Jet Airways: Sustaining Above 550-600 Can Fly Up To 800-1050

Q3FY16 result surprised the street aided by lower fuel costs & higher ASKM

CMP: 570

Buy either above 550-585 or in dips around 515-505;

TGT1: 615-650-685*-730-770-800 (1-6M)

TGT2: 925-1000-1040*-1100 (12-24M)

TSL< 490

Note: Consecutive closing below 490 zone, Jet may crash towards 470*-448 & 425-400 area in the alternative bear case scenario.

Q3FY16 PAT of Jet was reported at around Rs.468 cr against street estimates of around Rs.334 cr (YOY-63.11 and QOQ-87.59 including exceptional item); i.e a jump of nearly 640% and 435% on YOY & QOQ basis !!

Q3FY16 total revenue was at around Rs.5444 cr against Rs.5051 cr, increased by 7.7% (YOY) and by 3.5% QOQ (Rs.5258 cr).

Q3 reported EPS was at 41.11 against consensus of 29.45 (YOY-5.56; QOQ-7.71).

Interestingly, in all the last five quarters, there was an exceptional item and total accumulated loss in Jet since FY:11-15 was around Rs.7193 cr.

If Jet posted comparable PAT as in Q3FY16 in the forthcoming quarters, and with some expected growth, the company may wipe out all the previous accumulated losses as indicated above by FY-19.

QOQ	Q2FY15	Q3FY15	Q4FY15	Q1FY16	Q2FY16	Q3FY16
Exceptional Item	305.01	69.78	-1172.39	127.95	-45.56	??
PAT	69.82	63.11	-1728.99	221.7	87.59	467
YOY	FY-11	FY-12	FY-13	FY-14	FY-15	FY-16 (EXP)	Accumulated Loss(FY-16)
NET P/L(PAT)	9.69	-1236.1	-485.5	-3667.85	-1813.71	1292	-5901.47
ACCUMULATED LOSS	-7193.47
(UP TO FY-15)

As par published P/L statement for Jet, there was no mention of any exceptional item for Q3FY16 and it will be interesting to see, if any such exceptional item helped for sudden jump in Q3 PAT !!

Q3FY16 EBITDA was at around Rs.693 cr against Rs.229 cr (YOY) with margin stood around 12.7% Vs 4.5%.

Q3FY16 other operating income (leasing of aircraft & engine) was at around Rs.420 cr against Rs.370 cr (YOY) and Rs.402 cr (QOQ).

Q3FY16 total expenses was at around Rs.4947 cr against Rs.5014 cr (YOY). Notably. Jet's fuel expenses dropped by almost 27% to Rs.1235 cr against Rs.1701 cr (YOY) and 8% QOQ (Rs.1337 cr).

Clearly, Q3 result of Jet was supported by lower fuel (ATF) cost, higher traffic and increased aircraft utilization. Thus the growth in ASKM (available seat per KM) helped Jet quite a lot in improving its operating and financial performance in Q3. As par the management, in-depth focus on cost reduction initiatives has resulted in around 5% & 15% lower cost in non-fuel and total ASKM.

Notably, OCT-Dec quarter (Q3) is traditionally strong/peak season for airlines because of increased travel during festivals and year-end holidays. Passenger revenue grew by 4.8% (YOY) for Jet in Q3.

In 2014-15, price of Brent crude oil fall by over 80%. In India, fuel costs count for almost 50% of expenses of domestic airlines and a 4% movement of fuel costs affects around 2% operating margin of the airlines on either side.

However, crude is near its multiyear low around $27 and the short term range may be around $25-36, considering various techno funda parameters; i.e. crude may stabilize around $30 in the near term. Only by late 2016-17, we may see some re-balancing in demand/supply dynamics and in that scenario, crude may hover around $45-50.

For domestic airlines, thus incremental benefit of lower fuel costs may be at its peak and we may not see the Q3 like jumps (YOY-640% & QOQ-435%) in earnings for domestic airlines including Jet in the months ahead. Also, benefit of lower ATF prices may be passed on to the consumers to a great extent by other domestic airlines to grab the market share; i.e. we may see incrementally higher competition among the airlines in India, which may affect operating margin in the days ahead. 

As India is highly under penetrated in air travel compared to its peers, there will be huge scope for growth in the months ahead, considering the expected overall economic recovery, GDP growth, higher income aspirations of the young demography, implementation of 7-PC etc. But, higher regulatory charges, predatory ticket pricing for airline industry in India may be some of the headwinds.

ATF prices in India is now at multi year low (35-41/- par lt) and much below petrol price (around 60/- par lt), thanks to the Govt for not increasing any ED on ATF for developing infra purpose !! This is a huge boost for domestic airlines and over the years, a significant proportion of AC travelers for Indian Railways has converted to low cost domestic airlines as there is not so much cost difference, if one compare with the time & service quality in IR.

Jet has to also ensure stability of its higher management in the months ahead and part form that some common risks for domestic airlines may be :

1. Sharp spike in crude prices

2. Global recession probability, which may lower air traffic to a significant proportion

3. Depreciation of INR and cross-currency headwinds

4. Any geo-political risks in middle east, including oil prices melt down to below $25-20

As par BG metrics and current market parameters:

(Based on TTM & FWD EPS)

Projected median valuation of Jet : 955-1025-1100 (FY:16-18/FWD)

(if the current Q3 earnings growth momentum is maintained)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
JETAIRWAYS	-83.87	-387.83	15	#NUM!	#NUM!	#NUM!	473.51	600.88

JETAIRWAYS

113.55

-325.25

15

898.06

1011.66

954.86

473.51

600.88

JETAIRWAYS

130.75

-290.75

15

963.68

1085.58

1024.63

473.51

600.88

JETAIRWAYS

150.55

-245.25

15

1034.07

1164.88

1099.47

473.51

600.88

Technically, Jet may in the 5-th Wave of monthly EW cycle and the projected target of the same may be around 585-635, if the support zone of 515-505 holds.

Analytical Charts: