November 13, 2007| Aviation

Initiating Coverage Current price Target price

Rs 51 Rs 68
SpiceJet (MODLUF) Potential upside Time Frame
33% 12-15 months
Time frame
Potential 12 months
upside 13%
Time frame 12 months
Jet set go … OUTPERFORMER
Analyst Name
SpiceJet is one of the focussed low-cost carriers (LCC) in India. We believe
the airline is best positioned to breakeven given its low costs and Siddhartha Khemka
improving yields in a changing industry scenario. It plans to ramp up its siddhartha.khemka@icicidirect.com
fleet size, a move that would help it manage costs more effectively. We Ember Pereira
ember.pereira@icicidirect.com
initiate coverage on the company with an OUTPERFORMER rating.

ƒ LCCs transform industry dynamics

Sales & EPS trend
The advent of low-cost carriers (LCCs) has revolutinised Indian aviation. The
2500 4
Centre for Asia Pacific Aviation (CAPA) has predicted the domestic traffic, 3
2000
currently at 35.3 million passengers, would grow at 25%-30% annually until 2
1

Rs crore
1500
2010, taking the overall market to more than 70 million passengers. 0

Rs
1000 -1
-2
ƒ Lowest cost among peers 500
-3
0 -4
SpiceJet follows the pure LCC model. This has helped it achieve the lowest
FY06 FY07 FY08E FY09E
cost in the industry – its per unit cost is 20% lower than peers in the LCC Net Sales EPS (RHS)
segment, and 40% lower than players in the full-service carrier (FSC)
segment. We believe this would help it achieve breakeven ahead of others in
Stock metrics
an improving yield scenario.
Promoters holding 12.91%
Market Cap Rs 1,227 crore
ƒ Fleet expansion to help achieve breakeven
52 Week H/L 68 / 36
We expect the company to post profits at the net level by FY09E as an
Sensex 18,908
optimal fleet size is achieved, and fixed costs are absorbed over a higher
Average volume 494,811
capacity (ASKM). It has unveiled a phased capacity expansion plan which
will see the addition of 15 aircrafts by FY10E, and another 8 in FY11-12E,
taking its total fleet size to 34 aircrafts. Comparative return metrics
Stock return 3M 6M 12M
Valuations SpiceJet -11% 15% 20%
Globally, LCCs trade at a premium over FSCs because of the sustainability of Deccan Airlines 8% 33% 38%
their business model, and greater reach among masses. SpiceJet is Jet Airways 13% 14% 33%
currently in a growth phase and yet to achieve an optimal size. We believe
the company is set for a turnaround given the growth in the Indian aviation
sector and its cost leadership. We value the stock at 4.5x it FY09E
EV/EBIDTAR with a 12-15 months price target of Rs 68, an upside potential
of 33%.

Exhibit 1: Key Financials Price trend

Year to March 31 FY06 FY07* FY08E FY09E 120
Net Sales (Rs crore) 419.62 640.44 1340.09 2140.34 Absolute Sell
100
Net Profit (Rs crore) -47.29 -67.38 -5.94 69.78
Share Price (Rs)

EPS (Rs) -2.57 -2.80 -0.25 2.90 80 Target Price

P/E (x) -19.88 -18.22 -206.66 17.59 60
Price/Book (x) -73.64 6.65 6.87 4.94
40
EV/EBIDTAR (x) 116.30 -47.75 7.53 3.10 Absolute Buy
EV/EBIDTA (x) -38.53 -23.25 195.66 12.38 20
NPM (%) -11.27 -10.52 -0.44 3.26 0
RoNW (%) 370.41 -36.50 -3.32 28.09
Apr-05

Jun-05
Aug-05

Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06

Feb-07
Apr-07

Jun-07
Aug-07
Oct-07

RoCE (%) -10.25 -10.07 -0.38 14.09

Source ICICIdirect Research, *FY07 10 months year, FY06 ending 30-June ICICIdirect | Equity Research
1|Page
Company Background Shareholding pattern
Shareholder % holding
SpiceJet is the second largest low-cost airline in India. Promoters 12.91
The company was originally promoted by the SK Modi Institutional investors 28.44
Group under the name ModiLuft. It was acquired by
Other investors 42.34
Royal Holding Services (Kansagra family) in 2000 and re-
started operations in May 2005. SpiceJet flies a single General public 16.31
aircraft type fleet (Boeing 737), which allows for greater
efficiency in maintenance, and supports its low-cost Promoter & Institutional holding trend
structure. Currently, it has a fleet of 14 Boeing 737-800 28.4
30
aircrafts in single-class configuration with 189 seats. It 25.7
24.4 24.3
25
flies to 15 destinations, and plans to include two more
20 16.9
by next month.
15 12.9 12.9 12.9

The airline’s new fleet of aircraft is backed by cutting- 10

edge technology, and infrastructure. It has maintenance 5
support from KLM and state-of-the-art technology from 0
world leaders like Star Navigation, Russel Adams and Q3FY07 Q4FY07 Q1FY08 Q1FY08
Tech Log. SpiceJet has a partnership with Navitaire, the
Promoters (%) Institutional investors (%)
world’s renowned low-cost support system for
reservations and revenue management for providing e-
booking and e-ticketing services.

Exhibit 2: Global LCC model (Common size statement)

Southwest RyanAir EasyJet SpiceJet
Year ending 31-Dec-06 31-Mar-07 30-Sep-06 31-Mar-07 31-Mar-08 31-Mar-09
Passenger revenue 96.30 83.81 91.89 94.57 94.34 93.90
Ancillary revenue 3.70 16.19 8.11 5.43 5.66 6.10
Revenue 100.00 100.00 100.00 100.00 100.00 100.00

Staff costs 33.59 10.13 18.78 13.35 8.73 8.49

Fuel & Oil 23.53 31.00 23.44 54.56 47.38 45.56
Airport & handling charges 5.45 21.14 23.94 9.39 8.25 7.26
Maintenance, materials & repairs 5.15 1.88 6.76 10.49 8.72 7.81
Marketing, distribution & other costs 14.59 5.75 9.89 16.49 14.96 13.07
Total Cost 82.31 69.89 82.81 104.28 88.04 82.19
EBITDAR 17.69 30.11 17.19 -4.28 11.96 17.81
Aircraft rentals 1.74 2.60 8.23 21.35 17.97 15.26
EBITDA 15.95 27.50 8.96 -25.62 -6.01 2.55
Depreciation 5.67 6.42 1.69 0.91 0.61 0.55
Interest expense 1.41 3.70 1.49 0.67 0.32 0.14
PBT & Other Income 8.87 17.38 5.79 -27.20 -6.94 1.86
Other Income -0.18 2.78 2.19 16.31 6.47 1.91
PBT 8.69 20.16 7.98 -10.89 -0.47 3.77
Tax 3.20 0.69 2.17 0.16 0.09 0.50
PAT 5.49 19.47 5.81 -11.05 -0.56 3.26
Source: Respective company filling, ICICIdirect Research

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INDUSTRY OVERVIEW

Boom in Indian travel industry

India is one of the fastest growing tourism destinations in the world. The
World Travel & Tourism Council has estimated that India's tourism economy
will emerge as the world’s 3rd fastest growing over 2007-16, growing at over
8% per annum in real terms. Robust economic growth, higher disposable
incomes, and growth in tourism & business travel, are the major demand
drivers.

LCCs transform industry dynamics

The advent of low-cost carriers (LCCs) has revolutionized the Indian aviation
industry. Corporate travellers have historically formed the majority of the
domestic air travel market in India. However, the emergence of LCCs has
resulted in middle-income people and self-employed shifting from premium
class travel in trains to air travel.

The number of domestic air passengers grew at a healthy 38.5% with 35.3
million passengers flying in FY07 against 25.5 million in FY06. The Centre for
Asia Pacific Aviation (CAPA) has predicted that the domestic traffic would
grow at 25%-30% annually until 2010, taking the overall market to more than
70 million passengers. Aircraft manufacturer Boeing has raised its 20-year
market forecast for Indian commercial aircraft purchases to $86 billion from
$72 billion last year.

Exhibit 3: Domestic air passengers increasing (in millions)

80
70
60
50
40
30
20 CAPA has predicted domestic
10 passenger traffic would grow at
25%-30% annually until 2010
0
FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08E

FY09E

FY10E

Source: CMIE, CAPA, ICICIdirect Research

Domestic passenger traffic, which increased at a CAGR of 4% over FY97-04,

has moved into high growth trajectory with a 30% CAGR during FY04-07. We
expect a 26% CAGR in demand for domestic air travel over the next 5 years.

3|Page
LCCs – best positioned to capture the growth

LCCs operate on a distinct low-cost model, without any frills or additional

services, which allows them to charge low fares compared to a full-service
carrier (FSC). Besides the veritable ‘no-frill’ cost benefit, LCCs also use other
cost efficient techniques like single passenger class, standardised fleet and
direct ticketing (selling directly to customers via Internet and/or call center).

Exhibit 4: LCC v/s FCS

Features LCC FSC Advantage
SpiceJet Jet airways
Mix of turboprops, narrow-body
Standardised Maintenance, training
& wide-body aircraft (ATRs,
Fleet type fleet and service is simpler
B737-400/700/800/900, A330,
(B737-800s) and cheaper
B777)

B737-800 (dual)
Number of seats 189 economic
28 seats in business class & Higher yield per aircraft
per aircraft class
126 seats in economy class
LCCs are set to benefit from
Turnaround time 20-25 minutes 30-45 minutes High aircraft utilization, the high growth in the Indian
higher revenues per aviation sector
Flying hours
12 hrs per day 10.7 hrs per day aircraft, High yields
per day

Flights per day Fixed cost distributed

8 flights 6.5 flights
per aircraft over more flights

Avg. employees Lean structure – lower

146 176
per aircraft personnel cost

Lower cost ($2 as

Ticket form 100% e-tickets Paper and e-ticket (74%) compared to $8 for
paper ticket)

Focus on direct
Distribution Primary use of agents for ticket
distribution Lower commission cost
model distribution
avoiding agents

Source: Company, Jet Airways filings, ICICIdirect Research

A LCC is able to contain costs in areas that are under the control of the airline.
Things like fuel ciost, airport handling & navigation, and maintenance charges
are beyond the control of an airline. The ability of LCCs to offer tickets at lower
prices has made them popular in India, where consumers are very price
sensitive.

4|Page
Consolidation to result in increase in fares and yields
Recently there has been a consolidation in the domestic aviation sector. From
a fragmented sector with more than 10 players, today there are 3 major
players, and a couple of other smaller players in the LCC space. These three
together have a combined market share of around 80%.

Exhibit 5: Competitive scenario

Market share
(%) Fleet size
Jet + JetLite 29.4 86 (66 + 14) The top three players together
Kingfisher + Deccan 28.9 75 (31 + 44) have a combined market share
Air India + Indian 19.8 132 (77 + 55) of around 80%
Indigo 8.4 12
SpiceJet 8.3 13
Others 5.2 14
Source: Market share – DGCA, fleet – Industry, ICICIdirect Research

We believe consolidation would help the industry, which was hitherto plagued
by low yields and excess capacity. These large groups have already initiated a
route–rationalisation exercise, which will help in pulling out excess capacity
from sectors that are susceptible to heavy discounting. Consolidation has also
triggered rationalisation of fleet expansion plans. We expect average yields in
the industry would go up by around 5%-10% over the next few quarters,
which will help pure LCCs like SpiceJet to achieve early breakeven.

Infrastructure development to aid growth

The key challenge to sustain growth is infrastructure. The government has
taken a number of measures to boost airport infrastructure for the country.
India allows 100% foreign direct investment (FDI) in green-field airport
projects. It has opted for a Public-Private partnership (PPP) model, and has
already started for restructuring and modernization of the airports at Delhi and
Mumbai, and for setting up green-field airports at Bangalore and Hyderabad.
Further, a modernisation plan for 35 non-metro airports has also been
unveiled.

The anticipated investment in airport development during the 11th Five Year
Plan (2007-11) is over Rs 40,000 crore.

Exhibit 6: Airport development program

Indicative cost
Particulars Airport (Rs crore) Government plans to invest Rs
Restructuring/ Modernisation for Delhi, Mumbai 15,000 40,000 crore during the 11th
world class airports Chennai, Kolkatta 5,000 five-year plan to improve airport
Bangalore, Hyderabad, Goa, Pune, infrastructure in India
Greenfield airports Navi Mumbai, Nagpur (Hub) & 10,000
Greater Noida
Upgradation 25 selected airports 7,000
Modernisation / Improvement 55 airports 3,000
Source: Committee on Infrastructure, Govt. of India

We feel that these initiatives would structurally benefit the industry in the long-
term though medium term concerns regarding infrastructure would persists.

5|Page
INVESTMENT RATIONALE

Focused player in the LCC segment

SpiceJet re-commenced operations in May 2005. It follows a pure LCC model –
single aircraft type, point-to-point service, and quick turnaround time for
higher asset utilisation – which has been successful globally. It has positioned
itself as a niche player focusing on profitability rather than chasing market
share. Low-cost airlines like Southwest Airlines (based in Dallas, Texas, US),
RyanAir (Europe's largest LCC, headquartered in Dublin, Ireland) and EasyJet
(based in London) have shown sustained profitability over the years.

Exhibit 7: Profitable LCCs

Southwest RyanAir EasyJet LCCs like Southwest Airlines,
Year ending 31-Dec-06 31-Mar-07 30-Sep-06 RyanAir & EasyJet have shown
RoE 7.6 15.8 10.1 sustained profitability
Load factor 73.1 82.0 84.8
EBITDAR Margin 17.7 30.1 17.2
Net Margins 5.5 19.5 5.8
Source: Respective company filling, ICICIdirect Research

ƒ Focus on profitable routes

SpiceJet operates most of its flights between profitable metro routes to
optimise its load and yield (average revenue per passenger). It currently
operates from 16 destinations with more than 700 flights a week. 56% of these
flights originate from Delhi, Mumbai, Hyderabad and Bangalore. During FY07,
Delhi and Mumbai accounted for around 40% of the total domestic air traffic in
the country.

Exhibit 8: SpiceJet’s top destinations

Number of flights 56% of its flights originate from
Airport per week Delhi, Mumbai, Hyderabad and
Delhi 136 Bangalore
Mumbai 98
Hyderabad 83
Bangalore 77
Ahmedabad 57
Chennai 56
Source: Company, ICICIdirect Research

6|Page
ƒ Rationalised operations
SpiceJet focuses on a few destinations, and maximises frequencies between
them. This helps the company amortise the fixed costs of setting up bases at
airports over a larger number of seats. At present, the airline operates from16
airports, and plans to increase the number to 18 by the end of FY08E, and
further to 22 by FY09E.

Exhibit 9: Number of destinations to increase

25
22

20 18

14
15
11
10
6
5

0
FY05

FY06

FY07

FY08E

FY09E

Source: Company, ICICIdirect Research

ƒ Phased capacity expansion

SpiceJet has unveiled a phased capacity expansion plan to meet its growth
objectives. It started operations with a fleet of 3 aircrafts, which it has now
increased to 14. It plans to add another 12 by FY10E, which will take the total
to 26. During the time when the domestic market was mired by over capacity
and fierce competition, SpiceJet was able to increase its market share, while
maintaining its load factor. With an average age of 2 years, its fleet is also
among the youngest in the country.

Exhibit 10: Planned fleet expansion

40
34
35
30 SpiceJet plans to expand its
30 26 fleet significantly
25 23

20 17
15 11
10 6
5 3

0
FY05

FY06

FY07

FY08E

FY09E

FY10E

FY11E

FY12E

Source: Company, ICICIdirect Research

7|Page
Pure LCC model -- helps achieve lowest cost per unit
SpiceJet follows the pure LCC model used globally. This has helped it in
achieving the lowest cost in the industry.

Its per unit cost is 20% lower than other LCC competitors, and 40% lower than
players in the FSC segment. Going ahead, we expect the cost per unit to
reduce further on account of fleet expansion, which would absorb the high
fixed cost over a larger base.

Exhibit 11: Cost comparison with domestic peers

SpiceJet Deccan Jet Airways
Year ending 31-Mar-07 30-Jun-07 31-Mar-07
Revenues (Rs crore) 640.44 1774.55 7057.78
Total Operating Expenses (Rs crore) 667.85 2049.11 6434.67 Cost leadership gives it an edge
ASKM (crore) 310.97 757.80 1759.80 over peers

Revenue per ASKM (Rs) 2.06 2.34 4.01

Operating Cost* / ASKM (Rs) 2.15 2.70 3.66
Operating Cost* / ASKM (ex fuel) (Rs) 1.02 1.41 2.28
Source: Respective company filling, ICICIdirect Research (* excludes lease rentals)

Exhibit 12: Global peer cost comparison

Southwest RyanAir EasyJet SpiceJet
Year ending 31-Dec-06 31-Mar-07 30-Sep-06 31-Mar-07
Revenue per ASKM (Rs) 2.69 2.5 3.76 2.06
Operating Cost*/ASKM (Rs) 2.21 1.75 3.11 2.15
Operating Cost*/ASKM
1.58 0.97 2.21 1.02
(ex fuel) (Rs)
Source: Respective company filling, ICICIdirect Research (* excludes lease rentals)

SpiceJet’s model
SpiceJet’s strategy is to provide safe, reliable travel at low cost from point-to-
point by maximising the efficiency of all resources, keeping processes simple,
and without incurring expenditure on components which do not support the
basic function of travel.

ƒ Single aircraft type

The airline has a single aircraft type fleet, the Boeing 737-800, which allows for
greater efficiency in maintenance, and supports its low-cost structure. The
airline has a fleet of 14 new-generation Boeing 737-800 aircrafts with advanced
technology and added features like blended winglets.

The 737-800 is the most technologically advanced airplane in the single-aisle

market. With a new wing and more powerful engines, the 737 can fly higher,
faster and farther than previous models. The advanced-technology ‘Blended
Winglets’ allows the airline to save on fuel, extend range, carry more pay-load
and reduce engine maintenance costs.

A standardised aircraft fleet helps the airline reduce costs incurred on

maintenance, spares inventory, pilots training, engineering, and supervisory
activities. The 737-800s can spend more hours flying, as the new jets do not
need to spend much time in maintenance.

8|Page
 ƒ High seat density
SpiceJet’s aircraft are configured in a single economy class having 189 seats,
which is among the highest in the industry. This is possible as the airline
focuses on maximum space utilisation for generating more revenue per
aircraft. SpiceJet accommodates 21% more seats than a dual (business and
economy) configuration. With costs like fuel, lease, maintenance remaining
same per aircraft, its per-seat costs comes down by around 20%.

Exhibit 13: General seat configuration among airlines in India

Number of seats
Airline Aircraft type Class Business Economy Total
Jet Airways B737-800 Dual 28 126 154
Single 175 175
Kingfisher A320 Dual 20 114 134
Single 174 174
Indian A320 Dual 20 125 145 Highest seating capacity among
Deccan A320 Single 180 180 any domestic carrier
Indigo A320 Single 180 180
Go Air A320 Single 180 180
SpiceJet B737-800 Single 189 189
Source: Respective company’s website, ICICIdirect Research

ƒ Direct distribution of tickets

The airline sells its tickets via the Internet or call centre route. This helps it by-
pass travel agents who work on commissions, and expensive GDS (global
distribution system) employed by FSC for ticket reservations. The mechanism
also helps in reducing working capital requirements as the company receives
the money in advance prior to travel. There are no receivables, and also
controls bad debts. Overall it helps the company cut its distribution costs by
10% of the revenues.

ƒ High aircraft utilisation

A carrier aiming for the lowest possible cost of operation has to develop a
schedule that would give a high annual utilisation of each aircraft in its fleet.
Such a policy will lower cost as the fixed costs of the aircraft ownership or
lease rentals can be spread over higher quantity of output (ASKM).

Exhibit 14: Highest aircraft utilisation (hours)

14
12.0 11.6 11.3
12 10.7
9.8 9.7
10
8
6
4
2
0
Airways

RyanAir
SpiceJet

EasyJet

Southwest

Deccan
Jet

Source: Respective company filling, ICICIdirect Research

9|Page
SpiceJet has been consistently reporting high aircraft utilisation (around 12
hours a day), in line with international benchmarks. This is possible because of
its high on-time performance (82% within 15 minutes) and a low turnaround
time of 20-25 minutes as compared to 40-45 minutes takes by FSC. No loading
of meals or complex cargo and faster check-in system helps in reducing turn
around time. Overall it reduces fixed cost absorption by 15-20%.

Consolidation to result in stabilisation of yields

The Indian aviation industry has undergone through a major consolidation with
the market leader Jet Airways acquiring Sahara Airlines, Kingfisher taking a
stake in Deccan Airlines, and the government-owned Air India and Indian
Airlines merging. Post consolidation, these three together have a combined
market share of around 80%.

Earlier, airlines used to sell huge inventory of tickets at low or near zero prices
(Re 1/- to Rs 9/- base fare per ticket) to attract traffic and gain market share. Average yields set to improve
With consolidation, the large players have shifted their focus on profitability from Rs 2,430 per passenger in
from market share. As a result, the yields per ticket have been improving and FY08E to Rs 2,700in FY09E
the practice of heavy discounting has declined. SpiceJet, which has the lowest
cost in the industry, will be the first beneficiary, when the yields start
improving.

We expect the yield (average revenue per passenger) for SpiceJet to stabilise
at the current levels of Rs 2,430 for this financial year, and improve to around
Rs 2,700 in FY09E. This will bring in the break-even at EBIDITA levels.

Exhibit 15: Sensitivity to yields

Yields fall by Yields rise by
Base Estimate
10% 10%
FY08E Yield assumption Rs 2185 Rs 2429 Rs 2670
EBITDAR (Rs crore) 40.1 160.3 266.4
EBITDAR margin (%) 3.4 12.0 18.0
PAT (Rs crore) (127.9) (7.5) 98.8
EV / EBIDTAR 38.7 8.9 4.9
FY09E Yield assumption Rs 2430 Rs 2700 Rs 2970
EBITDAR (Rs crore) 195.0 381.1 567.2
EBITDAR margin (%) 10.1 17.8 24.1
PAT (Rs crore) (96.1) 69.8 235.7
EV / EBIDTAR 7.6 3.4 2.0
Source: ICICIdirect Research

10 | P a g e
Load factor to be maintained above industry average
Ever since its launch, SpiceJet has maintained the highest load factor in the
industry. In FY06, the company achieved a PLF (passenger load factor) of 86%,
which declined to 78% in FY07. Heavy discounting by airlines led to this
decline, even as SpiceJet continued to sell fewer tickets at very low prices.
Addition of new fleet by the company and increase in the overall industry
capacity also laid pressure on load factor. Going forward, we expect the
company to maintain PLF in the range of 74%-75% relatively higher than
industry levels of 65%.

Exhibit 16: Sensitivity to passenger load factor (PLF)

PLF fall by 400 PLF rise by 400
bps Base Estimate bps
FY08E PLF assumption 70% 74% 78%
EBITDAR (Rs cr) 93.9 160.3 216.5
EBITDAR margin (%) 7.4 12.0 15.4
PAT (Rs cr) (60.4) (7.5) 48.8
EV / EBIDTAR 15.9 8.9 6.3
FY09E PLF assumption 72% 76% 80%
EBITDAR (Rs cr) 283.2 381.1 479.0
EBITDAR margin (%) 13.9 17.8 21.3
PAT (Rs cr) (17.5) 69.8 157.0
EV / EBIDTAR 4.9 3.4 2.5
Source: ICICIdirect Research

Crude price hike offset by fuel surcharge

Airline companies in India have adopted the internationally-tested method of
passing on the cost of rising fuel prices to customers through fuel surcharge.
SpiceJet has also been pro-actively increasing its surcharge in line with the
industry to pass on the effect. This not only helped the company in avoiding a
direct hit on its bottom-line, but also in improving the overall yields. Going
forward, we expect the airline companies to continue with this surcharge and
increase it in line with any rise in their fuel costs.

Exhibit 17: ATF prices and corresponding fuel surcharge

50000 1600

1400
45000
1200
Cost of rising ATF prices,
40000 passed on to the customers by
1000 way of fuel surcharge
RS / ticket
Rs / KL

35000 800

600
30000
400
25000
200

20000 0
Mar-05

Mar-06

Mar-07
Jan-05

May-05
Jul-05
Sep-05

Nov-05
Jan-06

May-06
Jul-06

Sep-06
Nov-06

Jan-07

May-07
Jul-07

Sep-07
Nov-07

Fuel surcharge (RHS) Delhi Mumbai Chennai Kolkata

Source: IOC (Prices at 4 Metros including Sales Tax for domestic airlines), Company, ICICIdirect Research

11 | P a g e
Aviation Turbine Fuel (ATF) forms a major part of the overall cost for airlines in
India. It accounts for 40%-50% of total operating costs, the highest in the
world. ATF prices in India are 60% higher than international prices. The major
component of the ATF prices is taxes (see Exhibit 18), which account for 53%
of the base price.

ATF prices in India are based on the "International Import Parity Prices", and
directly linked to the benchmark of Platt's publication of FOB Arabian Gulf ATF
prices (AG); and do not relate to the actual cost of producing ATF in India.

ATF prices for domestic operations also include freight charges from the Gulf
to India, customs duty of 10% ad-valorem (which adds up to an effective rate
of approx 20% inclusive of the CVD and cess), domestic transportation and
other charges, excise duty of 8.24% (including cess), sales tax (levied by state
governments) averaging across the country at 25% as add-ons to the AG
prices, besides the oil companies' marketing margin, and throughput charges
paid to the Airports Authority.

Exhibit 18: Break-up of fuel costs

Rs / litre % to base price
Base price 25.00
Custom duty (incl of CVD & cess) 5.00 20
Excise duty 2.00 8
Sales tax and surcharge 6.25 25 Rationalisation of taxes on ATF
can bring huge saving in cost
Total taxes 13.25 53
for airlines
Marketing Margin 5.50 22
Throughput, transportation & other
charges 2.50 10
Retail price 46.25
Source: ICICIdirect Research

ƒ Sensitivity analysis
In our estimates, we have assumed ATF prices would increase to Rs 45 per
litre in FY09E from Rs 44 per litre (as on Nov 1, 2007). Any further rise in the
fuel prices will have a negative impact on our estimates.

Exhibit 19: Sensitivity ATF prices

ATF price fall ATF price rise
by 10% Base Estimate by 10%
FY08E ATF price assumption Rs 37.5 Rs 41.7 Rs 46
EBITDAR (Rs crore) 227.4 160.3 98.7
EBITDAR margin (%) 16.9 12.0 7.4
PAT (Rs crore) 59.5 (7.5) (69.2)
EV / EBIDTAR 5.9 8.9 15.1
FY09E ATF price assumption Rs 40.5 Rs 45 Rs 49.5
EBITDAR (Rs crore) 478.6 381.1 283.6
EBITDAR margin (%) 22.4 17.8 13.3
PAT (Rs crore) 156.6 69.8 (17.0)
EV / EBIDTAR 2.6 3.4 4.9
Source: ICICIdirect Research

12 | P a g e
Fleet expansion, funding on track
SpiceJet has unveiled a phased capacity expansion over FY08-FY12. From a
fleet of 11 aircrafts at the end of FY07, it plans to add 15 by FY10E, and another
8 in FY11-12E, which will take its total fleet size to 34.

The company has already secured financing arrangement for the next phase of
its expansion. In December 2005, it raised US$ 80 million through an FCCB
(foreign currency convertible bonds) issue, proceeds of which are being
utilised for the Pre-Delivery Payments (PDP) of first ten aircrafts. The
subscribers to the bond issue include Goldman Sach, and Istithmar, the private
equity arm of Government of Dubai.

The company also has a sale and lease back arrangement with Babcock &
Brown Aircraft Management and Nomura Babcock & Brown, for all 16 aircrafts
to be purchased during 2007-09. The deal is valued at over US$ 1.1 billion
based on the manufacturer’s list prices.

Further, in January 2007, the company raised US$ 67 million (Rs 297 crore)
through preferential equity allotment to strategic investors like the Tata Group,
Istithmar, KBC Financial Products (UK) and BNP Paribas.

Exhibit 20: Equity funding

Investor US$ million
Tata 18
Istithmar 31
BNP Paribas 15
KBC UK 3
Total 67
Source: Company, ICICIdirect Research

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RISK AND CONCERNS

Rising ATF prices

Rising global crude prices result in higher ATF prices. This would impose a
threat to the profitability of airlines. Over the last year, ATF prices have
increased by 20%. ATF being the largest single cost element (accounting for
over 40% of the total operating cost), any significant rise in its price, will
impact the company’s bottom-line significantly. Also, the high tax structure on
ATF need to be rationalised so as to make Indian carriers globally competitive.

Inadequate infrastructure to have a negative impact

The aviation industry is currently facing huge infrastructure constraints. Over
40% of the passenger traffic is concentrated in the two main airports of Delhi
and Mumbai. Both the airports have inadequate capacities to handle aircraft
and passenger movement. This along with limited terminal capacity, increased
congestion, outdated infrastructure, inadequate ground handling systems and
poor passenger amenities have a great impact on the operations of airlines.
Further, for a total fleet size of 310 aircrafts in the country, there are only
around 250 parking bays. Though the government has initiated plans for
infrastructural developments, any delay in infrastructure development would
aggravate the problem.

Availability of skilled personnel

Rapid growth in the industry has led to a sustained shortage of pilots and other
trained personnel in the industry. This is aggravated by the high gestation
period (more than 3 years) required for acquiring a commercial pilot’s license.
The training period for a cabin crew ranges from 6 months to one year. This
shortage is driving the cost of high-skilled staff. Also, the limited availability of
the required ground & maintenance staff could adversely affect growth plans
of the company.

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FINANCIALS

Exhibit 21: Key assumptions

FY07 FY08E FY09E
Average fleet 8.1 13.5 19.3
Average stage length (km) 900 888 915
Block hours (hrs) 12 12 12
ASKM (crore-km) 311 624 896
Passenger Load Factor (%) 78 74 76
Average Yield (Rs) 2328 2429 2700
Fuel cost (Rs/ litre) 37.4 41.7 45.0
Passenger carried (million) 2.3 5.2 7.4
Revenue /ASKM (Rs) 2.06 2.15 2.39
Cost/ASKM ex fuel cost (Rs) 1.46 1.26 1.24
Cost /ASKM (Rs) 2.59 2.28 2.33
Rupee Dollar exchange rate (Rs) 44 39 38
Source: ICICIdirect Research

Revenues set to surge

SpiceJet’s revenue are likely to increase at a CAGR of 83% from Rs 640 crore
in FY07 to Rs 2,140 crore in FY09E on the back of capacity addition, high load
factor and higher yields. In light of the increasing capacity in the industry and
increase in SpiceJet’s own fleet, we expect the average load factor to remain
at a low of 74% in FY08E, and then stabilise at 76% in FY09E.

Exhibit 22: 83% CAGR in revenues over FY07-09E

2500 Revenues to increase at a

robust CAGR of 83% over FY07-
2000 FY09E

1500
Rs crore

1000

500

0
FY06 FY07 FY08E FY09E

Source: Company, ICICIdirect Research

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Break-even to be achieved by FY09E
We expect the company to post profits at the net level by FY09E, as the
optimal fleet size is achieved and fixed cost being absorbed over a higher
capacity (ASKM). From a net loss of Rs 70.7 crore in FY07, it is likely to
turnaround and post a net profit of Rs 69.8 core in FY09E. Net margins are
expected to improve to 3.3% in FY09E from a negative margin of 11% in FY07.

Exhibit 23: Net profit/loss and NPM

80 6

60 4
2
40
0
20
Rs crore

-2
0

(%)
-4
FY06 FY07 FY08E FY09E
-20
-6
-40
-8
-60 -10
-80 -12

Net Profit NPM (%) (RHS)

Source: Company, ICICIdirect Research

EBITDAR, EBITDA margins to improve

SpiceJet posted a loss of Rs 27.4 crore at the EBITDAR level in FY07, which is
expected to improve to a profit of Rs 160.3 crore in FY08E and Rs 381.1 crore
in FY09E. EBIDTAR margins are likely to improve from a negative of 4.3% in
FY07 to a positive of 17.8% by FY09E, on back of higher yields, cost
efficiencies and rationalization of operations. EBITDA margins will improve
from negative of 25.6% in FY07 to 2.6% in FY09E.

Exhibit 24: Increase in EBITDAR, EBIDTA margins

20
15
10
5
0
-5
(%)

-10
-15
-20
-25
-30
FY06 FY07 FY08E FY09E

EBIDTAR margins (%) EBIDTA margins (%)

Source: Company, ICICIdirect Research

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VALUATIONS

At the current price of Rs 51, the stock is trading at a market cap-to-sales ratio
of 0.9x FY08E sales and 0.6x FY09E sales. On an EV/EBIDTAR (earnings before
interest, depreciation, tax, amortisation & aircraft rentals) basis, the stock is
available at 8.9x FY08E earnings and 3.4x FY09E earnings.

Globally, LCCs trade at a premium over FSCs as evidenced by higher

LCCs trade at a premium over
EV/EBITDA and price/earnings multiples (Exhibit 20). Considering the fact that
FSCs because of the
SpiceJet is currently in a growth phase, and is yet to achieve an optimal size,
sustainability of their business
the stock trades at a discount to a FSC like Jet Airways, which is currently model, and greater reach
trading at an EV/EBIDTAR of 12x its FY07 earnings. We believe the company is among masses.
set for a turnaround given the growth in the Indian aviation sector and its cost
leadership.

We value the stock at 4.5x it FY09E EV/EBIDTAR (a discount of 40% over Jet’s
FY09E EV/ EBIDTAR of 7.5x). We rate it an OUTPERFORMER with a 12-15
months price target of Rs 68, an upside potential of 33%.

Exhibit 25: Peer comparison (Estimates for FY09E)

Market Cap Revenue PAT EV / EV /
Company Price (Rs cr) (Rs cr) (Rs cr) EPS P/E EBITDAR EBITDA ROE ROCE
SpiceJet 51 1227 2140 70 2.9 17.6 3.4 13.8 28.3 13.8
Deccan 147 1441 3867 -108 -10.7 - 2.5 -162.1 - -
Jet Airways 825 7122 13843 275 28.3 22.7 7.5 8.9 15.6 7.9
Source: Consensus Estimates, ICICIdirect Research

Exhibit 26: Global valuation matrix (US$million) (latest financial year)

Airline Mkt Cap Sales PAT OPM P/E RoE EV/EBITDA
Full service carriers
Singapore Airlines 13503 9262 1360 9.6 9.0 14.9 6.7
British Airways 11021 16062 549 7.5 13.1 14.2 5.1
Low-cost carriers
Southwest 12624 9086 499 10.3 21.6 7.6 7.1
RyanAir 12141 2869 559 21.1 20.7 19.2 12.3
EasyJet 3779 2914 169 6.3 21.0 10.2 14.7
SpiceJet 196 142 -15 -19.1 - - -
Source: Bloomberg, ICICIdirect Research

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FINANCIAL SUMMARY

Profit and Loss Account (Rs crore)

Year to March 31 FY06 FY07* FY08E FY09E
83% CAGR in revenues over
Net Sales 419.62 640.44 1340.09 2140.34
FY07-09E
% Growth 52.62 109.24 59.72
Total Expenditure (ex lease rentals) 408.47 667.85 1179.76 1759.23
EBITDAR 11.16 -27.40 160.33 381.11
Operating profit -66.01 -164.11 -80.50 54.47
Other Income 32.33 107.84 86.67 40.81
EBIDTA -33.68 -56.27 6.17 95.28
EBIDTA margin (%) -8.03 -8.79 0.46 4.45
Depreciation 8.16 5.85 8.23 11.79
EBIT -41.83 -62.12 -2.06 83.49
Interest 4.16 4.27 2.71 3.05
PBT -46.00 -66.38 -4.77 80.44
Taxation 1.29 0.99 1.17 10.67
Breakeven to be achieved at net
PAT -47.29 -67.38 -5.94 69.78
level by FY09E
% Change YoY 77.7 42.5 -91.2 -1275.0
Shares O/S (crore) 18.43 24.07 24.07 24.07
EPS (Rs) -2.57 -2.80 -0.25 2.90
(Note: FY06 year ending June-06, *FY07 - 10 months year ending 31-Mar-07)

Balance Sheet (Rs crore)

Year to March 31 FY06 FY07 FY08E FY09E
Sources of Funds
Equity Share Capital 184.34 240.65 240.65 240.65
Reserves & Surplus -197.11 -56.07 -62.01 7.77
Secured Loans 359.64 357.18 312.00 304.00
Unsecured Loans 61.09 74.97 45.33 40.33
Current Liabilities & Provisions 163.79 687.15 492.90 170.16
Total Liability 571.75 1303.88 1028.87 762.90
Application of Funds
Net Block 49.06 48.38 80.15 88.36
Capital WIP 362.89 694.35 291.00 0.00
Investments 0.00 81.22 56.22 36.22
Cash 63.43 351.05 376.62 392.03
Trade Receivables 7.12 13.50 23.86 32.25
Loans & Advances 79.88 115.38 201.01 214.03
Miscellaneous Expenditure 9.37 0.00 0.00 0.00
Total Asset 571.75 1303.88 1028.87 762.91

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Cash Flow Statement (Rs crore)
Year to March 31 FY06 FY07 FY08E FY09E
Opening Cash Balance 28.97 63.43 351.05 376.62
Profit after Tax -41.42 -70.74 -5.94 69.78
Misc Expenditure w/off 14.08 -12.74 0.00 0.00
Dividend Paid 0.00 0.00 0.00 0.00
Depreciation 8.16 5.85 8.23 11.79
Provision for deffered tax 0.00 0.00 0.00 0.00
Cash Flow before WC Changes -19.19 -77.64 2.29 81.57
Net Increase in Current Liabilities 70.85 523.36 -194.25 -322.74
Net Increase in Current Assets 16.00 41.89 96.00 21.41
Cash Flow after WC Changes 35.66 403.84 -287.95 -262.59
Purchase of Fixed Assets (366.73) (336.63) 363.35 271.00
(Increase) / Decrease in Investment 0.00 (81.22) 25.00 20.00
Increase / (Decrease) in Loan Funds 306.60 11.43 -74.82 -13.00
Increase / (Decrease) in Equity Capital 58.93 290.20 0.00 0.00
Net Change in Cash 34.46 287.61 25.57 15.41
Closing Cash Balance 63.43 351.05 376.62 392.03

Ratio Analysis
Year to March 31 FY06 FY07 FY08E FY09E
EPS (Rs) -2.57 -2.80 -0.25 2.90
Book Value (Rs) -0.69 7.67 7.42 10.32
Enterprise Value (Rs. Crore) 1297.45 1308.43 1208.03 1179.62
EV/Sales (x) 3.09 2.04 0.90 0.55
EV/EDITDAR (x) 116.30 -47.75 7.53 3.10 The stock is available at
EV/EBIDTA (x) -38.53 -23.25 195.66 12.38 attractive valuations.
Market Cap to sales (x) 2.24 1.92 0.92 0.57
Price to Book Value (x) -73.64 6.65 6.87 4.94
Operating Margin (%) -8.03 -8.79 0.46 4.45
Net Profit Margin (%) -11.27 -10.52 -0.44 3.26
RONW (%) 370.41 -36.50 -3.32 28.09
ROCE (%) -10.25 -10.07 -0.38 14.09
Debt/ Equity (x) -32.96 2.34 2.00 1.39
Current Ratio 0.92 0.82 1.33 3.96
Debtors Turnover Ratio 58.94 47.44 56.15 66.36
Fixed Assets Turnover Ratio 8.55 13.24 16.72 24.22

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ANNEXURE

Glossary

Term Description
Aircraft utilisation Represents the average number of block hours operated per day per
aircraft for the total aircraft fleet
ATF Aviation turbine fuel
Available Seat Represents the aircraft seating capacity multiplied by the number of
Kilometres (ASKM) kilometres the seats are flown
Average stage length Represents the average number of kilometres flown per flight
Block hours Refers to the elapsed time between an aircraft leaving an airport gate
and arriving at an airport gate
Cost per ASKM Represents total cost less cargo revenue net of commissions, excess
baggage, other income and non-operating revenue including interest
income, divided by the ASKMs
EBITDA Earnings before interest, taxation, depreciation and amortization
excluding Non-operating Revenues and excluding any adjustments to
profit
EBITDAR Earnings before interest, taxation, depreciation, amortisation and
aircraft rentals (fixed), excluding Non-operating Revenues and
excluding any adjustments to profit
Seat Factor Revenue passenger kilometres expressed as a percentage of available
seat kilometres.
Revenue passengers Represents the total number of fare paying passengers flown on all
flight segments (excludes passengers redeeming their frequent flyer
miles).
Revenue Passenger Represents the number of kilometres flown by revenue passengers
Kilometres (RPKM)
Revenue per ASKM Net Passenger Revenue divided by ASKMs.
Yield Average revenue earned per passenger

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RATING RATIONALE
ICICIdirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its
stocks according to their notional target price vs current market price and then categorises them as
Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and
the notional target price is defined as the analysts' valuation for a stock.

Outperformer: 20% or more;

Performer: Between 10% and 20%;
Hold: +10% return;
Underperformer: -10% or more.

Harendra Kumar Head - Research & Advisory harendra.kumar@icicidirect.com

ICICIdirect Research Desk,

ICICI Securities Limited,
2nd Floor, Stanrose House,
Appasaheb Marathe Marg,
Prabhadevi, Mumbai – 400 025

research@icicidirect.com

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