Nuvama Cuts SpiceJet Target Price despite Q3 Profit: 3 Big Worries are… – Market News
Introduction
SpiceJet, one of the leading Indian low-cost carriers, has reported a net profit of ₹26 crore in the quarter ended September 30, 2022. Despite this encouraging news, Nuvama Institutional Equities, a leading brokerage firm, has cut its target price for the airline by 14% to ₹52, citing three major concerns that may impact the company’s growth trajectory. In this article, we’ll delve into the reasons behind Nuvama’s cautious approach and the key factors that may impact SpiceJet’s future performance.
Nuvama’s Concerns: Lack of Transparency in Sharing Data
One of the primary concerns that Nuvama has raised is the lack of transparency in sharing key operational data by SpiceJet. The airline’s available seat kilometers (ASKM) metric, which measures passenger-carrying capacity, fell by 41% year-on-year in the third quarter of fiscal year (FY) 2025. Additionally, the rate of aircraft on ground (AoG) shot up by 30% in Q2, indicating potential capacity constraints. This lack of data transparency makes it challenging for analysts to predict the airline’s future performance with accuracy.
Gradual Recovery Expected
Nuvama does see some hope on the horizon, however. The airline’s planned qualitative institutional placement (QIP) of ₹3,000 crore will help settle outstanding debts and allow for the induction of grounded fleet into service. This, in turn, should lead to a slow but steady recovery in operations. As Nuvama stated in a research note, "SpiceJet’s operations are set to improve as it has started to induct grounded fleet by settling with its lessors for outstanding dues."
Economic Slowdown May Hurt Earnings
Another significant concern that Nuvama has raised is the impact of the economic slowdown on demand for corporate and leisure travel. The brokerage firm believes that failure to maintain occupancy rates above 90% or any demand weakness could put pressure on revenue per available seat kilometer (RASK) and, subsequently, earnings and valuations. This stress on earnings, combined with the airline’s high fixed costs, could lead to a challenging environment for SpiceJet.
Q3 Performance: A Testament to Resilience
Despite these concerns, SpiceJet’s Q3 performance was a bright spot, with the airline swinging back to profitability for the first time in a decade. The company reported a net profit of ₹26 crore, compared to a loss of ₹300 crore in the same period a year ago. Revenue surged by 35% year-on-year to ₹1,651 crore, driven by improved yields and cost control. As Ajay Singh, Chairman and Managing Director of SpiceJet, aptly put it, "This quarter’s performance is a testament to our resilience and relentless focus on financial and operational recovery, an important milestone that underscores the success of our turnaround strategy."
Conclusion
In conclusion, Nuvama’s decision to cut its target price for SpiceJet is a reflection of the airline’s complex and challenging operating environment. While there are reasons to be optimistic about the airline’s future prospects, there are also several concerns that need to be addressed. As investors, it’s essential to stay informed about these challenges and opportunities to make informed decisions. With its resolution to address outstanding debts and induct grounded fleet, SpiceJet is taking the first steps towards a brighter future. However, the success of this turnaround plan will depend on the airline’s ability to navigate the industry’s turbulent landscape and address the concerns raised by Nuvama.
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