SpiceJet: investors see silver lining amidst mounting losses
Declining crude oil prices, which account for a large chunk of the total, may offer some respite
The 13% jump in SpiceJet Ltd’s shares on Monday hinted that the company’s June quarter results must have been impressive. But it was hardly the case. Higher fuel costs continued to wreak havoc on the company’s financial performance. Jet fuel expenses as a percentage of revenue increased to 45.7% in the June quarter from 43.4% in the same period last year. Increase in aircraft lease rentals and other expenses added to the woes.
The outcome: SpiceJet reported an operating loss of about ₹ 60 crore for the June quarter against a profit of ₹ 90.6 crore in the same period last year. At the post-tax level, the loss stood at ₹ 124 crore after taking into account sharp increase in finance costs and higher depreciation costs. SpiceJet had posted a net profit in June quarter last year. Since the June quarter is considered a relatively strong period for aviation, the results are all the more disappointing.
Then why did the shares jump? It seems things didn’t turn out to be as bad as feared. Besides, investors seem pleased with certain aspects of the airline company’s results. For one, it made an operating profit of ₹ 9 crore after adjusting for restructuring and certain one-off costs, the company claimed. Besides, revenue remained more or less the same at ₹ 1,691 crore despite a reduction in capacity. The airline also said it delivered the highest-ever revenue per available seat kilometre for May and June.
While all that is encouraging, it’s another matter whether it will help sustain investor interest for long. “Sure, the company has performed well on some measures; however, it needs to focus more on international routes (currently less than ~10% of the total fleet), which tend to be relatively more profitable and discontinue the loss-making domestic routes amid challenging domestic environment due to more competition and high elasticity in demand," says Rashesh Shah, analyst at ICICI Securities Ltd. Until that kind of route rationalization happens, it is a challenging road ahead, added Shah.
SpiceJet’s stock has declined from its high of about ₹ 21 seen in May. News regarding engineering checks by the sector regulator, heavy discounts on fares and weak financial health have made investors cautious and rightly so.
The company’s balance sheet is indeed worrisome. On 31 March, the airline had a negative net worth of ₹ 1,020 crore and its debt was to the tune of about ₹ 1,500 crore. One silver lining is that crude oil prices have declined, which makes a big difference because fuel costs account for a large chunk of total costs.
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