Value investors always look for an opportunity. One of the sector which look glamorous from outside but most of the times, fail to deliver any good returns is Aviation sector. Aviation is very capital intensive business therefore only a few players are able to drive this market. Few of the listed Indian aviation companies are SpiceJet, Aviation InterGlobe, Jet Airways.
In last 2 years, airline sector has caught investors attention because of following reasons
- High aviation passenger growth in developing countries.
- Growing traffic shows growing income.
- Still underpenetrated market.
Today I want to share a turn around story of SpiceJet which happened in late 2014.
Most of us will be aware that SpiceJet was near to close in late 2014. The airline failed to pay its dues on multiple accounts and caused a disrupt in its daily operations which finally lead to cancellation of its numerous flights. link
In Dec 2014, Ajay Singh, the founder of SpiceJet came to its rescue and purchased 58 % stake from Maran and his investment arm Kal Airways. During the acquisition, of Spicejet Singh also took the company debt of 1400 Rs Cr.
Within a year of management change, SpiceJet came out with shining colours. Its occupancy rate improved up to 93%. and in fact was higher among all its peers. Link.
After the Singh takeover on SpiceJet, Ajay completely turned the side of the company. He made the loss-making company into a profitable one. But that did not end, as the company was having huge debt on books so it needed to clear that off. and since Singh acquisition, SpiceJet has been continuously posted profitable results.
One noteworthy take is since the Singh acquisition, SpiceJet share has soared to 150 from 20 levels which translates to more than 800% returns to its faithful investors. Till date, SpiceJet is the best performing airline stock. Recently legendary investor Warren Buffet also took airline sector seriously and invested in the sector in early 2017. This also triggered various brokerage firms to add views on the aviation sector.
But airline sector is susceptible a huge number of wide changes like
- Fluctuating fuel oil expenses.
- Low occupancy rates on fewer routes.
- Wafer thin profit margins.
- A lot of government regulated norms
- The competitive pricing structure of tickets.
Due to all the lot of external dependence on fares of the airline, SpiceJet is increasing margin from its merchandise business. It has started selling tickets well in advance to increase its working capital.
Recently SpiceJet has also ordered new aircraft which are more fuel efficient and will help in decreasing running cost. Currently, SpiceJet trades at 140-150 levels and it is all set to expand its fleet in coming years.
Links:
- SpiceJet orders 40 Boeing 737 MAX 10s, worth $4.74 billion
- In Jun 2017, SpiceJet started its first phase of UDAN (Ude Desh ka Aam Naagrik) scheme.
- SpiceJet is all in news due to the recent spike in its share price and thus grabbed a lot of investors attention.
- With undaunting management, SpiceJet is all set to touch the sky.