Will the Jet-Tata Saga Culminate in a Happy Marriage? - The 5 Minute WrapUp by Equitymaster
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Will the Jet-Tata Saga Culminate in a Happy Marriage?

Nov 19, 2018

Ankit Shah, Research analyst

When I went on a holiday to Annaikatti with my wife in June this year, I'd flown to Coimbatore and back by Jet Airways. Not that this the airline of my choice, but this was the only option available.

Thankfully, there were no hassles or delays. And to top it, they offered us complimentary meals (which they have stopped now). As a true Indian, I love anything that says complimentary or free. (But remember, there are no free lunches. Someone's got to pay for it. In this case, it's been the shareholders.)

My liking for Jet Airways only lasted as long as my holiday. (I just read in the papers this morning that Jet cancelled 10 domestic flights, leavings hundreds of passengers stranded.)

Back in Mumbai, wearing the hat of an analyst, Jet Airways is one of the stocks I hate.

Sample this...

From financial year 2007-08 to 2017-18, Jet Airways has incurred losses in 9 out of 11 years. The only time it made profits was in 2015-16 and 2016-17. And that was because crude oil prices had crashed during these periods.

At the start of 2018, the stock price of Jet Airways hit a multi-year high. But as crude oil prices kept rising higher and the overall bull market lost its steam, the stock crashed as much as 80% by the start of October. The airline posted a loss of Rs 1,297 crore in the quarter ended September 2018, with liabilities rising further.

But guess what, as of Friday, the stock was up 102% from its October low. Isn't that a fantastic recovery in such a short period? What has driven up the stock price so rapidly? And is there still potential for further gains?

There are two reasons for the surge in the stock price of Jet Airways...

One, crude oil prices have crashed more than 20% after hitting a four-year high in early October.

Two, over the last couple of weeks there have been several stories doing the rounds about the Tatas potentially taking over the cash-strapped airline currently controlled by Naresh Goyal.

As per an article in Bloomberg, some unidentified sources claim that the Modi government has approached the Tata Group to rescue the troubled airline.

After all, if Jet Airways goes belly up like Kingfisher, it's going to be another jolt to the already stressed Indian banks and will also render thousands of employees jobless. This is not the kind of trouble you want when the general elections are just a few months away.

On Friday, Tata Sons clarified that discussions with Jet Airways have been preliminary and no proposal has been made. However, if the deal comes through, it may be a lease of life for the airline.

Well, it must be recalled that the Tatas were the first to enter the aviation sector as early as 1932. It was Tata Airlines that nationalized and turned into the financial mess that we now call Air India.

Ever since the government started allowing private airlines in the 1990s, the Tatas have harboured ambitions of returning to aviation. They reentered the Indian skies with two joint ventures - Vistara, a joint venture with Singapore Airlines, and another with Air Asia. But these joint ventures account for a small share of the Indian aviation market.

With Jet Airways, the Tatas could enter the big league and become the second largest aviation group in India after budget carrier Indigo (InterGlobe Aviation Ltd).

On the face of it, it seems like the Tatas are the ideal contenders to rescue the troubled airline. The Tatas have the resources to bring the airline back from the deathbed. But will it really turn the fortunes of the airline and make it profitable?

To me, this sounds like a Bollywood love saga wherein the protagonist rescues the damsel in distress, and they pledge to tie the knot and live happily ever after. However, most married men will agree that the real challenges arise post marriage. ??

As we've written time and again, the aviation business is one of the toughest nuts to crack. Despite India witnessing rapid passenger growth, the cost structures and high competitive intensity make it very difficult for most airline companies to turn a decent profit.

So, while traders and speculators may rush to trade on the news of a potential takeover by the Tatas and a likely consequent turnaround of the troubled airline, this is certainly not an investment idea for serious, long-term investors seeking safe stocks and a good night's sleep.

Chart of the Day

SIPs Continue to Rise Despite Market Correction

As I've shown you some of my earlier editorials (here, here and here), there's a structural change in the Indian stock markets. Domestic investors have emerged as key players in the Indian markets.

But there are a few questions that need to be answered...

Is this flood of domestic liquidity entering the markets a temporary fad? Or is there some element of long-term sustainability to it?

To answer these questions, the most reliable piece of data is SIP flows.

First, let me quickly explain what SIP is all about.

SIP stands for Systematic Investment Plan. It is an investment plan offered by mutual funds wherein one can periodically invest a fixed amount in a mutual fund scheme. It is similar to a recurring deposit wherein you deposit a certain amount every month.

SIP is a convenient method of investing in mutual funds through standing instructions to debit your bank account every month.

This not only saves you a lot of hassle, it also helps in averaging your costs and investing in a disciplined manner without worrying about timing the market.

For these reasons, SIPs have been gaining popularity among Indian mutual fund investors.

The liquidity pouring into the markets through SIPs is relatively stable, reliable, and long-term money.

Coming to the chart...

The chart plots the month SIP contributions over the 31-month period between April 2016 and October 2018.

During this period, SIP contributions have grown from Rs 3,122 crore in April 2016 to Rs 7,985 crore in October 2018, growing at compounded annual rate of 46%.

Currently, there are about 2.49 crore SIP accounts through which investors regularly invest in various Indian mutual fund schemes. As per AMFI data, the mutual fund industry added an average of about 10.05 lakh SIP accounts each month during the financial year 2018-19, with an average SIP size of about Rs 3,200 per SIP account.

If the trend in SIP inflows remains steady, it will provide the much-needed buoyancy to the Indian markets which have been witnessing an exodus of foreign investors.

Happy Investing,

Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Tanushree Banerjee, editor of StockSelect, is giving away a FREE report to her loyal readers containing 7 stocks that could potentially build a solid retirement nest egg. Click here for details.

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