Airline Sector Initiating Coverage

Initiating Coverage
Comparative Returns (%)

Stock Returns (%) Jet Airways SpiceJet Kingfisher 1M 5.1 3.6 -0.1 3M -10.5 17.8 -10.3 6M 48.4 73.2 -4.0 12M 276.9 336.9 91.8
Indian Airlines Sector

Ready to take off
The airline sector has witnessed a significant upturn in Q3FY10 (domestic pax traffic growth of 28% YoY) after experiencing a severe contraction throughout the major part of FY09. Growth is driven by optimism about the future, market share gains by low fare carriers (LFCs) and stable crude oil prices. LFCs are likely to benefit from the moderate growth of crude oil prices in FY11E-12E, contributing to higher pax growth and load factors for the sector. We are initiating coverage on airline sector with a STRONG BUY rating on Spicejet and REDUCE rating on Jet Airways.
March 26, 2010
Stock Metrics
Jet Airways CMP TP Upside Market Cap Revenue EBITDA EBITDAM PAT PATM EPS SpiceJet CMP TP Upside Market Cap Rs cr Rs cr % Rs cr % Rs FY10E 12,121 1,012 8.4 -568 -4.7 -53.6 Rs Rs % Cr FY11E 13,852 1,244 9.0 31 0.2 2.9 REDUCE 473.0 444.8 -6.0 4,083.4 FY12E 15,663 1,928 12.3 696 4.4 65.6
Improved macroeconomic environment to boost pax growth

With the economy gaining momentum (GDP grew 7.9% in Q2FY10) and upward revision of FY10 growth forecasts by the RBI (7.5% from 6% earlier), we expect business and consumer confidence to improve contributing to growth of domestic pax (CAGR of 12.8% during FY10E12E). Our forecasts are based on a pax growth multiple of 1.5x GDP growth (ex-agriculture). As the economy comes out of the slowdown, consumers will increasingly prefer low cost travel, benefiting LFCs (market share of 43.7% in Q4FY12E vs. 34.1% in FY09). Furthermore, the moderate growth of crude oil prices expected in FY11E-12E (average of US$83.9 per barrel in FY12E vs. US$76.9 in Q3FY10) will limit growth of passenger fares, further boosting demand for LFCs (due to high corelation between ticket prices and crude oil prices).
STRONG BUY Rs 58.0 Rs 72.0 % 24.1 Rs Cr 1,398.0 FY10E FY11E FY12E Revenue Rs cr 2,202 2,681 3,216 EBITDA Rs cr 74 216 335 EBITDAM % 3.4 8.1 10.4 PAT Rs cr 105 244 324 PATM % 4.8 9.1 10.1 EPS Rs 4.4 8.0 10.6 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.
Stock Price movement

600 450 300 150 0 Mar-09 Nov-09 Sep-09 May-09 Mar-10 Jan-09 Jan-10 Jul-09 20,000 15,000 10,000 5,000 0
Higher load factors to drive earnings

We believe the capacity rationalisation undertaken by airlines was a positive move, with domestic sector capacity decreasing by 2.4% YoY in FY09. As the current industry capacity is more in line with demand, domestic load factors have steadily improved (78.1% in Q3FY10 vs. the bottom of 62.2% in Q3FY09). We expect the sectors profitability to expand with continued growth of domestic load factor (75.6% in FY12E vs. 63.7% in FY09). However, yields will continue to remain under pressure due to increased competition in the LFC segment.
Key risks Include

Premature withdrawal of the economic stimulus package by the government External shocks in the global economy can derail GDP growth momentum, which may, in turn, decelerate pax traffic growth Additionally, the rise in competition among operators or significant rise in fuel prices from current levels may dent operators margins and adversely impact pax traffic growth of LFCs (higher proportion of fuel costs in total operating costs)
JAL - LHS Kingfisher - LHS
SpiceJet - LHS Sensex - RHS

FY09 3.9 1.0 3,770.3 4,074.0 5,915.9 6,217.0 63.7 65.5 FY10E 4.5 1.0 4,332.5 3,857.9 5,952.6 4,874.5 72.8 79.1 FY11E 5.0 1.1 4,803.9 3,742.2 6,443.5 5,526.6 74.6 67.7 FY12E 5.7 1.2 5,537.4 4,041.3 7,342.6 5,558.3 75.4 72.7
Sector Summary
In crore Domestic pax-traffic International pax-traffic Domestic RPKM International RPKM Domestic ASKM International ASKM Domestic Load factor (%) International Load factor (%)
Analysts name
Rashesh Shah Rashes.shah@icicisecurities.com
ICICIdirect.com | Equity Research

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Recommendations
The Indian airline sector is witnessing a significant change in its operational structure with major full service carriers (FSCs) such as Jet Airways and Kingfisher rapidly converting a majority of their capacities into low cost. The passenger preference has also tilted towards LFCs as the preferred mode of travel primarily due to the economic slowdown and high fuel prices in the past few quarters. SpiceJet, a pure-play LFC, has witnessed a rise in its market share to 12.5% in Q3FY10 from 10.5% in Q3FY09. Although the topline of airlines is still under pressure due to decline in yields, the improved pax traffic in Q3FY10 (29.9% YoY) and stable crude oil prices (average of US$76.9 in Q3FY10 vs. US$58.3 in Q3FY09) has raised hope for a bright future ahead. We believe an improvement in the macroeconomic environment, stable crude oil prices and improvement in load factors due to strong capacity rationalisation plans will help the airlines to improve their EBITDA margin. Our rating rationale is based on EV/EBITDA. We prefer SpiceJet due to its strong fundamentals and increasing brand preference in the fast growing low cost air travel.
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Indian airlines sector

Rebound of domestic pax growth in Q3FY10
Domestic passenger (pax) growth witnessed an upturn in Q3FY10 (28% YoY) driven by the improved macroeconomic performance (GDP growth of 7.9% in Q2FY10 vs. 6.1% in Q1FY10) and lower airline fares (yields have declined as a result of lower fuel prices and focus on the LFC model by airlines). As a result of the capacity rationalisation by operators (return of aircraft to lessor and leasing self-owned aircraft) and solid growth of pax traffic, domestic load factors significantly improved to 78.1% in Q3FY10 (vs. 62.2% in Q3FY09), allowing airlines to sustain low yields. With pax traffic growth scaling new all-time highs in December 2009 (44.5 lakh) despite the recent rise in crude oil prices (US$76.9 per barrel in Q3FY10 vs. US$59.5 in Q1FY10), we believe this is the beginning of a new growth phase for the industry. It has witnessed severe contraction throughout FY09 (pax traffic declined by 11% YoY). For Q4FY10, we expect a continuance of the recent uptrend as a robust booking window has been observed in January 2010 (as per industry sources), with operators under our coverage hinting at peak load factor as high as 80%. In our view, the buoyancy in demand is driven by the improved business and consumer confidence (upward revision of FY10E GDP forecasts to 7.5% from 6.0% earlier) and optimism about the future.
Exhibit 1: Monthly domestic pax* traffic
50 39 38 38 36 35 36 35 34 33 33 33 33 32 31 32 31 31 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. 30 26 36 37 35 36 36 36 37 39 39 40 39 39 41 44 50
Beginning of new phase of sector growth in Q3FY10
38
25
25
13
-25
0 Nov-07 Nov-08 Nov-09 Apr-07 Apr-08 Dec-07 Dec-08 Apr-09 Oct-07 May-07 Mar-08 May-08 Aug-07 Mar-09 May-09 Aug-08 Aug-09 Dec-09 Jun-07 Sep-07 Jan-08 Oct-08 Jun-08 Feb-08 Sep-08 Jan-09 Jun-09 Feb-09 Sep-09 Oct-09 Jul-07 Jul-08 Jul-09
-50
Domestic Passenger - Lakh (LHS)

Source: Source: DGCA, MOPSI, ICICIdirect.com Research, * Pax=Passenger
YoY Growth % (RHS)
Pax traffic contracted by 11% in FY09 due to high crude oil prices and global economic slowdown
Challenges for the airline sector first appeared at the end of FY08 with crude oil prices crossing US$100 per barrel resulting in significant margin erosion for operators. As a result, airlines were forced to raise ticket prices (gross yields increased by an average of 20% in FY09), resulting in lower pax traffic. Despite average crude oil prices declining to US$58.3 per barrel in Q3FY09 (vs. US$118.1 per barrel in Q2FY09), pax traffic growth continued to remain under pressure due to the global economic slowdown. The sector woes were further aggravated by the load factor falling to 63.7% in FY09 (from 68.9% in FY08) as the sector was flooded with excess capacity due to the robust demand in the boom period of FY05-08 (pax traffic grew at a CAGR of 31.7%).

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Exhibit 2: Annual domestic pax traffic

500 400 300 200 100 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 Growth YoY % FY08 FY09 137.1 139.5 156.8 194.5 252.0 128.5 357.9 443.8 394.7 70 50 30 10 -10 -30
Domestic Pax - Lakhs (LHS)

Source: DGCA, ICICIdirect.com Research
High crude oil prices during Q4FY08-Q2FY09 led to load factors crashing to 60.4% in August 2008. Further, load factor bottomed at 55.3% in September 2008 due to the global economic crisis.
Exhibit 3: Historical load factor of all airline operators
100 90 80 70 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. 60 50 Dec-07 Jun-07 Apr-07 Aug-07 Dec-08 Jun-08 Oct-07 Apr-08 Aug-08 Jun-09 Oct-08 Feb-08 Apr-09 Feb-09 Aug-09 Oct-09
Q2FY12 Q3FY12
150 120 90 60 30 0
Passenger Load Factor - % (LHS)
Crude oil prices - USD per barrel (RHS)
Source: DGCA, MOPSI, ICICIdirect.com Research
Exhibit 4: International crude oil and jet fuel prices ( forecasted by EIA)
150 125 100 75 50 25 0 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q4FY12
Moderate growth expected for crude oil prices during FY11E-12E
Crude Oil (USD per Barrel)
Jet Fuel (Cent per Litre)
Source: Energy Information Administration(USA)

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Low penetration of air travel in India

Despite the robust growth of pax traffic witnessed over the past few years, we believe significant growth opportunities exist for the aviation sector in India due to the current low penetration of air travel. As per our estimates, domestic pax per head in India (i.e. 43 per 1000 population) is significantly lower than China and the US. We expect strong growth in penetration of air travel to be driven by the sustained growth of per capita income (CAGR of 6.0% to Rs 36,876 during FY10E-12E), increased affordability accorded by LFCs and potential upgrading by the vast user base of Indian Railways. We believe a substantial upgrade is only possible if airlines continue to keep ticket prices low, which is contingent on movement of crude oil price. As per estimates of the Energy International Administration (EIA), average crude oil prices will increase to US$83.9 per barrel by FY12E as the global economy recovers (3.0% in FY11E and 3.5% in FY12E). In our view, the moderate growth expected for crude oil prices will drive growth of pax traffic, leading to increased penetration of air travel in the country.
Exhibit 5: Air pax per head (2009)
600 450 300 150 43 0 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. United States China India Air pax per head - RHS 0.0 520 2.0 1.5 1.0 0.5
Substantial growth potential due to the current low penetration of air transport in India
215
Domestic Pax (crore) - LHS
Source: Economic Intelligence Unit (EIU),USA, ICICIdirect.com Research

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Domestic pax to grow 1.5x GDP (ex agriculture) We estimate that domestic pax traffic will grow at a CAGR of 12.8% during FY10-12E driven by sustained growth of the economy, improved airport infrastructure, moderate growth of crude oil prices (average price of US$83.9 per barrel in FY12 vs. 76.9 per barrel in Q3FY10) and gain in market share by LFCs. Our growth forecasts are based on the assumption of 1.5x growth of domestic pax vis--vis GDP growth (ex agriculture) in FY11 and FY12. Pax growth averaged at 1.5x GDP in FY01-09. As per our analysis, a strong relationship exists between growth of domestic pax traffic and growth of GDP (ex-agriculture); correlation of 0.91 in FY04-09 with an R-square of 0.82. Key risks to our forecasts include a higher-than-expected rise in crude oil prices that may compel operators to hike ticket prices, consequently slowing down pax traffic growth. Further, the impact of an external shock in the global economy or urgency in withdrawal of stimulus package by the government may adversely impact domestic demand.
Exhibit 6: Forecasted domestic pax
60 45 6.0 4.5 3.0 1.5 0.0 -1.5 -3.0 Q3FY11E Q2FY12E
Agri GDP 0.39 0.15
Domestic pax traffic estimated to grow at a CAGR of 12.8% during FY10E-12E
Domestic pax traffic assumed to grow at 1.5x GDP (ex-agriculture) growth rate in FY11-12E
30 15 0 -15
Q1FY10E
GDP (Ex agri) YoY% (LHS)
Domestic Pax YoY% (LHS)
PAX/GDP Growth Multiple (RHS)
Exhibit 7: Strong correlation between GDP (ex agri) and pax traffic (FY04-09)
GDP (ex-Agri) Correlation R-Squared (Regression) 0.91 0.82 Industrial GDP 0.90 0.81 Services GDP 0.85 0.72
Rapidly improving infrastructure provides an upside to pax growth

Total Rs 49,200 crore earmarked for improvement in air transport infrastructure
We believe the rapidly improving air transport infrastructure in India provides a further upside to our pax traffic growth forecasts. In the Eleventh Five Year Plan (2007-12), the government has earmarked Rs 49,200 crore to upgrade infrastructure, improve connectivity and improve affordability of air transport. As a part of the plan, the Airport Authority of India (AAI) plans to modernise all the metro airports and upgrade 35 nonmetro airports.
Q4FY10E
Q1FY01
Q4FY01
Q3FY02
Q2FY03
Q1FY04
Q4FY04
Q3FY05
Q2FY06
Q1FY07
Q4FY07
Q3FY08
Q2FY09
-30 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.
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Exhibit 8: Airport development plans of AAI

City Kolkata Chennai Bangalore Delhi Mumbai Mumbai Activity Modernisation/Expansion Modernisation/Expansion Expansion/New Terminal New Integrated Terminal New Domestic Terminal Integrated Passenger Terminal Timeline Project awarded in October 2008 Project awarded in August 2008 Completion by 2014 Completion by July 2010 Completion by March 2011 Completion in 2012
Source: Planning Commission, ICICIdirect.com Research
Budget airlines expected to benefit from demand pickup

A new business model has emerged with Jet Airways launching a no frills brand Jet Airways Konnect (JAK) in May 2009, further widening the scope for budget travel in India (in addition to LFCs). JetKonnect was launched by the operator to deal with the economic slowdown. By Q3FY10, Jet Airways had converted nearly 70% of its capacity to Jet Airways Konnect (a mid-segment between the FSC, Jet Airways and LFC, Jet Lite), leading to market share gains. Similarly, Kingfisher Airline has also shifted a significant portion of its domestic capacity to its economy brand Kingfisher Red. In our view, budget airlines will benefit from the pax traffic growth in FY11E due to the increased price elasticity of demand (consumers are likely to opt for low cost travel as the economy comes out of the slowdown). Further, we expect muted growth of pax fares in FY11E-12E due to the moderate growth expected for crude oil prices, benefitting LFCs. Ticket prices of LFCs have a higher elasticity to changes in crude oil prices vis--vis FSCs as fuel costs account for 45-50% of total operating fromcosts of LFCs vs. 35-40% for FSCs. 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. Budget FY10E-11E has proposed to include economy class travel under the purview of service tax of 10% (earlier applicable to business class and above). This will lead to increase in ticket prices in the future. However, we feel that revision of individual tax slabs will increase the disposable income in the customers hands, thus minimising the negative impact of the introduction of service tax for air travellers. Consequently, we believe that major LFCs (JetLite, Indigo, Spice Jet and Go Air) will be able to increase their market share to 43.7% by Q4FY12E (vs. 40.4% in Q3FY10 and 32.4% in Q4FY08) primarily due to visible preference of customers towards low cost travel as the economy comes out of a slowdown.
Exhibit 9: Domestic market share LFCs vs. FSCs
100 75 50 25 0 Q1FY06 Q3FY06 Q1FY07 Q3FY07 Q1FY08 Q3FY08 Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11 Q1FY12 Q3FY12 %
LFCs to gain market share in FY11E-12E due to increased customer preference as economy comes out of slowdown
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NACIL
FSCs
LFCs
Other private players
Source: DGCA, ICICIdirect.com Research, LFCs- Indigo, SpiceJet, Jet Lite and Go Air, FSCs - Jet Airways and Kingfisher, Others private players includes Air Deccan, Paramount and MDLR

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Benign crude oil prices to boost load factor of LFCs

Majority of FSCs have shelved their fleet acquisition plans for the next two or three years. However, LFCs are likely to take delivery of aircraft in FY11E-12E that were ordered in the past. Domestic capacity, as measured by ASKMs, witnessed growth at a CAGR of 29.7% during the boom period of FY05-08. However, as a result of economic slowdown and consequent contraction in demand, airline operators undertook capacity rationalisation (capacity declined by 2.4% in FY09). Despite this, domestic capacity of LFCs increased by 14.1% in FY09 as this segment has been successful in maintaining an optimum capacity level due to prudent capacity addition during the growth phase of FY05-08. As a result, we estimate that fleet size of LFCs will continue to increase during FY10E-12E with the revival of demand. SpiceJet (+26.3% to 24), Indigo (+25.0% to 30) Go Air (+66.7% to 10), etc. Among FSCs, we expect NACIL to acquire new aircraft during the period FY10E-12E. However, the majority of the new aircraft will replace the old fleet, thus reducing the maintenance costs. Air India placed orders for 111 aircraft in 2007, primarily to Boeing and Airbus. All of these are expected to be delivered during 2007-2012. Consequently, we expect the load factor, a key determinant of utilisation, to increase for LFCs in FY09-12E (77.6% in FY12E vs. 67.8% in FY09). Further, the moderate growth expected for crude prices in FY11-12E will drive pax growth for LFCs, contributing to higher load factor. However, we expect a steeper rise in load factor of FSCs (77.5% in FY12E vs. 65% in FY09) due to capacity rationalisation (and no new capacity in FY10E12E) and conversion of majority of capacity into the low cost model in the last few quarters.
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Load factor of LFCs estimated to improve to 77.6% in FY12E (vs 67.8% in FY09) driven by the sustained demand for low cost travel and benign fuel prices
LFCs load factor fell below FSCs in Q4FY08 (70.0% for LFCs vs. 71.5% for to alternative means of transport (e.g. railways) with airlines raising ticket prices.
Exhibit 10: Load Factors (%) LFCs vs.. FSCs

85
75 % 65 55 Q1FY06 Q2FY06 Q3FY06 Q4FY06 Q1FY07 Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12
LFCs
FSCs
Source: DGCA, ICICIdirect.com Research, LFCs- Indigo, SpiceJet, Jet Lite and Go Air, FSCs - Jet Airways and Kingfisher

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Yields still under pressure

Yields, as measured by revenue per RPKM, have declined significantly due to the shift to the LCF model, with the yield of Jet Airways declining by 29.3% and 11.6% each for JetLite and SpiceJet, between Q3FY09 and Q3FY10. As airlines continue to focus on the LFC model over the next few quarters (and expected increase in competition in the space) combined with the moderate increase expected for crude oil prices, we estimate that yields will continue to remain under pressure. Out of our coverage companies, we expect the yield of Jet Airways to remain highest due to conversion of its idle capacities to JetKonnect (ticket prices typically 10-15% higher than pure-play LFCs).
Exhibit 11: Domestic net yields (Rs.)
8.0 6.0 4.0 2.0 0.0 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12
Limited upside to yields due to focus on LFC model by airlines and moderate increase in fuel prices
Jet Airways - Domestic
Jet Lite
SpiceJet
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Stretched balance sheet

Access to funding a key challenge facing airlines
In our view, the over-leveraged balance sheet due to the aggressive fleet addition in the past is the biggest challenge faced by airlines in India. In FY09, the debt/equity ratio of Jet Airways was 7.6x, while the net worth of Kingfisher and NACIL was negative. The combined debt was Rs 36,000 crore for Jet Airways, Kingfisher and NACIL. Despite the pickup of pax traffic and stabilisation of yields, we expect airlines to find it tough to pay back debt and service the significant interest expenses. As a result, airlines are raising equity to improve their liquidity position (and payout borrowings, primarily aircraft loans).
Exhibit 12: Equity raising plans of select airlines
Operator Fund requirement Government will provide a bailout pakage of Rs 2000 crore in the next 2-3 years Permission from government to raise nearly USD 400 mn (Rs 18,600 crore) through the QIPs route In discussion with PE firms to raise capital worth USD 350-400 million (Rs 16,275-18,600 crore) Status Rs 800 crore to be received by end of FY10 USD 200 mn (Rs 9,300 crore) to be raised by the end of FY10
Air India
Jet Airways
Kingfisher
No funds raised till Q3FY10
Source: Company, ICICIdirect.com Research

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Exhibit 13: Interest coverage ratio

10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 -30.0 -35.0 -40.0 -45.0 3.0 2.2 -0.2 -1.8 -15.3 -22.3 -29.6 -41.4 FY07 Kingfisher -18.9 -26.6 -2.2 -2.2 -15.8 -25.3
0.3
FY05
FY06
FY08 SpiceJet
FY09
Jet Airways - Consolidated
In our view, the governments restrictive FDI policy is a major hurdle for the sectors growth. At present, foreign airlines are not allowed to invest in the domestic sector, even though FDI limit in the sector has been capped at 49%. We believe a relaxation of the norms will allow the cash starved carriers to raise the much needed funds and benefit from technical expertise of the foreign partner. However, there has been no indication from the government towards this. We do not expect things to move rapidly on this front.
Exhibit 14: Foreign ownership limits in sector
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Passenger airlines Non schedule airlines, chartered airlines, and cargo airlines Ground handling services Maintenance and repair organisations, Training institutes
Source: Govt filings,, ICICIdirect.com Research
49% FDI and 100% investment by NRI 74% FDI and 100% investment by NRI 74% FDI and 100% investment by NRI 100% FDI

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Risks and Concerns

Significant increase in crude oil prices
As the global economy recovers, international crude oil prices have already increased by 29.3% during 9MFY10 to US$77 per barrel. A higherthan-expected rise in crude oil prices during FY11-12E due to a strongerthan-expected recovery of the global economy and speculative activities can result in pax traffic growth coming under presure, especially for LCFs where fuel costs account for a higher proportion of total operating costs (compared to FSCs). Pax traffic and, consequently, the load factor declined significant in FY09 with crude oil prices scaling new highs (US$124 per barrel in Q1FY09 and US$118 per barrel in Q2FY09).
Urgency in withdrawal of stimulus packages

The IMF recently raised its 2010 global GDP forecasts to 3.9% (from 3.1%) driven by improved economic performance during the last six months. However, substantial credit for the global economic recovery goes to increased spending by governments across the globe. A premature withdrawal of fiscal stimulus by governments may adversely impact the global economic recovery. Consequently, this may slow down Indias economic growth, resulting in a likely decline in domestic pax traffic growth. In particular, the Indian government has gone ahead with partial withdrawal of fiscal stimulus. Budget-2010 has proposed an increase in central excise duty (10% vs. 8% earlier), MAT (18% vs. 15% earlier), custom duty on crude petroleum (by 5%).
Excess capacity
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business confidence, airline operators may place large orders for new aircraft in anticipation of sustenance of buoyancy in demand. An oversupply situation is possible in case there is a slowdown of pax traffic (due to lower-than-expected economic growth or increase in crude oil prices), contributing to margin contraction for operators.
Inability to raise funding

In our view, access to funding is a key challenge facing the aviation sector. Large operators continue to grapple with significant debt on their balance sheets due to aggressive fleet addition in the past, consequently adversely impacting their liquidity conditions. Further, restriction on foreign ownership in the sector by the government remains an inhibitor for domestic operators looking to raise the much needed capital. We believe operators will be unable to take advantage of the expected buoyancy in pax traffic in FY12E if they are unable to raise the required funding.

Page 11
Valuations
The Indian airline sector is witnessing a significant change in its operational structure with major FSCs such as Jet Airways and Kingfisher rapidly converting a majority of their capacities into low cost. The passenger preference has also tilted towards LFCs as the preferred mode of travel primarily due to the economic slowdown and high fuel prices in the past few quarters. SpiceJet, a pure-play LFC has witnessed a rise in its market share to 12.5% in Q3FY10 from 10.5% in Q3FY09. Although the topline of the airlines is still under pressure due to a decline in yields, the improved pax traffic in Q3FY10 (29.9% YoY) and stable crude oil prices (average of US$76.9 in Q3FY10 vs. US$58.3 in Q3FY09) has raised hopes for a bright future ahead. We believe an improvement in the macroeconomic environment, stable crude oil prices and improvement in load factors due to strong capacity rationalisation plans will help the airlines to improve their EBITDA margin. Our rating rationale is based on EV/EBITDA. We prefer SpiceJet ahead of Jet Airways due to its strong fundamentals and increasing brand preference in the fast growing low cost air travel (due to increasing preference of customers). We believe that other multiples such as EV/EBITDAR (including lease rentals) cannot provide good indicator as enterprise value (EV) of players owning an aircraft always remains higher compared to players operating a majority of its fleet size under lease resulting in higher EV/EBITDAR multiples for players operating owned fleets. We have compared Jet Airways with major South-East Asian airlines that have a strong domestic market share and also have a sizable international presence (similar to Jet Airways). For SpiceJet, we have looked at the long-term EV/EBITDA band chart to derive the valuations.
Exhibit 15: Comparative Valuation
Company EPS P/E (x) EV/Sales (x) EV/EBITDA (x) ROCE (%) ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E FY09 FY10E Jet Airways SpiceJet -111.4 -14.0 -53.6 4.4 2.9 8.0 NA NA NA 13.1 162.6 7.1 1.5 0.9 1.5 0.7 1.2 0.6 NA NA 17.5 19.7 13.6 7.4 -10.0 -137.8 0.2 62.6 FY11E 1.4 71.1
We prefer SpiceJet on the back of its strong fundamentals and increasing brand presence
Exhibit 16: Global Valuation matrix

EV LC mn Air China China Eastern Airlines Co. China Southern Airlines Co. EVA Airways Cathay Pacific Korean Air Malaysia Airlines Singapore Airlines Thai Airways International Median Mean Adjusted Mean** LC - Local Currency
Source: Reuters, ICICIdirect.com REsearch
P/E TTM NA NA NA NA NA NA NA 17.3x NA 17.3x 17.3x 17.3x FY10E 37.9x 117.0x 120.0x NA 22.1x 127.2x NA 774.0x 19.7x 117.0x 174.0x 84.8x FY11E 43.6x 52.2x 41.7x 17.5x 24.2x 15.7x NA 20.9x 13.0x 22.5x 28.6x 27.3x
EV/Revenue TTM 5.9x 1.6x 1.5x 1.4x 1.1x 1.2x 0.2x 1.0x 0.9x 1.3x 1.6x 1.3x FY10E 5.8x 1.4x 1.4x 1.6x 1.5x 1.3x 0.3x 1.4x 1.0x 1.4x 1.7x 1.4x FY11E 5.0x 1.1x 1.3x 1.3x 1.3x 1.2x 0.3x 1.2x 1.0x 1.2x 1.5x 1.2x TTM
EV/EBITDA FY10E 28.9x 15.7x 11.0x 12.2x 10.1x 12.2x NA 9.3x 6.4x 12.2x 13.7x 12.6x FY11E 22.4x 7.4x 7.4x 10.3x 8.8x 8.9x 7.6x 6.0x 5.7x 8.2x 9.8x 8.7x TTM NA NA NA NA NA NA NA 18.2x NA 18.2x 18.2x 18.2x 77.6x NA NA 71.8x NA 19.5x NA 6.2x 34.6x 34.6x 42.0x 42.0x
EV/EBIT FY10E 136.0x NA 166.0x NA 22.7x 55.1x NA 341.4x 23.0x 136.0x 178.2x 144.3x FY11E 56.4x 19.3x 33.3x 57.1x 22.5x 22.5x 15.2x 19.6x 19.3x 22.5x 34.1x 31.3x TTM 7.2x 2.7x 6.5x NA 1.6x 2.0x NA 1.3x 0.9x 2.3x 3.1x 2.8x
P/BV FY10E 5.9x NA 5.1x 1.5x 1.5x 1.6x 0.9x 1.4x 0.9x 1.5x 2.3x 2.0x FY11E 5.2x 18.5x 4.4x 1.4x 1.5x 1.5x 1.0x 1.3x 0.9x 1.5x 3.8x 2.3x
303,682 61,798 82,492 116,690 98,227 12,559,972 3,375 16,457 173,502 107,459 1,359,594 129,074
**Adjusted mean is used to remove extreme values, either minimum or maximum.

Page 12
Initiating Coverage
March 26, 2010
Rating Matrix
Rating Target Target Period Potential Upside : : : : Reduce Rs 444 12 months -5%
Jet Airways (JETAIR)

Valuation concerns
Rs 465
Jet Airways (JAL) is the largest domestic airline operator in India with a market share of 26.9% (Q3FY10). We believe the company would benefit from the recent upturn in domestic pax traffic (29.9% YoY in Q3FY10) due to its strong market position and focus on the budget segment. However, it is also prone to major key risks that include slowdown of economic growth, steeper-than-expected increase in crude oil prices, leading to lower load factor and consequently profitability. We are also concerned with the adverse liquidity situation of the company (i.e. debtto-equity ratio of 5.7). Hence, we are initiating coverage on the stock with a REDUCE rating and a price target of Rs 444.
YoY Growth (%)

Net Sales EBITDA Net Profit EPS FY09 27.6 426.9 NA NA FY10E -7.3 -217.9 NA NA FY11E 14.3 22.9 LP LP FY12E 13.1 54.9 NA NA
Stock Metrics
Bloomberg/Reuters Code Sensex Average volumes Market cap (Rs crore) 52 week H/L Equity Capital (Rs crore) Promoters Stake (%) FII Holding (%) DII Holding (%) JETIN:IN /JET:BO 17,578 431,980.8 4,083 598.2/154.5 86 80.0 7.7 8.2
Revival of sector to drive topline

With the introduction of all-economy Jet Airways Konnect (JAK) services, we estimate strong domestic pax growth for JAL (CAGR of 14.3% during FY10E-12E) as consumers will increasingly prefer low cost travel with the economy coming out of the slowdown. JAL is expected to benefit from the revival of pax traffic in the domestic market (CAGR of 12.8% in FY10E-12E). As a result, we estimate JALs revenues will grow at a CAGR of 15% to Rs 15,991 crore during FY10E-12E. Continued strong performance of international operations is also expected to contribute to the topline growth (load factor of 81.5% in FY12E vs. 68.2% in FY09).
Valuation matrix
FY09 FY10E FY11E FY12E Slow recovery in margin in FY10E and FY11E Target PE -4.0 -8.3 152.9 6.8 EV/EBITDA -22.1 17.2 13.6 7.9 Despite the expectation of higher load factor and stable crude oil prices, EV/Sales 1.5 1.5 1.2 1.0 we estimate that the net margin will remain negative in FY10E (-6.1%) due Price/BV 1.9 2.0 1.9 1.5 ISIEmergingMarketsPDF in-mapegroup fromto high interest costs (debt-to-equity ratio of 5.7 at the end of Q3FY10). 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.
Stock Price movement (Stock vs. Nifty)

700 600 500 400 300 200 100 0 3/25/2009 5/25/2009 7/25/2009 9/25/2009 11/25/2009 1/25/2010 3/25/2010 6000 5000 4000 3000 2000 1000 0
Margins are expected to improve slowly in the next two years (2.4% in FY11E and 6.7% in FY12E) due to increased competition from LFCs (yields under pressure).
Valuations
At the CMP of Rs 465, the stock is currently trading at 1.3x FY11E EV/sales and 13.6x its EV/EBITDA. The rebound in tourist traffic has improved the outlook of the company. However, we continue to remain cautious on the liquidity situation of the company as the fresh capital expected to be raised by the management (~Rs 930 crore/US$200 million) falls short of the total payment obligation (~Rs 1,500 crore/US$330 million) of the company at the end of Q4FY10. Hence, we have valued JAL at a FY11E EV/EBITDA of 12.8x, at a discount to its current valuation multiple, computing a target price of Rs 444. We are initiating coverage on the stock with a REDUCE rating, downside risk of 4.5%.
Exhibit 1: Consolidated Financial summary
Rs. Crore Net Sales EBITDA Net Profit EPS (Rs) P/E (x) RoCE (%) RoNW(%) FY08 10,246 -163 -654 -75.7 -6.2 -7.8 -20.5 FY09 13,078 -859 -961 -111.4 -4.2 -10.0 -30.3 FY10E 12,121 1,012 -568 -53.6 -8.8 0.2 -23.9 FY11E 13,852 1,244 31 2.9 162.6 1.4 1.2 FY12E 15,663 1,928 696 65.6 7.2 4.7 23.7
Rs.
Jet Airways (LHS)
NIFTY (RHS)
Analysts name
Rashesh Shah rashes.shah@icicisecurities.com

Company Background
Jet Airways (India) Ltd (JAL), Indias largest private sector airline with a domestic market share of 26.9% in Q3FY10, began its operation in May 1993. The company strengthened its position in the aviation sector by acquiring Air Sahara (rechristened as JetLite, the all-economy, no-frills service) in April 2007. At present, JAL operates 112 aircraft, which flies to more than 61 destinations in India and abroad. In May 2009, JAL launched Jet Airways Konnect (JAK), an all-economy service, by utilising the idle business class capacity of the parent company, Jet Airways (JA). Out of the total fleet size of 89 aircraft, 27 aircraft are operated for JAK. JetLite operates predominantly on the domestic routes with a fleet size of 23 aircraft. In addition to the domestic operations, JA also provides international flight services to several destinations including Gulf, Saarc countries, Asia-Pacific, North America and Europe. In FY09, international operations contributed 52.5% of JAs revenues. In 2005, the company raised Rs 1,899 crore through an IPO of 1.72 crore shares at a price of Rs 1,100 per share to fund its domestic and international capacity addition. Despite the Indian aviation sector witnessing a significant contraction in FY09 (domestic pax traffic declined by 11.1% YoY), the consolidated revenues of the company increased by 27% YoY to Rs 13,078 crore driven by higher pax yields (high fuel prices contributed to increase in fuel surcharges). During FY05-08, JAL witnessed robust revenue growth (CAGR of 32.3%). This was fuelled by solid growth of domestic frompax traffic (CAGRon 2011-07-20which was supported by the booming 114.143.218.106 of 31.7%), 10:22:12 EDT. DownloadPDF. economy (GDP grew at an average annual rate of 8.9%). JAL, headquartered in Mumbai, has staff strength of 11,400 employees (December 2009).
Exhibit 2: Domestic market share (Dec 09)
G o A ir 5% S pice Jet 13% O thers 1% Jet A irw ay s 19% Jet L ite 7%
Exhibit 3: Domestic pax traffic (in lakh)

30 24 18 12 6 0 Q1FY08 Q3FY08 Q1FY09 Q3FY09 Q1FY10 Q3FY10
Indigo 15%
NA CIL 18%
K ingf is h er 22%
JA - Domestic
JA - International
JetLite

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Investment Rationale
Jet Airways (India) Ltd (JAL) has emerged as the largest player in the domestic aviation sector with a market share of 26.9% at the end of Q3FY10. JA, the parent company, is the first FSC that has capitalised well on the increasing customer preference towards low cost travel by utilising about 70% of its total capacity for budget travellers. We expect the domestic pax traffic of JAL to grow at a CAGR of 14.3% (12.8% for the sector) during FY10E-12E due to its strong brand presence and focus on the budget segment. However, we are concerned about the liquidity situation of the company due to high debt on its books (debt-to-equity ratio of 5.7 at the end of Q3FY10). We are initiating coverage on the stock with REDUCE rating and a price target of Rs 440.
Domestic business Aviation sector to witness robust pax traffic growth

We believe the Indian aviation sector will witness strong growth over the next two or three years after the significant contraction reported in FY09 (pax traffic declined by 11% YoY). Growth of pax traffic will be driven by improved economic environment (GDP expected to grow at a CAGR of 7.5% in FY10E-12E vs. 5.4% in FY09), stable crude oil prices and rapid growth of demand for low cost travel. As a result, we estimate the domestic pax traffic will grow at a CAGR of 12.8% during our forecast period FY10E-12E (1.5x the GDP-ex agri growth rate). In our view, JAL will be the primary beneficiary of the upturn in domestic pax growth due to its strong market position (market share of 26.9% in Q3 FY10), solid brand name, capacity rationalisation undertaken during the last few quarters and emphasis on the budget segment. Nearly 1/3 of the from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. parent companys capacity shifted to the all-economy brand, JAK by Q3FY10. As a result, we estimate JALs domestic pax traffic will grow at a CAGR of 14.3% in FY10E-12E with improvement expected in load factor (80.3% in FY12E vs. 67.1% in FY09). Further, JALs revenue passenger per kilometre (RPKM), a measure of demand, is expected to grow at a CAGR of 13.3% in FY10E-12E. As a consequence, we expect JAL to maintain its market share in FY12E (26.9%) despite the expected increase in competition from the LFCs.
Exhibit 4: Domestic pax traffic (in lakh) Sector vs. JAL*
600 500 400 300 200 100 0 FY06 Sector - LHS FY07 FY08 FY09 FY10E FY11E FY12E 252 119 128 129 111 117 135 152 358 444 395 445 566 502 50 45 40 35 30 25 20 15 10 5 0
We expect the domestic pax traffic of India to grow at a CAGR of 12.8% during FY10E-12E driven by strong macroeconomic growth, increase in demand for low cost travel and expectation of stable crude oil prices
JAL (Domestic) - LHS
JAL market share (%) - RHS
Source: Company, ICICIdirect.com Research, * Includes pax numbers for domestic operation of JA and JetLite

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Exhibit 5: RPKM (in lakh) JA (domestic) and JetLite

120,000 100,000 80,000 60,000 40,000 20,000 0 FY08 FY09 JA RPKM (Dom) - LHS JA (Dom) YoY% - RHS FY10E FY11E JetLite RPKM - LHS JetLite YoY% - RHS FY12E 40,090 85,650 84,096 68,840 38,560 71,047 38,821 40,308 43,571 97,229 25 20 15 10 5 0 -5 -10 -15 -20 -25
Source: Company, ICICIdirect.com Research,* potential upgradation to low cost air travel from premium rail travel
Introduction of Jet Airways Konnect a positive move

Introduction of all-economy JAK service to target low cost customers led to increase in market share in Q3 FY10
With the economy gaining momentum and preference of consumers for low cost travel, we believe the managements strategy to shift substantial capacity to JAK was a positive move (JALs market share increased to 26.9% in Q3FY010 compared to 24.3% in Q1FY10). JAK carried about 15.7 lakh pax, 65.4% of the total pax carried by JA during Q3FY10. JAK was launched in May 2009 by JA to utilise its domestic business class capacity that was left idle as a consequence of the economic slowdown. In a normal economic environment, business class pax fromaccounts for 50-60% 2011-07-20 10:22:12 EDT. DownloadPDF. 114.143.218.106 on of the total traffic for FSCs in India.
Consolidated domestic load factor to improve to 81.3% in FY12E

JALs domestic load factor deteriorated significantly in FY09 (66.9% vs. 70.9% in FY08) as a result of domestic pax contraction (down by 11.1% YoY in FY09). This was further aggravated by the strong capacity expansion undertaken during FY05-08 (fleet size grew at a CAGR of 18.3% to 106 aircraft). As a consequence, the management undertook an aggressive capacity rationalisation programme in FY09-10E, including leasing of idle aircraft to foreign airlines and return of some aircraft to the lessor. Further, according to the management, there are no plans to acquire new aircraft for the next 12-18 months. We believe JALs present capacity is more in line with the current demand. Therefore, we expect a firm load factor in Q4FY10E (the company reported load factor of 73.6% in January 2010 and 75% in February 2010). Also, the booking window of March 2010 has indicated a load factor in the high 70s for domestic operations. We estimate that the load factor for JAs domestic operations and JetLite will increase to 78.9% and 83.7%, respectively, in FY12E driven by the expected growth of domestic pax traffic. JAs load factor increased to 75.4% in Q3FY10 despite an increase in capacity (13.3% YoY and 17.9% QoQ). This was primarily due to the introduction of JAK service. The final phase of conversion of about 1/3 of the capacity to JAK was completed in October 2009.
Load factor will improve on the back of increasing domestic pax traffic and continuing capacity rationalisation in our forecast period

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Exhibit 6: ASKM (in lakh) and load factor (%) JA (domestic) and JetLite
150,000 120,000 90,000 60,000 30,000 0 FY07 FY08 JA ASKM (Dom) - LHS FY09 FY10E FY11E FY12E JetLite ASKM - LHS JetLite load factor (%) - RHS 100 90 80 70 60 50
JA (Dom) load factor (%) - RHS

Moderate growth expected in pax yields

In our view, the yields of JA, measured by revenue per RPKM, will grow by 7.6% YoY to Rs 5.8 in FY11E due to its focus on the budget segment (introduction of JAK service) and deferral of new aircraft addition (leading to improvement in load factor). Also, we expect capacity addition in the sector to remain muted due to balance sheet concerns of major players (including JAL). The strong growth in pax traffic and low capacity addition will help JA to improve its yields marginally. However, JAs yield is expected to be lower than the high witnessed in FY09 (Rs 6.8) primarily due to high price elasticity of consumers as the economy comes out of the slowdown, stable fuel prices, conversion of aircraft from FSCs to LFCs and increasing competition from pure-play low from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. cost carriers (SpiceJet, Indigo and Go Air).
Exhibit 7: Annual yields (Rs) Jet Airways (domestic) and JetLite
8 6 Rs. 4 2 0 FY07 FY08 FY09 JA - Dom
Focus on low-cost consumers expected to keep yields under pressure
6.8 5.7 4.6 3.4 3.9 3.5 3.7 3.8 5.8 5.4 5.8 5.9
FY10E JetLite
FY11E
FY12E

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International Business Growth momentum of international business to continue

During the last few quarters, the international operations have been more profitable for JA compared to its domestic operations due to higher load factor (82.5% for international operations in Q3Y10 vs. 75.4% for domestic operations) and route rationalisation undertaken by the company (discontinuing non-profitable international routes such as London-Amritsar, Mumbai-US via Shanghai etc ). As a result, the international segment contributed 51.3% of the total revenues of the consolidated business (vs. 43% in FY09) in Q3FY10. Also, all major international routes operated by JA were profitable during the quarter, with load factors ranging between 80 and 89% (excluding Gulf routes). In our view, the high load factor of international operations was driven by: Strong capacity rationalisation in the international segment (ASKM reduced by an average of 15.1% YoY during Q1-Q3FY10 vs. 7.2% YoY for domestic operations) by leasing out excess aircraft Introduction of several short-haul routes by JA that led to improved connectivity with Saarc countries. Some of the profitable routes that witnessed strong load factor in Q3FY10 were MumbaiKathmandu, Mumbai-Dhaka, DelhiHong Kong, and DelhiBangkok via Varanasi.
We expect high load factor in the international segment to continue due to strong capacity rationalisation and introduction of new short-haul routes
ISIEmergingMarketsPDF in-mapegroup from
Improved aircraft utilisation as domestic aircraft were utilised on international routes during the night time, primarily to Gulf and Saarc countries 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.
Exhibit 8: JA load factor (%) Domestic vs. international

100 70.2 75 50 25 0 FY07 FY08 FY09 JA (Domestic) FY10E JA (International) FY11E FY12E 70.9 68.0 67.5 66.9 68.2 72.7 80.6 78.3 79.3 78.7 81.5
The profitability of JAs international operation is also dependent on its lower cost of operation (cost per ASKM in domestic operation was higher by 61.1% in Q3FY10 as compared to international operation). Further, the fuel costs in India are about 29.7% higher than international destinations, leading to improved margins for international operations for the company (According to the management, average fuel prices for domestic

Page 18
operations were about Rs 41.5 per litre in Q3FY10 vs. Rs 32 per litre for international operations).
Exhibit 9: Cost per ASKM Domestic vs. international
6 5.3 3.9 2.7 2 1.9
4.8 3.7 2.2 1.5
4.7 3.3 2.2 1.8 3.8 2.5 2.3 1.7
(Rs.)
0
FY09 Cost/ASKM - Dom* Cost/ASKM - Intl#
Q1FY10
Q2FY10
Q3FY10
Cost/ASKM w/o fuel - Dom Cost/ASKM w/o fuel - Intl
Source: Company, ICICIdirect.com Research, * Domestic, # International
Exhibit 10: JA EBITDA margin (%) Domestic vs. international

25 18.4 18.3 20 14.9 15 7.7 10 4.0 2.6 5 0 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. -5 -1.9 -10 -9.7 -15 -10.4 -11.2 -20 -17.0 -25 -24.7 -30 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 15.7 18.6
Q3FY10
JA (Domestic)
JA (International)
Although we believe the improved economic environment will translate into higher business and leisure travel in the next few years, the incremental growth in international traffic will be contingent on JAs ability to maintain its market share in major routes such as Saarc, Asean and Gulf. We are conservative on the growth of international pax traffic and expect it to grow at a CAGR of 10.5% during FY10E-12E (lower than the growth of domestic pax traffic). However, we believe the managements plan to defer addition of incremental capacity in the international segment during the next three to four quarters will contribute to the improved load factor for international operations. Consequently, we expect the international load factor to increase to 81.5% in FY12E (compared to 78.9% in domestic operation).

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Margins Cost cutting measures bearing fruit

After witnessing a severe margin contraction in FY09 (EBITDA margin of 6.6% vs. -1.6% in FY08) and slight improvement in H110 (average of 1.7%), JAL reported a strong upturn in margins in Q3FY10 (15.4%). The margin expansion was driven by:
EBITDA margins will improve to 12.3% in FY12E due to continuance of cost saving initiatives and expectation of a stable fuel price environment
Higher load factor in domestic operations (75.4% in Q3FY10 vs. 62.4% in Q3FY09) as well as international operations (82.5% in Q3FY10 vs. 67.8% in Q3FY09) Lower crude oil prices (average price of US$76.9 per barrel in Q3FY10) compared to the highs witnessed in H109 (average price of US$121 per barrel) Staff rationalisation leading to lower employee costs; headcount reduced to 11,700 at the end December 2009 as compared to 13,400 in January 2009 Increased synergy between JA and JetLite employees leading to further cost savings
According to the management, cost per ASKM is expected to decrease by 5-10% YoY during the next few quarters. Accordingly, we estimate that the EBITDA margin will expand to 8.4% in FY10E and further to 9.0% in FY11E and 12.3% in FY12E. Margin expansions will be driven by stable jet fuel prices, continuance of cost saving initiatives and higher load factor.
Exhibit 11: JAL EBITDA margin (%)
15
ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. 9.0 8.4 10 5.1 5
12.3
0 -5 -10 FY07 FY08 -1.6 -6.6 FY09 FY10E FY11E FY12E
EBITDA Margin - JAL
Stable crude oil prices to benefit JAL

JAK service to benefit from stable fuel price during FY10E-12E
In our view, JAL will benefit from the expected stability of crude oil prices primarily due to the conversion of majority of its capacity to JAK. Budget carriers are able to price their tickets more competitively in a low fuel price environment. Our expectation of low crude oil prices are further supported by the Energy International Administration (EIA) of US, that forecasts crude oil prices at an average of US$70.1 per barrel in FY10E, US$80.3 per barrel in FY11E and US$83.9 per barrel in FY12E. Accordingly, we forecast that JALs cost per ASKM will remain lower in our forecast period (Rs 3.7 in FY12E) as compared to the high witnessed in FY09 (Rs 4.0)

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Exhibit 12: Consolidated cost per ASKM (Rs) with fuel and without fuel
5 4 3.0 3
Rs.
3.7 2.4 2.0
4.0 3.5 2.4 2.4
3.6 2.4
3.7 2.4
2 1 0
FY07
FY08
FY09
FY10E
FY11E
FY12E
Cost/ASKM - LHS
Cost/ASKM (w/o Fuel) - LHS
Fuel costs account for about 30-35% of the total operating costs of JAL, which makes the companys earnings highly susceptible to the movement in fuel prices. The sensitivity chart below presents the risk of fuel price movement to JALs bottomline (we have assumed average jet fuel prices of 50.2 cents per litre (CEP), 59.7 CEP, 63.1 CEP in FY10E, FY11E and FY12E, respectively, based on our crude oil forecasts).
Exhibit 13: Sensitivity of JALs EPS with jet fuel prices
Change in average jet fuel prices (%) EPS (Rs) EPS - FY12E 19.2 65.6 112.0 FY10E FY11E ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. 10 -64.2 -41.2 Base case -10
Source: EIA, ICICIdirect.com Research
-53.6 -42.9
2.9 47.0

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Balance sheet concerns Balance sheet severely stretched

JAs balance sheet is severely stretched with total borrowings of Rs 14,708 crore at the end of Q3FY10 (debt-to-equity ratio of 5.7x). As a result, we believe the bottomline will continue to remain under pressure during FY10E due to high interest expenses (interest coverage ratio of 0.1% in FY10E and 0.3% in FY11E), despite an improvement in operating results in Q3FY10. JAL has received permission from the government to raise equity worth ~Rs 1,860 crore (US$400 million) through the QIP route. Although, we have assumed that the company will be able to raise ~Rs 930 crore (US$200 million) in the next three or four months (as indicated by the management), the amount is still less than the payment obligation of about Rs 1,500 crore (outstanding creditors, loans for aircraft and payment obligation due to legal dispute with Sahara over JetLite) at the end of Q3FY10. JAL is also exploring the sale and lease back option for its assets (primarily aircraft) to use the proceeds to pay down its debt. However, we are cautious on this front as the company cannot sell JetLite assets without permission from the court (the JAL-Air Sahara dispute is sub judice at present).
Exhibit 14: Debt-to-equity ratio Consolidated
8 7.6
Despite an improvement in operational results, net profits will remain negative in FY10E due to high interest costs
ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. 5.7 6
5.3
4 2 0
2.7
2.9
FY07
FY08
FY09 Debt to Equity
FY10E
FY11E

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Risks and Concerns

Rise in fuel prices
Since fuel costs constitute about 30-35% of the total operating costs of the company, a significant rise in fuel prices will negatively impact the profitability. Further, as airlines are forced to raise ticket prices in a rising fuel price environment, a significant rise in fuel prices will lead to a slowdown in pax traffic.
Delay in recovery of domestic economy from slowdown

The pax traffic in India is highly sensitive to the performance of the real economy. With the government talking about the withdrawal of the fiscal stimulus in order to bring down the high fiscal deficit in India, the full recovery of the domestic economy may be delayed, leading to a decline in pax traffic as passenger will shift to cheaper modes of transport such as railways.
Strong capacity addition by LFCs may lead to over-supply situation

Pure-play LFCs such as SpiceJet, Indigo and Go air are planning to increase their fleet size during the period FY10-12. In case of a less-thanexpected recovery in pax traffic, there is fair chance of an over-supply situation in the sector. This will negatively impact the load factor.
Inability to raise money in international market

ISIEmergingMarketsPDF in-mapegroup fromJALs plan to raise ~Rs 1,860 crore through the QIP route. 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.
A slower than expected recovery in the international market may derail JAL wants to raise fresh capital of ~Rs 930 crore (US$200 million) within three to four months in order to partially payback its debt, which stood at Rs 14,708 crore at the end of Q3FY10.

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Financials
Consolidated revenue growth to pick-up from Q4FY10E
We expect the consolidated revenue sales of JAL to grow at 23.8% YoY to Rs 3,428 crore in Q4FY10 after witnessing an average de-growth of 15.6% YoY during the past three quarters. The growth is expected to be driven by the revival of domestic as well as international pax traffic on the back of a strong macroeconomic performance and stable fuel prices. With an improvement in yields, both domestic and international, we expect the topline of JAL to grow at a CAGR of 13.7% during FY10E-12E (as compared to 32.3% during FY06-09). The international business, which contributed 51.3% to the consolidated revenues in Q3FY10, is expected to maintain its share in the topline driven by the increased focus of the company to improve its share on international routes such as Asean, Saarc and Gulf routes.
Exhibit 15: Consolidated revenues estimated to grow at a CAGR of 13.7% during FY10E-12E
20000 16000 Rs. crore 12000 8000 4000 0 -4000 FY07 FY08 FY09 FY10E FY11E ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. JAL - LHS Growth YoY (%) - RHS FY12E 20 0 -20 9,054 10,300 13,078 12,121 13,852 15,663 60 40 80

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Positive EBITDA expected in FY10E

After reporting negative EBITDA in the last two years (due to high fuel prices and a slowdown in the domestic market), we expect JAL to report a positive EBITDA of Rs 1,012 crore in FY10E on the back of the strong performance in Q3FY10 (EBITDA of Rs 510 crore). With the revival of the demand environment, ongoing cost cutting measures and stable fuel prices, we expect JALs EBITDA to grow at a CAGR of 38% to Rs 1,944 crore during FY10E-12E.
Exhibit 16: Consolidated EBITDA to improve during FY10E-12E
2500 1875 Rs. crore 1250 625 0 -625 -1250 FY07 FY08 (163) (859) FY09 EBITDA - LHS 362 1,012 1,244 1,928 300 50 -200 -450 -700 FY10E FY11E FY12E
Growth YoY% - RHS
Margin to recover slowly

ISIEmergingMarketsPDF in-mapegroup fromIn our view, the EBITDA margin 10:22:12 EDT. DownloadPDF. 114.143.218.106 on 2011-07-20 of the company will improve
to 12.3% in FY12E on the back of improved domestic and international operations. In Q3FY10, the international operations of the company reported higher EBITDA margin (18.6%) as compared to domestic operations (15.7%). This was primarily due to high load factor, leading to better realisations. Although we believe the growing domestic demand, stable fuel prices, and low interest costs (due to slowdown in capacity addition) will help the company to improve its bottomline, the margin will still be lower than the high witnessed in FY05-06.
Exhibit 17: Slow recovery in margin during FY10E-12E
30 24 18
(%)
27.9 16.4 9.0 8.0 5.1 0.4 -1.6 -6.4 FY05 FY06 FY07 FY08 EBITDA Margin -6.6 -7.4 FY09 8.4 9.0 0.2 12.3 4.4
12 6 0 -6 -12
-4.7 FY10E FY11E FY12E
PAT Margin

Page 25
Return ratio to gain in FY11E and FY12E

JAL operates about 50% of its aircraft on a lease basis while the other half is through a sale and lease back basis. This model got severely impacted in the slowdown (FY09 and H1FY10) due to high fixed costs. However, due to high operating leverage, we expect this to drive a big upturn in returns on the back of expected improvement in the pax traffic. Further, the deferral of capacity expansion by the company is also expected to lower the interest costs for the company, leading to an improvement in return ratios in our forecast period.
Exhibit 18: RoCE (%) and RONW (%)
30 20 10 0 -10 -20 -30 -40 FY08 -20.5 -30.3 FY09 ROCE FY10E ROE FY11E FY12E -23.9 -7.8 -10.0 0.2 1.2 1.4 23.7
4.7

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Valuations
JAL is the largest domestic airline operator in India with a market share of 26.9% in Q3FY10. We believe the company will be the prime beneficiary of the recent upturn of domestic pax traffic (28% YoY in Q3FY10) due to its strong market position, focus on the budget segment and capacity rationalisation undertaken in FY09. As the economy comes out of the slowdown, we expect increased demand for JAs all-economy service JAK, contributing to higher load factors. Further, the margin is expected to improve driven by the expected increase in load factor and stable crude oil prices. Key risks include slowdown of economic growth and a steeper-thanexpected increase in crude oil prices, leading to lower load factor and consequently profitability. Further, a significant debt on the balance sheet (Rs 14,708 crore in Q3FY10 and debt-to-equity ratio of 5.7) poses additional risk to our earning forecasts as a contraction in operating results may lead to worsening of the liquidity situation for the company. At the CMP of Rs 465, the stock is currently trading at 1.3x FY11E EV/sales and 13.6x its EV/EBITDA. The rebound in tourist traffic has improved the outlook of the company. However, we continue to remain cautious on the liquidity situation of the company as the fresh capital expected to be raised by the management (~Rs 930 crore/US$200 million) falls short of the total payment obligation (~Rs 1,500 crore/US$330 million) of the company at the end of Q4FY10. Hence, we have valued JAL at a FY11E EV/EBITDA of 12.8x, at a discount to its current valuation multiple, computing a target price of Rs 444. We are initiating coverage on the stock with a REDUCE rating, downside risk of 4.5%.
Exhibit 19: Asean peers valuation matrix
TTM Jet Airways Air China China Eastern Airlines Co. China Southern Airlines Co. EVA Airways Cathay Pacific Korean Air Malaysia Airlines Singapore Airlines Thai Airways International Median Mean Adjusted Mean** NA NA NA NA NA NA NA NA 17.3x NA 17.3x 17.3x 17.3x
JAL valued at 1.3x FY11E EV/Sales, at a premium to its Asian peers but valuation concern remains
P/E FY10E NA 37.9x 117.0x 120.0x NA 22.1x 127.2x NA 774.0x 19.7x 117.0x 174.0x 84.8x FY11E 162.6x 43.6x 52.2x 41.7x 17.5x 24.2x 15.7x NA 20.9x 13.0x 22.5x 28.6x 27.3x TTM 1.4x 5.9x 1.6x 1.5x 1.4x 1.1x 1.2x 0.2x 1.0x 0.9x 1.3x 1.6x 1.3x
EV/Revenue FY10E 1.5x 5.8x 1.4x 1.4x 1.6x 1.5x 1.3x 0.3x 1.4x 1.0x 1.4x 1.7x 1.4x FY11E 1.3x 5.0x 1.1x 1.3x 1.3x 1.3x 1.2x 0.3x 1.2x 1.0x 1.2x 1.5x 1.2x TTM NA 77.6x NA NA 71.8x NA 19.5x NA 6.2x 34.6x 34.6x 42.0x 42.0x
EV/EBITDA FY10E 17.5x 28.9x 15.7x 11.0x 12.2x 10.1x 12.2x NA 9.3x 6.4x 12.2x 13.7x 12.6x FY11E 13.6x 22.4x 7.4x 7.4x 10.3x 8.8x 8.9x 7.6x 6.0x 5.7x 8.2x 9.8x 8.7x TTM 2.8x 7.2x 2.7x 6.5x NA 1.6x 2.0x NA 1.3x 0.9x 2.3x 3.1x 2.8x
P/BV FY10E 2.0x 5.9x NA 5.1x 1.5x 1.5x 1.6x 0.9x 1.4x 0.9x 1.5x 2.3x 2.0x FY11E 1.9x 5.2x 18.5x 4.4x 1.4x 1.5x 1.5x 1.0x 1.3x 0.9x 1.5x 3.8x 2.3x

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Table and Ratios

Profit and loss statement
(Year-end March) Net Sales % Growth Fuel Expenses % of Sales Personal Cost % of Sales Other Operating Expenses % of Sales Total Expenditure % Growth Operating Profit % Growth Other Income Depreciation EBIT % Growth Interest Non-operation income Profit before Tax % Growth Taxation Net Profit FY08 10,246 45.2 4,070 39.7 1,389 13.6 4,950 48.3 10,409 55.5 -163 NA 0 802 -965 NA 522 676 -812 NA -158 -654 FY09 13,078 27.6 5,854 44.8 1,584 12.1 6,499 49.7 13,937 33.9 -859 NA 0 902 -1,761 NA 802 1,536 -1,027 NA -66 -961 FY10E 12,121 -7.3 3,900 32.2 1,373 11.3 5,836 48.1 11,109 -20.3 1,012 LP 0 976 36 102.0 946 343 -568 NA 0 -568 FY11E 13,852 14.3 4,682 33.8 1,407 10.2 6,519 47.1 12,608 13.5 1,244 22.9 0 1,008 236 -560.7 690 485 31 LP 0 31 (Rs Crore) FY12E 15,663 13.1 4,925 31.4 1,520 9.7 7,290 46.5 13,736 8.9 1,928 54.9 0 1,167 760 222.1 613 548 696 NA 0 696
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Balance Sheet
(Year-end March) Liabilities Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Current Liab. & Prov. Others Total Liabilities Assets Gross Block Less: Acc. Depreciation Net Block Capital WIP Net Fixed Assets Loans & Advances Cash Trade Receivables Inventory Investments Total Current Assets Others - Goodwill Total Assets FY08 86 4,065 1,753 10,452 4,523 573 21,452 FY09 86 2,111 5,036 11,598 4,113 275 23,219 FY10E 106 2,457 3,136 11,584 5,103 275 22,661 FY11E 106 2,487 2,136 11,625 5,130 275 21,760 (Rs Crore) FY12E 106 3,183 1,136 11,677 5,222 275 21,600
16,669 2,556 14,113 1,303 15,415 1,192 958 1,399 604 10 4,164 1,872 21,452
18,845 2,550 16,295 657 16,952 1,324 1,466 808 696 100 4,394 1,872 23,219
18,845 3,527 15,318 657 15,975 1,389 2,053 847 425 100 4,813 1,872 22,661
18,845 4,535 14,310 657 14,967 1,556 1,880 949 435 100 4,921 1,872 21,760
18,845 5,702 13,143 657 13,800 1,764 2,515 1,076 472 100 5,927 1,872 21,600

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Cash Flow statement

(Year-end March) Profit before Tax Depreciation Other Non Cash expenses Diect Tax Paid Interest Income Others Cash Flow before WC Changes Net Increase in Current Liabilities Net Increase in Current Assets Cash Flow after WC Changes Purchase of Fixed Assets (Inc.)/Dec. in Investment CF from Investing Inc/(Dec) in Loan Funds Inc/(Dec) in Net Worth Others Casf Flow from Financing Actv Op. Cash & Cash equivalents Cl. Cash & Cash equivalents FY08 -812 802 2,567 13 0 1,683 862 2,200 928 2,134 -8,263 804 -7,459 6,149 0 -522 5,627 1,097 958 FY09 -1,027 902 -838 15 0 -294 -684 -631 -367 -948 -1,531 281 -1,250 4,429 0 -802 3,626 958 1,466 FY10E -568 976 0 0 0 -633 1,041 990 -168 2,200 0 313 313 -1,913 934 -946 -1,926 1,466 2,053 FY11E 31 1,008 0 0 0 -205 1,244 27 280 991 0 485 485 -959 0 -690 -1,649 2,053 1,880 (Rs Crore) FY12E 696 1,167 0 0 0 -64 1,928 92 371 1,648 0 548 548 -949 0 -613 -1,561 1,880 2,515
Page 30
Ratios
(Year-end March) Per share data (Rs) EPS Cash EPS Book Value Operating Profit Per Share Operating Ratios Operating Margin Net Profit Margin Return Ratios RoNW ROCE Valuation Ratios EV/EBITDA PE EV/Sales Sales to Equity Market Cap to Sales Price to Book Value Turnover Ratios Fixed Asset Turnover Ratio Debtor turnover Creditor turnover Cash to abs. Liab. FY08 -75.7 17.1 480.8 -18.9 FY09 -111.4 -6.9 254.5 -99.5 FY10E -53.6 38.5 241.6 95.4 FY11E 2.9 98.0 244.5 117.3 FY12E 65.6 175.7 310.1 181.7
-1.6 -6.4
-6.6 -7.4
8.4 -4.7
9.0 0.2
12.3 4.4
-20.5 -7.8
-30.3 -10.0
-23.9 0.2
1.2 1.4
23.7 4.7
-94.1 -6.2 1.5 2.5 0.4 1.0
-22.4 -4.2 1.5 6.0 0.3 1.9
17.5 -8.8 1.5 4.7 0.3 2.0
13.6 162.6 1.2 5.3 0.3 1.9
7.9 7.2 1.0 4.8 0.3 1.5
549.2 49.8 72.5 0.2
473.1 22.5 49.5 0.4
481.1 25.5 32.6 0.4
394.4 25.0 29.2 0.4
321.6 25.1 28.0 0.5
Solvency Ratios Debt/Equity 2.9 7.6 5.7 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. Current Ratio 0.9 1.1 0.9 Quick ratio 0.8 0.9 0.9
5.3 1.0 0.9
3.9 1.1 1.0

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Initiating Coverage
Rating Matrix
Rating Target Target Period Potential Upside : : : : Strong Buy Rs 72 12 months 24 %
Spicejet Ltd (MODLUF)

Riding high on improving macros
FY12E 19.9 54.9 33.0 33.0
March 26, 2010
Rs 58.0
YoY Growth (%)

Net Sales EBITDA Net Profit EPS FY09 30.5 66.3 159.4 159.0 FY10E 30.3 -117.7 -131.2 -131.2 FY11E 21.8 192.5 131.6 83.1
SpiceJet is Indias second-largest low fare carrier (LFC) with a market share of 12.8% (Q3FY10). The company has grown faster than the sector in April-December 2009 (pax traffic growth of 46.3% YoY vs. 11.5% for the sector) due to the preference of consumers towards low cost travel and higher capacity (average growth of 28.2% YoY). We believe the company will benefit in FY10-12E from the strong revival in domestic pax-traffic and stable crude oil prices. We are initiating coverage on the stock with a STRONG BUY rating with a target price of Rs 72.
Stock Metrics
Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market cap (Rs crore) 52 week H/L Sensex Average volumes SJET:IN SPJT:BO 10.0 12.9 1,397.9 64.4/13.1 17,558.0 3,774,376.5
Strong topline growth in FY10E-12E

We expect SpiceJets topline to grow strongly in FY10E-12E (CAGR of 20.8% to Rs 3,215.8 crore) driven by the preference of consumers towards low cost travel as the economy comes out of the slowdown and higher capacity (fleet size of 24 in FY12E vs. 19 in FY09). Consequently, SpiceJets market share is estimated to increase to 13.9% in FY12E (from 12.8% in Q3FY10). The recent upward revision of the FY10 GDP growth forecast by RBI (7.5% vs. 6% earlier) is likely to boost consumer and business confidence, leading to robust growth of the sectors pax traffic (12.8% CAGR in FY10-12E).
Valuation matrix
Target PE EV/EBITDA EV/Sales Price/BV FY09 -5.2 -4.7 1.2 -4.1 FY10E 16.9 25.1 0.8 -5.4 FY11E 9.2 7.4 0.8 27.3 FY12E 6.9 5.4 0.6 5.5
Margin expansion imminent
Stock Price movement (Stock vs. Nifty)

80 60 40 20 0 Jan-09 May-09 Sep-09 Jan-10 Jul-09 Mar-09
20,000 15,000 10,000 5,000 0 Mar-10 Nov-09
Driven by higher load factor (75.7% in FY10E vs. 66.1% in FY09) and stable crude oil prices (average of US$70.1 per barrel in FY10E vs. US$121 per barrel in H1FY09), we expect SpiceJet to turn profitable in fromFY10E (EBITDA margin of 3.4% vs. -24.8% in FY09) for the first time since 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. it commenced operations. The operational performance improved significantly in 9MFY10 (EBITDA margin of 0.7% vs. -24.8% in FY09). This is likely to contribute to positive PAT margins in FY10E (lower interest expenses of Rs 8.6 crore vs. Rs 16 crore in FY09).
Valuations
At the CMP of Rs 58.0, the stock is trading at 7.4x FY11E EV/EBITDA against its global peers average mean FY11E EV/EBITDA of 8.8x. We believe the stock is currently undervalued considering its improving operational performance on account of the improving macroeconomic outlook. The company has a sound financial position and is also foraying into the profitable international market. As a result, we value the stock at 9.0x FY11E EV/EBITDA (i.e. at a premium to its global players). We are initiating coverage on the stock with target price of Rs 72 and a STRONG BUY rating, offering an upside of 24%.
Exhibit 1: Financial Summary
Rs. Crore Net Sales EBITDA Net Profit EPS (Rs) EV/EBITDA (x) RoCE (%) RoNW(%) FY08 1,295 -252 -132 -5.5 -5.3 -44.2 -124.6 FY09 1,689 -419 -340 -14.1 -3.8 -137.8 169.6 FY10E 2,202 74 105 4.4 20.0 62.6 -27.8 FY11E 2,681 216 244 8.0 7.4 71.0 -198.1 FY12E 3,216 335 324 10.6 5.4 54.7 132.7
Prices - LHS
Sensex - RHS
Analysts name
Rashesh Shah rashes.shah@icicisecurities.com

Company Background
SpiceJet commenced its operation in May 2005 as a budget airline with a strong focus on the domestic market. The company has emerged as the second largest LFC after Indigo, with a market share of 12.8% at the end of Q3FY10. The company operates 19 aircraft, which fly to 18 different cities in India. SpiceJet is planning to add five aircraft by 2012 (24 aircraft) in order to boost its domestic capacity and start international operations. The airline has recently received permission from the government to fly on international routes. Spice Jets revenues witnessed a growth of 30.5% YoY to Rs 1,689 crore in FY09 despite the significant contraction witnessed in the pax traffic (growth of 0.12% in FY09 vs. 57.6% in FY08). The strong growth in topline was primarily due to high fuel prices, leading to high yields during the year. During FY06-08, SpiceJet witnessed robust revenue growth (CAGR of 75.7%) driven by booming pax traffic in the domestic market. SpiceJet is listed on the BSE and is headquartered in Gurgaon, Haryana.
Exhibit 2: Evolution of SpiceJet
2008 WL Ross & Co as new investor and exit of Goldman Sachs from FCCB investment
SpiceJet is planning to add five aircraft by 2012 (24 aircraft) in order to boost its domestic capacity and start international operations. The airline has recently received permission from the government to fly on international routes.
2005 Renamed SpiceJet, started operation in domestic market 1996 Ceased operations after renaming again to ModiLuft Ltd
1984 Incorporated 2006 Raised US$80 as Genius Leasing million through FCCBs to Finance Investment Istithmar and Goldman ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. Company, promoted Sachs 2000 Started by Modi Group operations as Royal companies Airways 1993 Renamed as MG Express, started providing air transportation Source: Company, ICICIdirect.com Research
Exhibit 3: Domestic pax traffic (in lakh) and market share (%)
18 10.1 12 8.2 8.2 10.3 10.5 8.1
13.6 13.6 15.5
12.2 10.5
12.8
13.0
12.8
15
10
9.1
11.7 8.6
11.6
12.0 7.2
10.0
11.9
0 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10
Pax carried (In lakh) - LHS

Market Share (%) - RHS

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Investment Rationale
SpiceJet is the second-largest LFC operating in India with a market share of 12.8% in Q3FY10. We are positive on the growth prospects of the company driven by the following rationale:
Strong macroeconomic growth and stable crude oil prices to improve the domestic pax-traffic
Strong macroeconomic growth (real GDP expected to grow at CAGR of 7.5% during FY10E-12E) to boost domestic pax traffic Low crude oil prices (average of US$78.1 per barrel during FY10E12E vs. US$121 per barrel in H109) will benefit LFCs Rising income levels, with GDP per capita expected to grow at a CAGR of 6% during FY10E-12E to Rs 36,876, will push premium rail travellers towards low-cost air travel The improving operational performance of SpiceJet coupled with rising brand presence will improve the market share (13.9% in Q4FY12E)
Pax traffic growth in India is highly dependent on macroeconomic performance and fuel price movement. A premature withdrawal of the fiscal stimulus by the government and a higher-than-expected rise in fuel prices can impede the growth potential of the company.
Potential upgradation of premium rail pax to boost LFC

Potential upgradation of about one-third of premium rail traveller (primarily AC class travellers) can increase air-pax traffic penetration to 5.3% in FY10E
We believe low cost airlines (SpiceJet, Indigo, Go Air, Paramount and JetLite) will be the primary beneficiaries of the potential upgradation of premium rail travellers due to improving air traffic infrastructure and rising income levels in the country. In our view, the potential shift of about onethird of the premium rail travellers (about 50,000 passengers daily) can increase the air-pax traffic penetration to 5.3% in FY10E (vs. 3.8% in fromFY10E without theon 2011-07-20 10:22:12 EDT. DownloadPDF. 114.143.218.106 potential upgradation).
Exhibit 4: Potential increase in domestic pax traffic
80 60 In Lakh 40 20 0 FY07 FY08 FY09 FY10E FY11E FY12E 8 6 4 2 0
Pax traffic (Normal) - LHS Penetration (Normal %) - RHS
Pax traffic (Pot Upgrad*) - RHS Penetration (Pot upgrd* %) - RHS
Source: Company, ICICIdirect.com Research,* potential upgradation to low cost air travel from premium rail travel
In our forecasts, we have assumed that railways premium travellers (constituting passengers travelling in the higher upper class) will grow at a CAGR of 12.5% during FY09-12E (vs. 12.2% during FY07-09). According to our analysis, the passengers who travel in AC I and AC II (constituting about one-third of the total AC travellers) and pay an average ticket price of Rs 2,350, have a greater chance of choosing low-cost air travel as compared to AC III passengers (The current AC III passengers are expected to upgrade themselves to AC I and AC II with rising income levels).

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Exhibit 5: Railways ticket prices* on Delhi-Mumbai route

Delhi - Mumbai Mumbai Rajdhani Golden Temple Average Ticket Prices Class 1A 3,305 2,586 2,946 Class 2A 1,975 1,532 1,754 Class 3A 1,495 1,120 1,308
Source: Indian Railways, ICICIdirect.com Research, * Air ticket prices for travel on March 19, 2010
Exhibit 6: SpiceJet ticket prices*

From New Delhi New Delhi Average ticket prices
Source: Indian Railways, ICICIDirect.com Research,* Air ticket prices for travel on March 19, 2010
Destination Mumbai Ahmedabad
Avg Ticket Prices 5,474 4,229 4,852
However, any potential upgrade of premium rail traffic is constrained by a significant increase in crude oil prices as fuel expenses account for about 45-50% of the total operating expenses for LFCs. A rising fuel price environment forces LFCs to increase their ticket prices at a higher rate compared to full service carriers (FSCs), leading to reduced gap between the ticket prices of these carriers. Further, a slower-than-expected recovery of economic growth can force premium rail travellers to fall back on the cheaper railway services.
Well positioned to increase market share
SpiceJets market share is expected to increase to 13.9% in Q4FY12E vs. 12.8% in Q3FY10
SpiceJet is the second-largest LFC in India with a market share of 12.8% at the end of Q3FY10 (Indigo is the only pure-play LFC ahead of SpiceJet with a market share of 14.4% in Q3FY10). The growing preference of passenger towards low cost travel, as the economy comes out of the slowdown, was evident from the fact that SpiceJet witnessed a robust pax traffic growth of 46.3% YoY during April-December 2009 (vs. 11.5% for the sector and -0.4% for market leader Jet Airways{JAL}). Growth was driven by: Lower ticket prices for SpiceJet during April-December 2009 (average passenger yields of Rs 2.97 vs. Rs 3.44 for JAL) Decline of 24.1% YoY in fuel expenses during April-December 2009 due to lower crude oil prices (average crude oil prices of US$68.2 per barrel vs. US$100.1 per barrel during April-December 2008) Increased aircraft utilisation as number of flights per day per aircraft increased to 6.4 in H1FY10 from 5.3 in FY09 Capacity, as measured by available seat per kilometre (ASKM), grew at a monthly average of 28.4% YoY during April-December 2009 vs. 26.8% YoY during April-December 20008 Improvement in load factor to an average of 75.8% during 9MFY10 (vs. 63.4% during 9MFY09)
We expect the market share of SpiceJet to grow to 13.9% in Q4FY12E driven by strong pax traffic growth (CAGR of 17.5% during FY10E-12E vs. 12.8% for the sector), improvement in capacity due to increase in fleet

Page 35
size (24 in FY12E vs. 19 in FY09) and stable fuel prices (US$80.3 per barrel in FY11E and US$83.9 per barrel in FY12E).
Exhibit 7: Domestic pax traffic (in lakh)
30 23 15 8 0 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 12 7 12 14 14 15 15 16 16 19 18 19 22 18 20 120 80 40 0 -40
10
Passenger Traffic (LHS)
Growth YoY% (RHS)
SpiceJet leads in aircraft utilisation

High aircraft utilisation rate of 12 hours by SpiceJet translates into one additional flight a day
SpiceJet maintains a high aircraft utilisation rate of 12 hours primarily to spread its fixed costs (such as lease rentals, etc.). This translates into one additional flight a day. As a result, the company is able to lower its cost of operation, which translates into lower ticket prices for customers.
ISIEmergingMarketsPDF in-mapegroup fromLoad factor to improve despite capacity expansion 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.
We estimate that SpiceJets capacity will grow at a CAGR of 15.4% during FY10E-12E driven by the induction of five new aircraft in its fleet (fleet strength of 24 in FY12E vs. 19 in FY09). According to the management, the fleet expansion is primarily aimed at boosting the airlines presence in profitable domestic routes and the commencement of international operations from FY11E.
SpiceJets load factor will improve to 79.8% in FY12E (vs. 66.1% in FY09) despite capacity expansion plans
We expect SpiceJets load factor to improve (79.8% in FY12E vs. 66.1% in FY09) despite the capacity expansion plans of the company. Improvement in load factors will be driven by the revival of domestic pax traffic with a strong preference towards low cost travel; SpiceJet witnessed a robust load factor of 78.9% in Q3FY10 (vs. 65.5% in Q3FY09) despite 28.2% YoY growth in capacity addition. Further, load factor will be supported by the strong capacity rationalisation witnessed in the sector (domestic capacity declined by 2.4% in FY09 vs. growth of 24.4% in FY08). JAL and Kingfisher (with a combined domestic capacity of ~ 46.3% in FY09) have shelved their capacity expansion plans for the next 12-18 months, leading us to believe that supply will be well aligned with the demand situation in our forecast period.

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Exhibit 8: ASKM (in lakh) and load factors (%)

160,000 118,376 120,000 88,860 80,000 40,000 0 FY07 FY08 FY09 FY10E FY11E FY12E 35,320 72,080 60,130 101,259 75 50 25 0 100
ASKM - (LHS)
Load Factor (%) - (RHS)
Yields to remain under pressure despite improvement in outlook

In our view, SpiceJets yields will remain under pressure (Rs 3.2 in FY12E) primarily due to increasing competition in the budget segment. Major FSCs such as JAL and Kingfisher have converted a majority of their capacities into low cost in order to improve their load factors. JAL has started a new service, Jet Airways Konnect (JAK), by converting about 1/3rd of the fleet size (excluding JetLite) into low-cost carriers.
Marginal increase in yields due to increasing period FY10E-12E (average of US$82.1 per barrel) as compared to the ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. competition from FSCs high witnessed in H1FY09 (average of US$121 per barrel). This will keep
Further, we expect crude oil prices to remain lower during our forecast fuel surcharge at a comparatively low level, leading to stable yields for the company. In our view, the low fuel price environment will help SpiceJet to increase its focus on load factors while maintaining low-ticket prices during our forecast period.
Exhibit 9: Pax Yields (Revenue per RPKM)
4 3 2.2 2 1 0 FY07 FY08 FY09 FY10E FY11E FY12E 2.8
3.3
3.0
3.1
3.2
Pax Yields (Rs.)

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EBITDA margin to turn positive from FY11E

SpiceJet witnessed a robust EBITDA margin of 15.9% in Q3FY10 after reporting an average EBITDA margin of -10.4% in H1FY10. The margin improvement in Q3FY10 was driven by:
Strong growth in net sales and lower fuel expenses to improve EBITDA margins
Robust topline growth of 35.9% YoY to Rs 642.1 crore in Q3FY10 Decline in crude oil prices during the last three quarters (average price of US$68 per barrel vs. US$121 per barrel witnessed in H109 Significant improvement in load factors (78.9% in Q3FY10 vs. 65.5% in Q3FY09)
In our view, SpiceJets operating performance will remain strong during our forecast period primarily due to strong topline growth (CAGR of 20.8% during FY10E-12E) and expectation of lower crude oil prices (share of fuel expenses in total operating expenses is expected to decline to 39.4% in FY12E vs. 44.8% in FY09). As a consequence, we expect the EBITDA margin to improve to 8.1% in FY11E and 10.4% in FY12E. Further, the decline in fuel expenses during our forecast period is expected to lower the cost per ASKM of SpiceJet to Rs 2.4 in FY12E (Rs 2.9 in FY09).
Exhibit 10: EBITDA margin (%)
20 10 0 -10
ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. -20 -19.5 -24.8 -25.0 -30
8.1 3.4
10.4
FY07
FY08
FY09
FY10E
FY11E
FY12E
EBITDA Margin (%)

Exhibit 11: Cost per ASKM (Rs) with and without fuel
4 3
Rs.
100 2.6 1.4 2.9 2.4 1.6 1.5 2.4 1.5 2.4 1.5 50 25 0 FY08 FY09 FY10E FY11E FY12E Cost per ASKM BE* load factor (%) Cost per ASKM - w/o Fuel BE* load factor (%) - w/o fuel
%
75
2 1 0
Source: Company, ICICIdirect.com Research,*Breakeven load factor

Page 38
Although we have forecasted lower crude oil prices during FY10E-12E (average prices of US$70.1 per barrel in FY10E, US$80.3 per barrel in FY11E and US$83.9 per barrel in FY12E), a higher-than-expected rise in crude oil prices poses a significant threat to the operation of SpiceJet. LFCs are more vulnerable to a rise in crude oil prices due to higher share of fuel expenses in total operating expenses as compared to FSCs. To capture the impact of rising crude oil on the companys bottomline, we have carried out a sensitivity analysis of the movement in crude oil prices on SpiceJets EPS. We have assumed average jet fuel prices of 50.2 cents per litre (CEP), 59.7 CEP, 63.1 CEP in FY10E, FY11E and FY12E, respectively, based on our crude oil forecasts.
Exhibit 12: Sensitivity of SpiceJets EPS with jet fuel prices
Change in average jet fuel prices (%) FY10E 10 0 -10
Source: EIA, ICICIdirect.com Research
Change in EPS (Rs) FY11E 4.8 8.0 11.2 FY12E 7.2 10.6 14.1
3.5 4.4 5.3
FCCBs conversion to strengthen balance sheet

FCCB worth US$78 million due for redemption in December 2010
SpiceJet has foreign currency convertible bonds (FCCBs) worth US$78 million on its books due for redemption in December 10. Istithmar, a UAE-based investment house, holds FCCBs worth US$12 million while the rest is held by WL Ross & Co, a US-based investment company. SpiceJet has also issued warrants worth Rs 606.1 million (convertible to equity shares at Rs 25 per share) with a conversion date in June 10. According to our analysis, we believe SpiceJet will proceed with full conversion of warrants and about 40% of FCCBs conversion into equity from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. shares to increase its foreign shareholding to 48.4% in FY11E (when these warrants and FCCBs are due for redemption) from 27.5% at present. Foreign shareholding decreased to 27.5% in February 09 after Istithmar sold about 13.4% of its equity stake in SpiceJet to domestic investors in India. In our view, the full conversion of warrants and part-conversion of FCCBs will keep the foreign shareholding within the prescribed limit of 49% as mandated by the government. We estimate that the conversion of FCCBs will help SpiceJet to reduce its debt (Rs 348.7 crore in FY12E from Rs 488.8 crore in FY09). This, in turn, will strengthen its balance sheet (positive net worth of Rs 81.4 crore in FY11E vs. negative net worth of Rs 429.4 crore in FY09).
Exhibit 13: Net worth to turn positive in FY11E
450 300 150 0 -150 -300 -450 -600 406.3 184.6 28.0 82.1 25 20 15 10 5 -429.4 FY07 FY08 FY09 Networth (Rs crore) -328.2 FY10E FY11E FY12E 0 -5
Debt-to-equity (x)

Page 39
Risks and Concerns

Increase in crude oil prices
LFCs, such as SpiceJet, are more vulnerable to rise in crude oil prices than FSCs as fuel expenses account for about 45-50% of the total operating expenses (vs. 30-35% for FSCs). In a rising fuel price environment, LFCs are forced to hike their ticket prices more rapidly than FSCs, thus narrowing the gap between ticket prices of these carriers.
Continuance in macroeconomic slowdown

SpiceJet primarily caters to the demand of typical low-cost travellers who have upgraded themselves from premium railways services and prefer personal or leisure travel. Given the dependence of air traffic on the economic performance, a slowdown in macroeconomic growth will hit the low cost travellers more than business travellers. This can negatively impact SpiceJets pax traffic growth.
Excessive capacity addition may lead to decline in utilisation levels

Our analysis suggests that the present demand situation in the sector is well aligned with the capacity situation and the sector can easily accommodate capacity growth of 7-8% in the next two or three years. However, LFCs such as SpiceJet, Indigo, Go Air and Paramount have strong capacity addition plans as 28 new aircraft are expected to be delivered to these airlines during FY10E-12E. Any slowdown in the demand situation during our forecast period will create an oversupply situation in the sector, leading to a decline in load factors.

Page 40
Financials
Total revenues to grow at a CAGR of 20.8% during FY10E-12E
SpiceJets total revenues witnessed a growth of 27.0% YoY during AprilDecember 09 (vs. 42.1% YoY witnessed during April-December 08) primarily due to the high base effect. The growth was driven by a decline in fuel surcharges (average crude oil prices of US$68.2 per barrel during April-December 2009 vs. US$100.1 per barrel during April-December 2008). Consequently, we estimate that total revenues will grow at 30.3% YoY to Rs 2,202 crore in FY10E. In our view, SpiceJets revenues will grow at a CAGR of 20.8% to Rs 3,215.8 crore during FY10E-12E (higher than 15% growth for market leader JAL) driven by a revival of domestic pax demand and preference towards low cost travel.
Exhibit 14: Net sales estimated to grow at a CAGR of 20.8% during FY10E-12E
3,500 2,800 Rs. crore 2,100 1,400 700 0 FY07 FY08 FY09 Net sales - LHS FY10E FY11E FY12E 643.8 1,295.0 1,689.4 2,681.3 2,202.0 3,215.8 120 100 80 60 40 20 0
SpiceJets revenues to grow at a CAGR of 20.8% to Rs 3,215.8 crore during FY10E-12E (higher than 15% growth for market leader JAL) driven by a revival of domestic pax demand and preference towards low cost travel.
Growth YoY % - RHS
EBITDA to improve significantly during FY10E-12E
We estimate that the EBITDA of the company will improve significantly in FY10E (Rs 74 crore vs. Rs -419.2 crore in FY09) driven by strong growth in net sales and a decline in fuel expenses (11% YoY in FY10E). In our view, strong topline growth and stable crude oil prices expected during FY10E12E will help SpiceJet to manage its expenses better than the past years. As a consequence, we expect positive EBITDA of Rs 216.5 crore during FY11E and Rs 335.4 crore during FY12E. Further, the EBITDA margin of the company is expected to grow to 10.4% in FY12E vs. -24.8% in FY09.
Exhibit 15: EBITDA to improve during FY10E-12E
350 200 Rs. crore 50 -100 -250 -400 -550 FY07 FY08 EBITDA - LHS -25.0 -19.5 -24.8 FY09 FY10E FY11E FY12E -160.8 -252.0 -419.2 3.4 74.0 216.5 8.1 10.4 335.4 15 8 0 -8 -15 -23 -30
EBITDA Margin (%) - RHS

Page 41
Full year profit expected in FY10E

We expect SpiceJet to report a net profit of Rs 101.3 crore in FY10E (after witnessing losses during the past five years). In addition to a strong improvement in the margin, we estimate lower interest payment of Rs 8.6 crore in F10E (vs. Rs 16 crore in FY09) due to repayment of secured loans scheduled during the year. Further, we believe that the company will proceed with the part-conversion of FCCBs (which is due on December 20009) into equity shares, leading to a decrease in interest payment obligations during FY11E-12E. As a result, we expect the net margin to expand to 10.8% in FY12E.
We expect companys net margin to expand to 10.8% in FY12E. Exhibit 16: Net margin to improve during FY10E-12E
400 200 Rs. crore 0 -200 -400 FY07 FY08 FY09 FY10E FY11E FY12E 101.3 -80.1 -133.5 -352.6 243.7 20 10 0 -10 -20
324.2
Net Profit - LHS
Net Margin (%) - RHS
Net worth of the company to turn positive in FY11E.
Net worth to turn positive in FY11E
With increased visibility in operating profit, we expect the net worth of the company to turn positive in FY11E.
Exhibit 17: RoCE expected to improve in FY11E-12E
450 300 150 0 -150 -300 -450 -600 FY07 FY08 -429.4 FY09 Net Worth -328.2 184.6 28.0 82.1 406.3 100 50 0 -50 -100 -150 -200 FY10E ROCE (%) FY11E FY12E

Page 42
Valuations
SpiceJet has emerged as the second-largest LFC in India with a market share of 12.8% in Q3FY10. We believe that SpiceJet will be one of the prime beneficiaries of the preference of passengers towards low cost air travel (as the economy comes out of the slowdown) and potential shift of premium rail passengers towards air travel. As a consequence, we expect SpiceJets pax traffic growth (CAGR of 17.5% during FY10E-12E) to be higher than the sector (12.8%). Further, the lower fuel price expected during our forecast period (US$80.3 per barrel in FY11E and US$83.9 per barrel) will help the company to improve its EBITDA margin to 10.4% in FY12E (vs. -24.8% in FY09). SpiceJets earnings are highly susceptible to the movement of crude oil prices as fuel expenses account for about 45-50% of the total operating expenses. Higher-than-expected crude oil prices can negatively impact the companys operations. We are also concerned about the capacity addition by SpiceJet and other LFCs such as Indigo, Go Air and Paramount that can lead to an overcapacity situation in the sector in case demand growth remains muted. The sudden withdrawal of fiscal stimulus by the government can derail the economic growth momentum, leading to low pax traffic. At the CMP of Rs 58.0, the stock is trading at 7.4x FY11E EV/EBITDA against its global peers average mean FY11E EV/EBITDA of 8.8x. We believe the stock is currently undervalued considering its improving operational performance on account of the improving macroeconomic outlook. The company has a sound financial position and is also foraying into the profitable international market. As a result, we value the company at 9.0x FY11E EV/EBITDA (i.e. at a premium to its global players). We are initiating coverage on the stock with a target price of Rs.72 and a from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF. STRONG BUY rating, offering an upside of 24%.
SpiceJet is valued at 9.6x FY11E EV/EBITDA , at Rs 72 per share.
Exhibit 18: Comparable Analysis

Company EV USD m TTM EV/Revenue FY10E 4.5x 1.3x 1.3x 1.5x 1.4x 1.2x 0.4x 1.2x 1.0x 1.3x 1.5x 1.2x FY11E 3.9x 1.0x 1.1x 1.3x 1.2x 1.2x 0.4x 1.0x 0.9x 1.1x 1.3x 1.0x TTM 60.8x NA NA 68.6x NA 18.4x NA 5.4x 31.5x 31.5x 36.9x 36.9x EV/EBITDA FY10E 22.6x 14.4x 9.9x 11.7x 9.6x 11.5x NA 8.0x 5.9x 10.7x 11.7x 10.1x FY11E 17.5x 6.7x 6.7x 9.8x 8.3x 8.4x 11.7x 5.2x 5.2x 8.3x 8.8x 7.8x TTM NA NA NA NA NA NA NA 15.7x NA 15.7x 15.7x 15.7x EV/EBIT FY10E 106.5x NA 150.3x NA 21.6x 52.0x NA 294.2x 21.0x 79.2x 107.6x 70.3x FY11E 44.2x 17.6x 30.2x 54.6x 21.4x 21.2x 23.2x 16.9x 17.6x 21.4x 27.4x 24.0x TTM 5.3x 2.3x 5.4x NA 1.5x 1.7x NA 1.2x 0.6x 1.7x 2.6x 2.7x P/BV FY10E 4.4x NA 4.2x 1.3x 1.4x 1.4x 1.3x 1.2x 0.6x 1.4x 2.0x 1.8x FY11E 3.9x 15.7x 3.7x 1.3x 1.3x 1.3x 1.5x 1.2x 0.6x 1.3x 3.4x 3.7x
Air China China Eastern Airlines Co. China Southern Airlines Co. EVA Airways Cathay Pacific Korean Air Malaysia Airlines Singapore Airlines Thai Airways International Median Mean Adjusted Mean**
4.6x 1.4x 1.4x 1.3x 1.1x 1.2x 0.4x 0.9x 0.8x 1.2x 1.5x 1.1x

Page 43
Table and Ratios

Profit and loss statement
(Year-end March) Net Sales % Growth Fuel Expenses % of Sales Personal Cost % of Sales Other Operating Exps % of Sales Total Expenditure % Growth Operating Profit % Growth Depreciation EBIT % Growth Interest Non-operation income Profit before Tax % Growth Taxation Net Profit % Growth FY08 1,295 101.1 703 54.3 140 10.8 704 54.4 1,547 FY09 1,689 30.5 945 55.9 155 9.2 1,008 59.7 2,109 FY10E 2,202 27.9 820 37.2 181 8.2 1,127 51.2 2,128 FY11E 2,681 15.4 980 36.5 195 7.3 1,290 48.1 2,465 (Rs Crore) FY12E 3,216 19.9 1,134 35.3 214 6.6 1,532 47.7 2,880
-252 56.8 8 -260 47.6 14 144 -130 71.5 0 -130 71.5
-419 66.3 7 -426 64.1 16 105 -337 159.4 0 -337 159.4
74 -117.7 9 65 -115.2 9 49 105 -131.2 0 105 -131.2
216 192.5 13 203 213.2 13 54 244 131.6 0 244 131.6
335 54.9 13 322 58.5 13 64 374 53.4 50 324 33.0

Page 44
Balance Sheet
(Year-end March) Liabilities Equity Share Capital Preference capital Reserves & Surplus Secured Loans Unsecured Loans Current Liab. & Prov. Others Total Liabilities Assets Gross Block Less: Acc. Depreciation Net Block Capital WIP Net Fixed Assets Loans & Advances Cash Trade Receivables Inventory Investments Total Current Assets Total Assets FY08 241 0 -213 167 365 791 0 1,351 FY09 241 6 -677 33 456 691 0 751 FY10E 241 6 -575 21 456 730 0 878 FY11E 305 0 -223 37 306 751 0 1,176 (Rs Crore) FY12E 305 0 102 43 306 768 0 1,523
86 21 65 499 564 174 600 2 11 0 787 1,351
96 28 68 185 253 154 308 12 23 0 498 751
96 41 55 185 240 214 399 13 12 0 638 878
96 54 42 360 402 271 472 16 15 0 774 1,176
96 67 29 360 389 316 783 19 17 0 1,135 1,523

Page 45
Cash Flow statement

(Year-end March) Profit after Tax Depreciation Other Non Cash expenses Diect Tax Paid Interest Income Others Cash Flow before WC Changes Net Increase in Current Liabilities Net Increase in Current Assets Cash Flow after WC Changes Purchase of Fixed Assets (Inc.)/Dec. in Investment CF from Investing Increase/(Decrease) in Loan Funds Increase/(Decrease) in Net Worth Others Casf Flow from Financing Activities Op. Cash & Cash equivalents Cl. Cash & Cash equivalents FY08 -130 8 0 2 0 130 -254 35 58 -278 171 81 396 99 -26 -14 60 351 600 FY09 -337 7 0 3 0 108 -441 -225 3 -670 304 0 429 -43 -53 -10 -106 600 308 FY10E 105 9 0 0 0 40 74 39 49 63 0 0 49 -12 0 -9 -21 308 399 FY11E 244 13 0 0 0 40 216 21 63 175 0 0 -121 -134 173 -19 19 399 472 (Rs Crore) FY12E 374 13 0 50 0 51 286 17 50 254 0 0 -111 6 0 -13 -7 472 783

Page 46
Ratios
(Year-end March) Per share data (Rs) EPS Cash EPS Book Value Operating Profit Per Share Operating Ratios Operating Margin Net Profit Margin Return Ratios RoNW ROCE Valuation Ratios EV/EBITDA PE EV/Sales Sales to Equity Market Cap to Sales Price to Book Value Turnover Ratios Fixed Asset Turnover Ratio Debtor turnover Creditor turnover Cash to abs. Liab. FY08 -5.4 -5.1 1.2 -10.5 FY09 -14.0 -13.7 -17.8 -17.4 FY10E 4.4 4.7 -13.6 3.1 FY11E 8.0 8.4 2.7 7.1 FY12E 10.6 11.1 13.3 11.0
-19.5 -10.0
-24.8 -20.0
3.4 4.8
8.1 9.1
10.4 10.1
-124.6 -44.2
169.6 -137.8
-27.8 62.6
-198.1 71.0
132.7 54.7
NA -10.5 1.0 46.3 1.1 49.9
NA -4.1 0.9 -3.9 0.8 -3.3
20.0 13.3 0.67 -6.7 0.6 -4.3
7.6 7.3 0.61 32.6 0.5 21.5
4.0 5.5 0.41 7.9 0.4 4.4
159.0 0.5 133.0 0.8
54.6 2.7 236.8 0.4
39.8 2.1 157.4 0.5
54.7 2.2 149.4 0.6
44.1 2.1 170.4 1.0
Solvency Ratios Debt/Equity 19.0 -1.1 -1.5 Current Ratio 1.0 0.7 DownloadPDF. 0.9 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. Quick ratio 1.0 0.7 0.9
4.2 1.0 1.0
0.9 1.5 1.5

Page 47
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I, Rashesh Shah CA BCOM; research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
pankaj.pandey@icicisecurities.com
Disclosures:
ICICI Securities Limited (ICICI Securities) and its in-mapegroup from 114.143.218.106 investment management and brokerageEDT. DownloadPDF. ISIEmergingMarketsPDF affiliates are a full-service, integrated investment banking, on 2011-07-20 10:22:12 and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Rashesh Shah CA BCOM; research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. It is confirmed that Rashesh Shah CA BCOM; research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

Page 48

Airline Sector Initiating Coverage

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Airline Sector Initiating Coverage

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Initiating Coverage

Comparative Returns (%)

Indian Airlines Sector

March 26, 2010

Improved macroeconomic environment to boost pax growth

Stock Price movement

Higher load factors to drive earnings

Key risks Include

JAL - LHS Kingfisher - LHS

SpiceJet - LHS Sensex - RHS

ICICIdirect.com | Equity Research

Indian Airlines Sector

ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.

ICICIdirect.com | Equity Research

Indian Airlines Sector

Indian airlines sector

Beginning of new phase of sector growth in Q3FY10

Domestic Passenger - Lakh (LHS)

YoY Growth % (RHS)

ICICIdirect.com | Equity Research

Indian Airlines Sector

Exhibit 2: Annual domestic pax traffic

Domestic Pax - Lakhs (LHS)

Passenger Load Factor - % (LHS)

Crude oil prices - USD per barrel (RHS)

Source: DGCA, MOPSI, ICICIdirect.com Research

Moderate growth expected for crude oil prices during FY11E-12E

Crude Oil (USD per Barrel)

Jet Fuel (Cent per Litre)

Source: Energy Information Administration(USA)

ICICIdirect.com | Equity Research

Indian Airlines Sector

Low penetration of air travel in India

Domestic Pax (crore) - LHS

Source: Economic Intelligence Unit (EIU),USA, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Indian Airlines Sector

Domestic pax traffic estimated to grow at a CAGR of 12.8% during FY10E-12E

GDP (Ex agri) YoY% (LHS)

Domestic Pax YoY% (LHS)

PAX/GDP Growth Multiple (RHS)

Source: DGCA, MOPSI, ICICIdirect.com Research

Source: DGCA, MOPSI, ICICIdirect.com Research

Rapidly improving infrastructure provides an upside to pax growth

ICICIdirect.com | Equity Research

-30 ISIEmergingMarketsPDF in-mapegroup from 114.143.218.106 on 2011-07-20 10:22:12 EDT. DownloadPDF.

Indian Airlines Sector

Exhibit 8: Airport development plans of AAI

Source: Planning Commission, ICICIdirect.com Research

Budget airlines expected to benefit from demand pickup

Other private players

ICICIdirect.com | Equity Research

Indian Airlines Sector

Benign crude oil prices to boost load factor of LFCs

Exhibit 10: Load Factors (%) LFCs vs.. FSCs

ICICIdirect.com | Equity Research

Indian Airlines Sector

Yields still under pressure

Jet Airways - Domestic

Stretched balance sheet

No funds raised till Q3FY10

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research