in avoiding a direct hit on its bottom-line, but also in improving the overall yields. Going forward, we expect the airline companies to continue with this surcharge and increase it in line with any rise in their fuel costs.

Exhibit 17: ATF prices and corresponding fuel surcharge

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Source: IOC (Prices at 4 Metros including Sales Tax for domestic airlines), Company, ICICIdirect Research

Cost of rising ATF prices, passed on to the customers by way of fuel surcharge

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Aviation Turbine Fuel (ATF) forms a major part of the overall cost for airlines in India. It accounts for 40%-50% of total operating costs, the highest in the world. ATF prices in India are 60% higher than international prices. The major component of the ATF prices is taxes (see Exhibit 18), which account for 53% of the base price.

ATF prices in India are based on the "International Import Parity Prices", and directly linked to the benchmark of Platt's publication of FOB Arabian Gulf ATF prices (AG); and do not relate to the actual cost of producing ATF in India.

ATF prices for domestic operations also include freight charges from the Gulf to India, customs duty of 10% ad-valorem (which adds up to an effective rate of approx 20% inclusive of the CVD and cess), domestic transportation and other charges, excise duty of 8.24% (including cess), sales tax (levied by state governments) averaging across the country at 25% as add-ons to the AG prices, besides the oil companies' marketing margin, and throughput charges paid to the Airports Authority.

Exhibit 18: Break-up of fuel costs Rs / litre % to base price Base price 25.00 Custom duty (incl of CVD & cess) 5.00 20 Excise duty 2.00 8 Sales tax and surcharge 6.25 25 Total taxes 13.25 53 Marketing Margin 5.50 22 Throughput, transportation & other charges 2.50 10 Retail price 46.25 Source: ICICIdirect Research

Sensitivity analysis In our estimates, we have assumed ATF prices would increase to Rs 45 per litre in FY09E from Rs 44 per litre (as on Nov 1, 2007). Any further rise in the fuel prices will have a negative impact on our estimates.

Exhibit 19: Sensitivity ATF prices

ATF price fall by 10% Base Estimate

ATF price rise by 10%

FY08E ATF price assumption Rs 37.5 Rs 41.7 Rs 46 EBITDAR (Rs crore) 227.4 160.3 98.7 EBITDAR margin (%) 16.9 12.0 7.4 PAT (Rs crore) 59.5 (7.5) (69.2) EV / EBIDTAR 5.9 8.9 15.1 FY09E ATF price assumption Rs 40.5 Rs 45 Rs 49.5

EBITDAR (Rs crore) 478.6 381.1 283.6 EBITDAR margin (%) 22.4 17.8 13.3 PAT (Rs crore) 156.6 69.8 (17.0) EV / EBIDTAR 2.6 3.4 4.9

Source: ICICIdirect Research

Rationalisation of taxes on ATF can bring huge saving in cost for airlines

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Fleet expansion, funding on track

SpiceJet has unveiled a phased capacity expansion over FY08-FY12. From a fleet of 11 aircrafts at the end of FY07, it plans to add 15 by FY10E, and another 8 in FY11-12E, which will take its total fleet size to 34.

The company has already secured financing arrangement for the next phase of its expansion. In December 2005, it raised US$ 80 million through an FCCB (foreign currency convertible bonds) issue, proceeds of which are being utilised for the Pre-Delivery Payments (PDP) of first ten aircrafts. The subscribers to the bond issue include Goldman Sach, and Istithmar, the private equity arm of Government of Dubai.

The company also has a sale and lease back arrangement with Babcock & Brown Aircraft Management and Nomura Babcock & Brown, for all 16 aircrafts to be purchased during 2007-09. The deal is valued at over US$ 1.1 billion based on the manufacturer’s list prices.

Further, in January 2007, the company raised US$ 67 million (Rs 297 crore) through preferential equity allotment to strategic investors like the Tata Group, Istithmar, KBC Financial Products (UK) and BNP Paribas.

Exhibit 20: Equity funding Investor US$ million Tata 18 Istithmar 31 BNP Paribas 15 KBC UK 3 Total 67 Source: Company, ICICIdirect Research

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RISK AND CONCERNS Rising ATF prices Rising global crude prices result in higher ATF prices. This would impose a threat to the profitability of airlines. Over the last year, ATF prices have increased by 20%. ATF being the largest single cost element (accounting for over 40% of the total operating cost), any significant rise in its price, will impact the company’s bottom-line significantly. Also, the high tax structure on ATF need to be rationalised so as to make Indian carriers globally competitive.

Inadequate infrastructure to have a negative impact The aviation industry is currently facing huge infrastructure constraints. Over 40% of the passenger traffic is concentrated in the two main airports of Delhi and Mumbai. Both the airports have inadequate capacities to handle aircraft and passenger movement. This along with limited terminal capacity, increased congestion, outdated infrastructure, inadequate ground handling systems and poor passenger amenities have a great impact on the operations of airlines. Further, for a total fleet size of 310 aircrafts in the country, there are only around 250 parking bays. Though the government has initiated plans for infrastructural developments, any delay in infrastructure development would aggravate the problem.

Availability of skilled personnel Rapid growth in the industry has led to a sustained shortage of pilots and other trained personnel in the industry. This is aggravated by the high gestation period (more than 3 years) required for acquiring a commercial pilot’s license. The training period for a cabin crew ranges from 6 months to one year. This shortage is driving the cost of high-skilled staff. Also, the limited availability of the required ground & maintenance staff could adversely affect growth plans of the company.

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FINANCIALS Exhibit 21: Key assumptions FY07 FY08E FY09E Average fleet 8.1 13.5 19.3 Average stage length (km) 900 888 915 Block hours (hrs) 12 12 12 ASKM (crore-km) 311 624 896 Passenger Load Factor (%) 78 74 76 Average Yield (Rs) 2328 2429 2700 Fuel cost (Rs/ litre) 37.4 41.7 45.0 Passenger carried (million) 2.3 5.2 7.4 Revenue /ASKM (Rs) 2.06 2.15 2.39 Cost/ASKM ex fuel cost (Rs) 1.46 1.26 1.24 Cost /ASKM (Rs) 2.59 2.28 2.33 Rupee Dollar exchange rate (Rs) 44 39 38 Source: ICICIdirect Research

Revenues set to surge SpiceJet’s revenue are likely to increase at a CAGR of 83% from Rs 640 crore in FY07 to Rs 2,140 crore in FY09E on the back of capacity addition, high load factor and higher yields. In light of the increasing capacity in the industry and increase in SpiceJet’s own fleet, we expect the average load factor to remain at a low of 74% in FY08E, and then stabilise at 76% in FY09E.

Exhibit 22: 83% CAGR in revenues over FY07-09E

0

500

1000

1500

2000

2500

FY06 FY07 FY08E FY09E

Rs c

rore

Source: Company, ICICIdirect Research

Revenues to increase at a robust CAGR of 83% over FY07-FY09E

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Break-even to be achieved by FY09E We expect the company to post profits at the net level by FY09E, as the optimal fleet size is achieved and fixed cost being absorbed over a higher capacity (ASKM). From a net loss of Rs 70.7 crore in FY07, it is likely to turnaround and post a net profit of Rs 69.8 core in FY09E. Net margins are expected to improve to 3.3% in FY09E from a negative margin of 11% in FY07.

Exhibit 23: Net profit/loss and NPM

-80

-60

-40

-20

0

20

40

60

80

FY06 FY07 FY08E FY09ERs c

rore

-12

-10

-8

-6

-4

-2

0

2

4

6

(%)

Net Profit NPM (%) (RHS)

Source: Company, ICICIdirect Research EBITDAR, EBITDA margins to improve SpiceJet posted a loss of Rs 27.4 crore at the EBITDAR level in FY07, which is expected to improve to a profit of Rs 160.3 crore in FY08E and Rs 381.1 crore in FY09E. EBIDTAR margins are likely to improve from a negative of 4.3% in FY07 to a positive of 17.8% by FY09E, on back of higher yields, cost efficiencies and rationalization of operations. EBITDA margins will improve from negative of 25.6% in FY07 to 2.6% in FY09E.

Exhibit 24: Increase in EBITDAR, EBIDTA margins

-30-25-20-15-10

-505

101520

FY06 FY07 FY08E FY09E

(%)

EBIDTAR margins (%) EBIDTA margins (%)

Source: Company, ICICIdirect Research

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VALUATIONS At the current price of Rs 51, the stock is trading at a market cap-to-sales ratio of 0.9x FY08E sales and 0.6x FY09E sales. On an EV/EBIDTAR (earnings before interest, depreciation, tax, amortisation & aircraft rentals) basis, the stock is available at 8.9x FY08E earnings and 3.4x FY09E earnings.

Globally, LCCs trade at a premium over FSCs as evidenced by higher EV/EBITDA and price/earnings multiples (Exhibit 20). Considering the fact that SpiceJet is currently in a growth phase, and is yet to achieve an optimal size, the stock trades at a discount to a FSC like Jet Airways, which is currently trading at an EV/EBIDTAR of 12x its FY07 earnings. We believe the company is set for a turnaround given the growth in the Indian aviation sector and its cost leadership.

We value the stock at 4.5x it FY09E EV/EBIDTAR (a discount of 40% over Jet’s FY09E EV/ EBIDTAR of 7.5x). We rate it an OUTPERFORMER with a 12-15 months price target of Rs 68, an upside potential of 33%.

Exhibit 25: Peer comparison (Estimates for FY09E) Exhibit 26: Global valuation matrix (US$million) (latest financial year) Airline Mkt Cap Sales PAT OPM P/E RoE EV/EBITDA Full service carriers Singapore Airlines 13503 9262 1360 9.6 9.0 14.9 6.7 British Airways 11021 16062 549 7.5 13.1 14.2 5.1 Low-cost carriers Southwest 12624 9086 499 10.3 21.6 7.6 7.1 RyanAir 12141 2869 559 21.1 20.7 19.2 12.3 EasyJet 3779 2914 169 6.3 21.0 10.2 14.7 SpiceJet 196 142 -15 -19.1 - - - Source: Bloomberg, ICICIdirect Research

Company Price Market Cap

(Rs cr) Revenue (Rs cr)

PAT (Rs cr) EPS P/E

EV / EBITDAR

EV / EBITDA ROE ROCE

SpiceJet 51 1227 2140 70 2.9 17.6 3.4 13.8 28.3 13.8 Deccan 147 1441 3867 -108 -10.7 - 2.5 -162.1 - - Jet Airways 825 7122 13843 275 28.3 22.7 7.5 8.9 15.6 7.9

Source: Consensus Estimates, ICICIdirect Research

LCCs trade at a premium over FSCs because of the sustainability of their business model, and greater reach among masses.

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FINANCIAL SUMMARY

Profit and Loss Account (Rs crore) Year to March 31 FY06 FY07* FY08E FY09E Net Sales 419.62 640.44 1340.09 2140.34 % Growth 52.62 109.24 59.72 Total Expenditure (ex lease rentals) 408.47 667.85 1179.76 1759.23 EBITDAR 11.16 -27.40 160.33 381.11 Operating profit -66.01 -164.11 -80.50 54.47 Other Income 32.33 107.84 86.67 40.81 EBIDTA -33.68 -56.27 6.17 95.28 EBIDTA margin (%) -8.03 -8.79 0.46 4.45 Depreciation 8.16 5.85 8.23 11.79 EBIT -41.83 -62.12 -2.06 83.49 Interest 4.16 4.27 2.71 3.05 PBT -46.00 -66.38 -4.77 80.44 Taxation 1.29 0.99 1.17 10.67 PAT -47.29 -67.38 -5.94 69.78 % Change YoY 77.7 42.5 -91.2 -1275.0 Shares O/S (crore) 18.43 24.07 24.07 24.07 EPS (Rs) -2.57 -2.80 -0.25 2.90 (Note: FY06 year ending June-06, *FY07 - 10 months year ending 31-Mar-07) Balance Sheet (Rs crore) Year to March 31 FY06 FY07 FY08E FY09E Sources of Funds Equity Share Capital 184.34 240.65 240.65 240.65 Reserves & Surplus -197.11 -56.07 -62.01 7.77 Secured Loans 359.64 357.18 312.00 304.00 Unsecured Loans 61.09 74.97 45.33 40.33 Current Liabilities & Provisions 163.79 687.15 492.90 170.16 Total Liability 571.75 1303.88 1028.87 762.90 Application of Funds Net Block 49.06 48.38 80.15 88.36 Capital WIP 362.89 694.35 291.00 0.00 Investments 0.00 81.22 56.22 36.22 Cash 63.43 351.05 376.62 392.03 Trade Receivables 7.12 13.50 23.86 32.25 Loans & Advances 79.88 115.38 201.01 214.03 Miscellaneous Expenditure 9.37 0.00 0.00 0.00 Total Asset 571.75 1303.88 1028.87 762.91

Breakeven to be achieved at net level by FY09E

83% CAGR in revenues over FY07-09E

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Cash Flow Statement (Rs crore) Year to March 31 FY06 FY07 FY08E FY09E Opening Cash Balance 28.97 63.43 351.05 376.62 Profit after Tax -41.42 -70.74 -5.94 69.78 Misc Expenditure w/off 14.08 -12.74 0.00 0.00 Dividend Paid 0.00 0.00 0.00 0.00 Depreciation 8.16 5.85 8.23 11.79 Provision for deffered tax 0.00 0.00 0.00 0.00 Cash Flow before WC Changes -19.19 -77.64 2.29 81.57 Net Increase in Current Liabilities 70.85 523.36 -194.25 -322.74 Net Increase in Current Assets 16.00 41.89 96.00 21.41 Cash Flow after WC Changes 35.66 403.84 -287.95 -262.59 Purchase of Fixed Assets (366.73) (336.63) 363.35 271.00 (Increase) / Decrease in Investment 0.00 (81.22) 25.00 20.00 Increase / (Decrease) in Loan Funds 306.60 11.43 -74.82 -13.00 Increase / (Decrease) in Equity Capital 58.93 290.20 0.00 0.00 Net Change in Cash 34.46 287.61 25.57 15.41 Closing Cash Balance 63.43 351.05 376.62 392.03 Ratio Analysis Year to March 31 FY06 FY07 FY08E FY09E EPS (Rs) -2.57 -2.80 -0.25 2.90 Book Value (Rs) -0.69 7.67 7.42 10.32 Enterprise Value (Rs. Crore) 1297.45 1308.43 1208.03 1179.62 EV/Sales (x) 3.09 2.04 0.90 0.55 EV/EDITDAR (x) 116.30 -47.75 7.53 3.10 EV/EBIDTA (x) -38.53 -23.25 195.66 12.38 Market Cap to sales (x) 2.24 1.92 0.92 0.57 Price to Book Value (x) -73.64 6.65 6.87 4.94 Operating Margin (%) -8.03 -8.79 0.46 4.45 Net Profit Margin (%) -11.27 -10.52 -0.44 3.26 RONW (%) 370.41 -36.50 -3.32 28.09 ROCE (%) -10.25 -10.07 -0.38 14.09 Debt/ Equity (x) -32.96 2.34 2.00 1.39 Current Ratio 0.92 0.82 1.33 3.96 Debtors Turnover Ratio 58.94 47.44 56.15 66.36 Fixed Assets Turnover Ratio 8.55 13.24 16.72 24.22

The stock is available at attractive valuations.

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ANNEXURE Glossary Term Description Aircraft utilisation Represents the average number of block hours operated per day per

aircraft for the total aircraft fleet

ATF Aviation turbine fuel

Available Seat Kilometres (ASKM)

Represents the aircraft seating capacity multiplied by the number ofkilometres the seats are flown

Average stage length Represents the average number of kilometres flown per flight

Block hours Refers to the elapsed time between an aircraft leaving an airport gateand arriving at an airport gate

Cost per ASKM Represents total cost less cargo revenue net of commissions, excessbaggage, other income and non-operating revenue including interestincome, divided by the ASKMs

EBITDA Earnings before interest, taxation, depreciation and amortizationexcluding Non-operating Revenues and excluding any adjustments toprofit

EBITDAR Earnings before interest, taxation, depreciation, amortisation andaircraft rentals (fixed), excluding Non-operating Revenues andexcluding any adjustments to profit

Seat Factor Revenue passenger kilometres expressed as a percentage of availableseat kilometres.

Revenue passengers Represents the total number of fare paying passengers flown on allflight segments (excludes passengers redeeming their frequent flyermiles).

Revenue Passenger Kilometres (RPKM)

Represents the number of kilometres flown by revenue passengers

Revenue per ASKM Net Passenger Revenue divided by ASKMs.

Yield Average revenue earned per passenger

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RATING RATIONALE

ICICIdirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its stocks according to their notional target price vs current market price and then categorises them as Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Outperformer: 20% or more; Performer: Between 10% and 20%; Hold: +10% return; Underperformer: -10% or more.

Harendra Kumar Head - Research & Advisory harendra.kumar@icicidirect.com ICICIdirect Research Desk, ICICI Securities Limited, 2nd Floor, Stanrose House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025 research@icicidirect.com

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