Aviation stocks at new high on cut in turbine fuel prices

Shares of the three listed aviation companies zoomed on Friday with gains of 10-14 per cent intraday after oil marketing companies slashed aviation turbine fuel prices by 10 per cent, the fourth consecutive monthly cut. While shares of Jet Airways and SpiceJet touched fresh 52-week highs, newly-listed InterGlobe Aviation hit a new high.

With the latest cut in prices, ATF rates are now at the lowest in the last five-and-a-half years. The cost of fuel (ATF) constitutes around 32 per cent of total costs at aviation companies. With Goldman Sachs seeing crude prices falling further to $20 in 2016, from around $37 now, the rally in aviation stocks seems sustainable.

Also, the general improvement in economic activity and companies passing on the benefits of lower costs to passengers will help grow the topline of these companies. According to the latest data available on the Directorate General of Civil Aviation website, during January-November 2015 domestic airlines ferried 7.33 crore passengers as against 6.09 crore in the corresponding period of the previous year; this is a growth of 20.41 per cent.

November saw a month-on-month growth of close to 25 per cent, the highest since July.

As a result, the passenger load factor of scheduled domestic airlines except SpiceJet and Air Costa improved in November compared to October. Kotak Institutional Equities expects demand in India’s domestic air travel space to expand during FY2015-18E. It estimates a growth of 19 per cent compound annual growth rate (CAGR) on account of the narrowing gap between rail and air fares and expected pick-up in economic activity.

It recently initiated a ‘buy’ rating on InterGlobe Aviation with a target price of ₹1,420, which implies a limited upside of 6 per cent in the short term.

“IndiGo will be the prime beneficiary of this trend given 1) its dominant position in the space; and 2) lack of capacity with its peers. Strong PAT CAGR of 41 per cent in FY2015-18E should enable high FCF generation and dividend payout and attract premium valuations for the company,” Kotak said.

After a subdued debut, shares of the company have already soared 75 per cent from its issue price of ₹756. This is also partly because share prices of Jet Airways and SpiceJet already got re-rated and leaped 81 per cent and 356 per cent respectively, in the last one year.