SpiceJet ‘networth a negative Rs 630 cr’, airline in urgent need of funds

FP : Sindhu Bhattacharya Nov 21, 2013

New Delhi: Mounting losses and an unstable cost environment could make further funding of SpiceJet’s operations difficult. The airline seems to have improved its domestic performance in October over peers, leaving Air India behind to claim the second slot in market share and yields will surely have improved too over the second quarter because of price hikes announced in September by all domestic airlines. But one or two months of better performance alone may not be enough for SpiceJet to survive — it needs funding and needs them urgently.

Rashesh Shah and Darpan Thakkar of ICICI Securities have said in a note to clients earlier this week that the airline’s networth is negative Rs 603 crore as on September 30th and its loan liability is over Rs 1,700 crore.

“Given the negative net worth of Rs 603 crore and loan liability of over Rs 1700 crore, funding the operations, going forward, would remain a very challenging task for the company…..Any strategic tie-ups with foreign carriers remain a key positive trigger while currency weakness and rise in competition from other carriers also pose a threat to our recommendations.”

Rashesh Shah and Darpan Thakkar of ICICI Securities have said in a note to clients earlier this week that the airline’s networth is negative Rs 603 crore as on September 30th and its loan liability is over Rs 1,700 crore.

SpiceJet posted its highest ever quarterly loss in September at Rs 559 crore due to escalating costs, currency weakness and passenger slowdown. It has in the past been engaged in talks with several potential investors, including foreign airlines, but no funding has materialised from these efforts so far.

Promoters have been infusing funds into SpiceJet regularly but the Marans have already infused equity and hiked promoter stake in the airline by 5% this fiscal so the equity route for bringing in more funds till March 2014 is now closed.

Vikram Suryavanshi of Antique Stockbroking said in a note last week that he now expects the airline to post a loss of Rs 530 crore this fiscal against earlier estimate of Rs 99.1 crore profit since its profitability is highly sensitive to fuel costs.

Can SpiceJet take another year of losses? Aircraft fuel expenses were 11% higher for SpiceJet year on year in the September quarter and fuel cost as a percentage of sales increased to 57% in the quarter from 53% in the same quarter last year despite higher revenue from its international business.

To put things in perspective, not just SpiceJet but every other Indian airline except IndiGo saw erosion of profitability last quarter as fuel costs remained unpredictably high and airlines’ pricing power remained limited in the face of mounting competitive pressures. In fact, auditors to three publicly listed Indian airlines have raised red-flags on their ‘going concern’ status after the September quarter ended.

Vijay Mallya‘s Kingfisher Airlines, Naresh Goyal’s Jet Airways and Kalanithi Maran’s SpiceJet – auditors of each have raised concerns in their latest quarterly review reports. A ‘going concern’ is a situation where a company has sufficient resources to continue to operate indefinitely and to avoid any potential bankruptcy risks.
Kingfisher is non-operational, Jet has just yesterday completed sale of 24% equity stake to Etihad Airways which means a large amount of cash inflow is expected into the airline which in turn will help cut long term debt and help improve profitability. The only airline of the three where concerns over future funding and indeed viability remain is SpiecJet.

The only way forward for SpiceJet is to expand international operations so that aircraft utilisation is improved and continue efforts to get fresh funds