Why HSBC Has Given Jet Airways Its Lowest Price Target

Shares of Jet Airways Ltd. fell nearly 2 percent after global research firm HSBC cut its target price nearly by half for India's second-largest airline. The carrier later recouped losses to trader higher.

The brokerage slashed the target price to Rs 150, a potential downside of more than 50 percent, citing a “very tight” liquidity position and a “highly stretched” balance sheet. HSBC's price target is the lowest in the street, according to data compiled by Bloomberg.

To be sure, the consensus of eight brokerages covering the stock is close to Rs 477 apiece. Of eight analysts tracked by Bloomberg, seven have a target price higher than the current market price of Jet Airways. IndiaNivesh is the most bullish with a price target of Rs 1,010, implying a nearly threefold upside in potential.

Shares of the full-service carrier had tumbled on Friday after the Economic Times reported, quoting unnamed people, that the company told employees it can't operate for more than 60 days without cutting expenses, including salaries. While the airline, in an exchange filing, admitted to have resorted to cost cuts, it called the report “incorrect”.

That comes when higher fuel costs, adverse foreign exchange movements and lower yield due to competition continue to hurt the aviation industry's profitability.

A 97 percent decline in net profit of InterGlobe Aviation Ltd.-operated IndiGo, the country's largest airline, sent a distress signal for the sector, HSBC said, adding a 5 percent decline in its yield—earnings per passenger per kilometre—in June quarter came as a shock.

The research firm, however, expects the problems to persist in the ongoing financial year. Based on this, it also downgraded and cut target prices for two other listed airlines—Interglobe Aviation and SpiceJet.

The industry is adding a lot of capacity on new leisure routes, which will keep the overall yields soft, it said. “The yield should remain soft until demand on these new routes starts maturing.”

HSBC said the industry will continue to face challenges from higher fuel prices and currency fluctuations.

Fuel cost accounts for 30-40 percent of an airline's total cost. So far this year, aviation turbine fuel prices have increased close to 20 percent.

Inflationary and forex pressures will impact airlines' other operating costs. An increase in passenger fees, employee costs and selling and distribution costs are expected to hurt airline as well, according to HSBC.

It doubts Jet Airways' ability to raise funds and repay the non-convertible debentures worth Rs 700 crore. HSBC said the airline's aim to cut ex-fuel unit cost by 12-15 percent will be a challenge given forex headwinds.

IndiaNivesh, however, is optimistic. It expects Jet Airways to benefit from its focus on reducing its ex-fuel unit cost, newer routes for higher revenue growth and debt repayment that would reduce the interest burden.

Shares of Jet Airways were trading at Rs 308.60 apiece in early trade. The stock has declined 63 percent so far this year.