1) India needs to fly. Travelling by air is not yet a common practice among many Indian household. Air travel in India is still in its infancy. The penetration level for Indian aviation industry is extremely low not only when compared with developed nations but also when also compared with a similar economy as china. India has 0.09 scheduled airline seats per person compared to 0.3 in China and 5.6 in Australia and 4.7 in US. Someone might say air travel is still a luxury but my view is that when mobile phone was first launched in India it was also considered a luxury but look around today it has become a commodity today and needless to say all the mobile company stocks have become multibaggers
2) Now, if there is actually a potential for the airlines industry to shine then comes the question which airline stock to buy. With so much turmoil going around the world economy, no one can be sure if another recession is going to hit us. So, the best thing to do is to select a company that can survive if there is another recession. Though none of the airline company currently has a low debt to equity ratio, spicejet is better off than the rest.Spicejet used to have more cash in its balance sheet than debt/ bank loan but recently it started raising debt from market, but the good thing is that it is doing so at a time when interest rate cycles have peaked and RBI is about to decrese interest rate. And spicejet is raising this debt to fund expansion plans and not to sustain daily existing operations like kingfisher. Spicejet is planning for serving the tier 2 cities of India (which no low cost carrier currently serves) and hence the raising of debt. Another point worth mentioning here is that the auditors of both kingfisher and jet have raised questions about the survival of these companies in future. Kingfisher in fact has closed its low cost model and cancelled several flights. So, in case if these airlines actually shut shop there would be even less competition for spicejet and indigo and hence future gains in market share.
3) In spite of many people saying that airlines is a lousy industry, one of all time best return in the stock market history in the world is that of Southwest airlines. It also follows a similar low cost model like spicejet and always had huge cash in its balance sheet to take advantage of any economic boom
4) Promoters are buying. No one probably can understand the health of a company better than its owners. In spicejet’s case the promoters recently bought huge amount of share at RS 35 which is at a huge premium to current market price. So, current price of 23 is at a huge discount to what the promoters think the business should be worth. Though there is always a possibility that the price can go down even further because of rising crude oil prices but then again it is almost impossible to predict these things. So, it is best to believe what Warren Buffet once said that ‘Be fearful when others are buying and be brave when others are selling’
