The aviation sector in the country is going through tough times due to the coronavirus crisis. But that might not be apparent from the rally in the airline stocks over the past few months. The IndiGo Airlines stock is up about 90 per cent and the SpiceJet stock is up about 71 per cent from their March lows. This is despite both the airlines posting huge losses over the past three quarters. In the March, June and September 2020 quarters, IndiGo’s consolidated loss was ₹ 871 crore, ₹ 2,844 crore and ₹ 1,195 crore respectively, while SpiceJet’s consolidated loss was Rs 816 crore, ₹ 601 crore and ₹ 106 crore, respectively.
Clearly, the coronavirus lockdowns have had a devastating impact on the financials of the airlines. Yet, the stocks have rallied this year – IndiGo is now steadily approaching its all-time high seen last year, and SpiceJet too has been climbing up.
The small retail investor seems to be piling on to the IndiGo and SpiceJet stocks. Shareholding of individual investors (with capital up to ₹ 2 lakh) in the SpiceJet stock is 18 per cent as of September 2020, steadily increasing from 11.19 per cent as of September 2019. In the case of IndiGo, such shareholders hold 1.09 per cent as of September 2020, up from 0.87 per cent as of September 2019. Such shareholders seem to be taking on high risk at a time caution is warranted in the airline stocks.
Headwinds
Sure, the September 2020 quarter results were better than the disastrous June 2020 quarter when the airlines flew for only 37 of the 91 days. Both the airlines pared their September quarter losses sequentially, thanks to full quarter operations, some easing of domestic capacity deployment restrictions (from about a third to up to 60 per cent pre-Covid levels), a few international flights being allowed (under air-bubbles and the Vande Bharat repatriation mission), and consequently better passenger numbers. But the losses still remain high making the airlines financially vulnerable.
The pain is likely to continue at least through FY 2021, and possibly even further, due to continuing fare caps and capacity curbs, and likely reduction in non-essential travel, especially business travel, until a vaccine against the virus is found and made widely available. On the other hand, there is hope that restrictions on domestic capacity deployment (recently increased from 60 per cent to 70 per cent) and fare caps will eventually go, and also that international air travel will eventually resume.
But when this will happen is unclear. Also, even when it happens, whether passengers will take to flying with the same gusto as before needs to be seen. Health concerns and a possible permanent dip in business travel, with the ‘online meetings’ becoming the new normal, could play spoilsport. Airlines have been pushing the pedal harder on other revenue sources such as cargo and charters. But these still contribute a relatively small portion to overall revenue. The airlines have also been renegotiating various contracts and cutting costs, including employee expenses; benign fuel prices have provided a breather too. But unless passenger traffic is back in force, these measures may not be enough to move the needle – cash burn could reduce but still remain high.
IndiGo better-placed
Compared with SpiceJet, IndiGo’s financial position is better, with positive net worth and significantly higher cash balances. As of September 2020, IndiGo’s consolidated net worth was a positive ₹ 1,846 crore, while its financial assets were ₹ 18,710 crore (of which cash, cash equivalents and bank balance were ₹ 11,601 crore). SpiceJet’s net worth as of September 2020 was a negative ₹ 2,287 crore, while its financial assets were ₹ 2,182 crore (of which cash, cash equivalents and bank balances were ₹ 55 crore). Given its stronger financial profile, IndiGo’s plan to raise funds through equity (₹ 4,000 crore) might find more takers.
It doesn’t help that the ongoing turmoil in global aviation due to Covid-19 could delay receipt of the compensation SpiceJet expects from Boeing for the grounded 737 MAX aircraft. For the past many quarters, SpiceJet has been recognizing significant ‘other income’ (₹ 139 crore in the September 2020 quarter) towards claims of reimbursement from Boeing for the MAX aircraft grounding; the auditors have been qualifying the audit reports in this regard.
Besides, the long-running dispute on securities’ allocation between SpiceJet and its erstwhile promoters, the Marans, is an overhang and could result in significant cash outflow for the airline. The Supreme Court recently stayed an adverse order against SpiceJet in this case, but it continues to hang like a Damocles’ sword over the airline’s head. Also, about 44 per cent of the promoter group’s shares in SpiceJet have been pledged.
Overall, the market seems to be betting that IndiGo is in a better position to ride out the storm and benefit from a possible shake-out in the sector; that perhaps explains the sharp rally in the stock taking it towards its peak. While the SpiceJet stock has also rallied in the past few months, it is still far below the highs seen last year.
Flying blind
With huge losses over the past three quarters and poor visibility about a return to profits, investors in both the airline stocks may be flying blind on the valuations (price-to-earnings) of these stocks. It may be a good idea to alight from the birds before they possibly crash land.