Jet Airways (India) Ltd.

Qualitative Coverage – Buy

Rating –
Sector: Aviation CMP:INR 821.1 Nifty: 5543.50 Sensex: 18409.35 Date: August 23, 2010

Risk Return Matrix Overview

Jet Airways India Ltd is India’s largest domestic airline
operating on both domestic and international routes. In
Risk

domestic segment, the company has a market share of

26.9% and offer services under three banners viz. Jet
Airways, JetKonnect and JetLite, erstwhile Air Sahara and
Return has a combined fleet strength of 113 aircraft and operates
over 500 flights daily to about 66 destinations including 23
Stock Data international destinations across US, Europe and Asia. Jet
also extends its offerings through code sharing relationships
Market Cap : INR 70,333.1 mn with carriers such as Qantas, Gulf Air, Etihad Airways,
American Airline, Brussels Airlines, etc.. We recommend a
52 week range : INR 831.3/INR 221.8
Buy on the stock.
Bloomberg : JETIN@IN
Investment Rationale
Reuters : JET.BO
1. Improved Domestic and International
BSE : 532617 macroeconomic: Jet stands to benefit hugely from the
NSE : JETAIRWAYS sharp upturn in domestic business sentiments because
of being the largest player in the segment. Improved
Avg Daily Vol. (1 year NSE) : 1,013,593
global macroeconomic environment helped company
No. of Shares : 86.33 mn score even better load factors and margins in its
international business segment. The company achieved
Shareholding Pattern (as on June 30,2010) an overall seat factor of 79.7% in Q1 FY11 up from
73.4% in Q1 FY10. Given the huge international network
and alliances, Jet is the best placed Indian airlines to
benefit from the growing global attention towards India
DII Others
9% 4% 2. Increasing Business Travel: Bulk of the demand for air
FII
6%
travel comes from the corporate and business travelers.
Further shifts in business travel demand mirrors the
economic trends. India with its high GDP growth rate
and stable economy is expected to witness strong
Promoter demand for air travel from the corporate. Already, with
80%
almost all blue-chip companies having detailed travel
policies, travel costs have emerged as the third largest
Promoter FII DII Others expenses for them, after salaries and raw materials.
Relative Performance
3. Low penetration of air travel in India: Indian Aviation
Industry is still in a very nascent stage and offers a huge
potential. With a peak annual average of less than 3.75
trips per 100 people India’s aviation at best has just
scratched its surface. India’s air passenger per capita
are at .09 is still abysmally low as compared to .30 in
China, 5.63 in Australia and 4.69 in US . The huge
untapped market size, the booming economy, rising
disposable income, huge & fast growing middle class –
almost the size of US and increasing business
opportunities in small towns, all would provide a further
fillip to the demand for air services.
4. Increasing international tourist Activity: Tourism
accounts only for 2.5% of India’s GDP, versus 6% in
Asia Pacific and 5.3% in China. However this ratio is fast
changing with India emerging amongst the fast growing
tourism destinations in the world. According to the World
Financial Performance Travel & Tourism Council, Indian tourism industry will
grow at over 8% per annum in real terms over 2007-16.
(INR Crs)
5. Limited Capacity Addition: While the demand is
FY10 FY09 FY08 FY07 growing over 25%, cautious outlook, both from the
Sales
Industry & the lenders has limited capacity addition to
10,438.57 11,571.15 8,852.15 7,005.13 mere 5%-7%, a trend expected to continue for a few
EBITDA more years. New capacity addition is coming primarily
1,487.33 252.26 857.88 705.54
Adj PAT from LCC players which means FSC might see little
-538.5 -1,747.90 -641.39 -1
capacity addition from reconversion of existing LCC to
EPS(INR) FSC and hence stand to benefit much faster ramp up in
- - - 2.22
load factor than LCC
Jet Airways
Jet Airways MonthwisePassenger Volume Investment Rationale

6. Strong entry barriers: The industry is also facing a

severe infrastructural bottleneck, especially for a few
critical airports, a concern voiced by the Civil Aviation
Minister Praful Patel himself clearly stating that we
have almost come to a stage where no more flights in
and out of Mumbai can be allowed.
7. Hedged Revenue & Cost Structure: The cost
structure of airlines has strong positive correlation to
US$. Aircraft lease, maintenance and crude form over
two thirds of the total expenditure and are directly
linked to US$. Companies like Jet, which have around
60% of revenue coming from international
appreciation is naturally hedged far better than most
other airlines against volatile currency movements
8. Improving Demographic - Rising income levels,
favorable demographic shift and rising middle class to
increase demand
9. Low market value of free float stock – With only
three listed airlines in the sector, the total free float
available is less than 4,000 Cr or not even a billion
Market Share US$
10. Higher load factors to drive earnings – Limited
capacity addition and strong growth in demand airline
GoAir Paramount load factor are reaching all time high. For June 2010,
5.6% 0.3% Jet Airways had a load factor of 79.7 in Q1 FY11 up
SpiceJet Jet Airways &
13.2% JetLite from 73.4% in Q1 FY10. Given high operational
26.6%
leverage of the business, any increase in load factor
has huge positive impact on the bottomline
IndiGo 11. Most nimble FSC in India – Jet Airways was quick to
16.9%
Air India Kingfisher understand the market sentiments and change its
Airlines
17.3%
20.0%
business model to meet the business need of the
sector. Not surprisingly, the company not only
managed to survive downturn but also was only
Jet Airways & JetLite Kingfisher Airlines Air India
operationally profitable FSC as per FY2010 results.
IndiGo SpiceJet GoAir
12. Operational Excellence – Jet Airways grew at 36%
Paramount against industry average of 23%. It won its third
consecutive Customer and Brand Loyalty Award in
FY10 and also emerged victorious in the ‘Award for
excellence in operations – Airline’ category of the Bird
Express TravelWorld Awards during same period
13. Strengthening Balance Sheet – Jet Airways not only
managed to stay cash positive but also reduced it
debt by over INR 2400 Cr during FY10

Key Concerns

1. Load Factor: Given high operating leverage, decrease

in load factor due excessive capacity addition or
reduction in demand has higher impact on bottomline
2. Yields: As cost structure of the company is fixed, any
reduction in yield because of aforementioned reasons
would directly hit the bottomline
3. Crude prices: LFCs have higher proportion of fuel costs
in total operating costs. Their expenses on crude form ~
35% of the total expenditure. Any increase in crude
without proportionate increase in revenue would impact
bottom-line of the company
Jet Airways
Key Concerns

4.Global Macro: Given the fact that bulk of Jet Airways

revenue comes from its international business, it has far
higher dependence on global growth than its domestic
focused peers. External shocks in the global economy can
have both direct impact on the international revenues and an
indirect impact by derailing domestic GDP growth
momentum, which may, in turn, decelerate domestic
passenger traffic growth
5.Competition: Rise in competition can lead to reduction in
yield, load factor or shortage of manpower adversely
impacting company’s bottomline
Recommendation

Given strong pick up in demand, high market share of

the company, strong track record, sound company
fundamentals and inexpensive valuations, Jet Airways is
one of the best airline stocks to invest in. The company
scores a 4 (out of 5) on our star matrix and has been
assigned the low risk-high return rating.
We recommend a Buy on the stock.
 Ó»¬¸±¼±´±¹§

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