Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Spicejet: High in the sky but grounded in reality - Outside View by Luke Verghese

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Spicejet: High in the sky but grounded in reality
Sep 20, 2010

The vulnerability of the industry

Looking at the annual report of SpiceJet one wonders what it is that spurs entrepreneurs to kick start aviation companies. Is it the self perceived glamour quotient, or is it the adrenalin pumping razzmatazz of owning a set of wheels which operates at 30,000 feet above ground level, or, some such equivalent lunacy? It has got to be, as the aviation industry is characterized by high capital costs, high operating costs, acute competition, and high vulnerability. Till a decade ago it was every other nation’s pride to own a state owned airline of sorts. If they subsisted for long it was due to lack of competition from within and without, and not due to any level of efficiency in operations. All state airlines became croppers when the markets were opened up to competition. After the attack on the World Trade Centre, the first industry to reel from the aftermath of the full blast of the shockwaves, and go six feet under was a string of aviation companies. But entrepreneurs never learn from the mistakes of others, and consequently, history has a way of repeating itself.

From bad to worse

SpiceJet is in deep trouble and it should thank the gods that it has found a benefactor in the promoter of the Sun TV group. SpiceJet itself is a spinoff of another aviation disaster which went by the name of ModiLuft, promoted by S K Modi of the Delhi based Modi group. What miracles Kalnanithi Maran can conjure up will be most interesting to see. SpiceJets’ singular problem is that no lender will touch it even with a bargepole. What Maran will most definitely have to do is to bring in oodles of additional cash as capital, and utilize it very judiciously, but for which the company is well and truly sunk. Minor miracles are not known to visit the aviation industry.

After five years of operations of the new avatar under the Kansagras, all that the company has to show for its efforts is an accumulated book loss of Rs 8.2 bn. If the unabsorbed depreciation and other liabilities, which are not quite easily discernable, are also factored in, then the book losses will be way higher. Needless to add its total liabilities as it stands, exceeds its total assets by a mile, and which is another way of saying that its net worth is negative. Its net working capital position at year end, inspite of the book profits, was strictly in negative territory.

Enter the tooth fairy

If SpiceJet was able to show some modicum of respectability in its operations in the year just past, it was because of the excessive interest shown in the industry’s welfare by the aviation ministry. The latter used its good offices to slash aviation turbine fuel prices to the bone, and get PSU oil marketers to go slow on collecting receivables. With so much capital already locked up in the beleaguered industry, and its numerous spinoffs, the government was caught in a veritable Catch 22 situation, so to speak, and had perforce to act.

Seeing the writing on the wall, the current management chose to cut their losses, and bring in the fat cats. If the company has not signed off already, it was only due to some good fortune coming its way. (This is inspite of the latest annual report crying itself hoarse, with the aid of a number of pie charts and graphs to buttress its statements, that the Indian air passenger traffic is going to boom, that it is the most efficiently run aviation company, and of it steadily gaining market share. These protestations are nothing more than a last gasp before the final denouement).

The funding nightmare

It was the well thought out manner in which the long term funding for acquisition of aircraft was tied up. This deal did not enforce any interest burden on its already tottering cash flow. The company issued zero coupon FCCBs (Foreign Currency Convertible Bonds) in excess of Rs 4 bn to be converted into equity shares at future dates at a premium to the face value. The caveat here was that if the holders do not exercise their rights to the issue of equity shares by November 2010, then the company has to redeem the debentures at a premium. With the deadline fast approaching and with Rs 3.6 bn still outstanding (excluding premium on redemption of Rs 1.4 bn) there was no way out for the promoters but to exit in a hurry. These loans materialized as a part of a package to induct 7 new aircraft in FY11.

That is only a part of the overall story. It has perforce to fund capital works in progress of Rs 3.3 bn, and the estimated amount of contracts to be executed on capital account and not provided for runs into a gargantuan Rs 25.9 bn. Quite simply stated, it requires the services of the tooth fairy to fund this extravaganza.

Selling its family silver

How ironic the reality is. Currently the company is actually selling aircraft apparently just to remain afloat. At least this is what the accounts reveal. It realized a profit of Rs 617 m in FY10 on the sale of aircraft, and a profit of Rs 35 m in the latest year. But the fixed assets schedule does not show any appreciable deletion from the gross block table in this respect. How can this be? The accounts also show that it had received advances of Rs 3.1 bn at year end (Rs 1.8 bn in the preceding year) in its books against agreement to sell aircraft. As a matter of fact its tangible gross block is a telltale sign of the state of affairs. On a gross block of a mere Rs 833 m (20 aircraft on its rolls!) it was able to drum up revenues of Rs 21.8 bn. This is equivalent to a magician pulling a rabbit out of the hat. The trick here is that the aircraft are now on lease, judging from the revenue outflow on lease rentals in the P&L account.

The new setup

One has to see what call the new management will take on the company’s commitment to acquire new aircraft. Or by how much it can cut revenue expenditure. The big ticket costs are really not negotiable. Lease rentals, the fuel bill, landing rights, salaries, and insurance costs. Not negotiable on the revenue income side is the pricing of the ticket sales, as all the airlines are busy chasing the ever growing flyer base to get a higher load factor. The latter factor is a double irony. The new owners may even seek to merge the company with the Sun TV group and take advantage of the tax benefits that accrue. Whether the company will affect a name change is also a moot point. However this is unlikely to earn the company any brownie points.

All in all, a very interesting situation in the making as the days goes by.

Disclosure: Please note that I am not a shareholder of this company

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Spicejet: High in the sky but grounded in reality". Click here!


More Views on News

JET AIRWAYS Announces Quarterly Results (2QFY19); Net Profit Down 2714.3% (Quarterly Result Update)

Nov 14, 2018 | Updated on Nov 14, 2018

For the quarter ended September 2018, JET AIRWAYS has posted a net profit of Rs 13 bn (down 2714.3% YoY). Sales on the other hand came in at Rs 62 bn (up 9.5% YoY). Read on for a complete analysis of JET AIRWAYS's quarterly results.

SPICEJET LTD Announces Quarterly Results (1QFY19); Net Profit Down 122.0% (Quarterly Result Update)

Aug 21, 2018 | Updated on Aug 21, 2018

For the quarter ended June 2018, SPICEJET LTD has posted a net profit of Rs 381 m (down 122.0% YoY). Sales on the other hand came in at Rs 22 bn (up 19.5% YoY). Read on for a complete analysis of SPICEJET LTD's quarterly results.

JET AIRWAYS 2017-18 Annual Report Analysis (Annual Result Update)

Aug 14, 2018 | Updated on Aug 14, 2018

Here's an analysis of the annual report of JET AIRWAYS for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of JET AIRWAYS. Also includes updates on the valuation of JET AIRWAYS.

And the Company that Wants to Buy Air India Is... (The 5 Minute Wrapup)

Jun 30, 2017

With reports suggesting InterGlobe has evinced interest in Air India, what should its shareholders make out of this?

More Views on News

Most Popular

These Are the Kind of Blue Chips You Should Invest In(The 5 Minute Wrapup)

Nov 9, 2018

All blue chip companies are large caps but all large caps are not blue chips.

Get this Small Cap Logistics Company at a 16% Discount Right Now...(Profit Hunter)

Nov 6, 2018

If you turn the clock back, the current macroeconomic climate is nothing new. The markets have seen them all, and every downcycle has been succeeded by gravity defying gains...more so in the small cap space. This time will be no different.

Insider Buying: These Owner Operators Are Taking Advantage of the Correction(Chart Of The Day)

Nov 2, 2018

We believe insider buying is one of the strongest smart money indicators.

Are You Among The 35% Parents Who Will Not Be Able To Finance Their Child's Future?(Outside View)

Nov 1, 2018

PersonalFN explains the importance of being prepared for your child's future.

Are Fund Houses Opening Up Their NFO Factories Again?(Outside View)

Nov 2, 2018

PersonalFN sheds light on FY 2018-19 so far, the mutual fund industry has collectively launched 84 New Fund Offers (NFOs), of which some are still open for subscription.


Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms