SpiceJet, IndiGo stocks have run up too fast, too soon: Analysts

19/04/2019

new delhi: The gradual descent of Jet Airways’ operations over the past few months has proved to be a boon for the other players who are not only looking to capture the temporarily out of service airlines’ market-share, but also benefit from the soaring ticket prices.
The markets have been quick to respond to the development. SpiceJet and Interglobe Aviation (IndiGo’s parent company) have outperformed the benchmark index thus far in calendar year 2019 (CY19) with a gain of nearly 36 per cent and 49 per cent respectively, as compared to 9 per cent up move in the S&P BSE Sensex, ACE Equity data show. Jet Airways, on the other hand, lost 13 per cent during this period.
“Aviation is an oligopolistic industry where small number of firms compete. Barriers to entry are significant. Jet’s (temporary) closure will benefit SpiceJet and Indigo over the medium-to-long term and that is what the markets also expect,” says G Chokkalingam, founder and managing director, Equinomics Research.
But, have the stocks run up too fast, too soon? Analysts do think so and suggest investors now book partial profit.
“In the short-term, SpiceJet has added too many aircraft. Air Asia and Vistara are also in the line to grab this available opportunity to improve their market share. Vistara has started to cut prices and be more competitive. In true sense, Jet Airways competed with Vistara and not SpiceJet and IndiGo, which are low-cost carriers.
Also, crude oil prices are nearing $71 a barrel, which is not a comforting sign for the airlines. IndiGo and SpiceJet have run up too fast, too soon at the bourses,” says A K Prabhakar, head of research at IDBI Capital.
On Thursday, SpiceJet rallied 7 per cent in intra-day trade to hit its 52-week high on the BSE, while Indigo also reached its 52-week high level of Rs 1,650 during the day after Jet Airways ceased operations in post market hours on Wednesday.
In the past one month alone, both these stocks have rallied over 70 per cent and 22 per cent respectively, outperforming the S&P BSE Sensex that has gained 3.3 per cent during this period, ACE Equity data show.
Disruption of Jet Airways’ capacity can lead to temporary demand – supply mismatch, particularly going into peak summer demand, analysts say. Post Kingfisher’s capacity disruption in FY2013, IndiGo was the only airline which added meaningful capacity over FY2014-15. Overall industry capacity grew at a compounded annual growth rate (CAGR) of 6 per cent over FY2013-15, reports indicate.
“The extent of yield increase is dependent on the quantum of capacity that the industry can collectively add to ease the supply-demand mismatch. This yield benefit may, however, be lower, and sustain for a shorter duration of time compared to FY2013 (Kingfisher’s capacity loss) as all airlines including IndiGo, SpiceJet, GoAir, Vistara and AirAsia India are looking to increase capacities,” says Garima Mishra, an analyst tracking the sector with Kotak Institutional Equities.

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