Investors with a high-risk appetite can consider buying shares of low-cost airline SpiceJet.

The turbulence in the Indian aviation sector over the past year has taken a heavy toll on all listed airline stocks. Despite recent gains, the SpiceJet stock at its current price of Rs 30 is down more than 60 per cent since the beginning of 2011.

The sector is not out of the woods yet, faced with continuing pressure due to high fuel costs and a weak rupee. Also, demand growth has slowed compared to earlier years.

Yet, SpiceJet seems well placed to tide over the difficult times. It has a healthier balance sheet with much less leverage compared to its listed peers. Regular equity support from the promoter (around Rs 130 crore in October 2011 and Rs 100 crore in April) provides added comfort on the capital front.

While the airline made losses in the December 2011 quarter (Rs 39 crore), it has reduced losses. SpiceJet is also spreading its reach to Tier-II and Tier-III cities using its new smaller Q400 aircraft which enjoy concessions on fuel tax and other charges.

This strategy, while it may have caused load factors to dip in the past few months, should benefit SpiceJet in the long run, through expansion in high-potential markets.

Budget boost

Importantly, SpiceJet may benefit in a big way from the various measures announced for the sector in the recent Budget. The airline has obtained permission to directly import aviation turbine fuel. Though this involves logistical challenges, SpiceJet could potentially save a tidy sum on taxes, if and when it is able to put in place necessary arrangements.

Also, SpiceJet, thanks to its relatively healthier balance-sheet strength, could be better-placed than peers to use the external commercial borrowing (ECB) route. It could borrow up to $300 million (around Rs 1,500 crore) in relatively cheaper ECBs to refinance high-cost domestic debt.

Finally, the proposal for allowing foreign airlines to invest up to 49 per cent in Indian airline companies may be approved by the Government in the next few months.

Again, SpiceJet is better positioned to attract foreign airline investment, when the proposal comes through. This could be a good trigger for the stock.

Rising market share

The gradual decline of Kingfisher Airlines has benefitted other airline operators, with both yields and market share improving over the last quarter. This, and the expanding network of SpiceJet have seen its market share in the domestic skies increase from 13.8 per cent in September 2011 to 17.1 per cent in March 2012.

Yet, considering that the sector may continue posting losses for some more quarters before it turns the corner, an investment in SpiceJet at this juncture will be suited only for a patient investor.

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