SPICEJet (SJ) reported net loss of Rs 7.9 bn (Indigo: -Rs 10.6 bn). Earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs (Ebitdar) stayed negative at Rs 1.5 bn owing to high ATF prices (up 2x y-o-y) and weak INR; yield improved 31% y-o-y (Indigo: +44%) to Rs 5.3.

Highlights: i) SJ’s lack of transparency in sharing its key operational data (RPKM, CASK) since Q3FY21 remains a major concern. ii) Cargo business remained profitable with Ebitdar/PAT of Rs 570 mn/Rs 18 mn, despite high fuel cost. iii) Balance sheet remains weak, impacting operations; however, SJ is looking to raise up to $200 mn. iv) Addition of more fuel efficient Boeing 737-8 MAX to boost SJ’s competitiveness, but it is a long haul. We reduce FY23E Ebitdar by 27% and the target price to Rs 49. Retain ‘Hold’.

Industry-leading PLF on higher capacity; ATF price key headwind: SJ reported the highest PLF within the industry of 86.4% (vs. Indigo’s 80%). We estimate yields to have surged 31% led by pent-up demand coupled with increase in operating flights (+137% y-o-y; 23% q-o-q) and launch of new routes (added 24 routes in Q1FY23). We anticipate near-term yields to remain subdued on a seasonally weak quarter. Cargo business revenue remained muted. However, SJ plans to deploy additional freighter aircraft by FY23 and aims to expand operations once it hives off the segment in Q2. Growth is likely to be buttressed by the addition of 737-8 MAX; higher capacity of 737-8 MAX along with greater fuel efficiency will boost SJ’s competitiveness.

Liquidity a concern; operational restrictions to impact earnings: Given its weak balance sheet and high operating expenses, multiple lessors have asked DGCA to de-register SJ’s aircraft – four already reclaimed by lessors and two awaiting DGCA’s approval. Moreover, with the rise in mechanical failures due to financial constraints, DGCA restricted SJ’s operation to 50% of its scheduled routes. In contrast, SJ is looking to raise funds to drive recovery and achieve future growth.

Outlook: Challenges, industry tailwind:– Given the de-registration of its aircraft, restriction to operate only 50% of scheduled routes, lack of transparency for investors, replacement of cheap Boeing planes, and a weak balance sheet, we are reducing FY23E Ebitdar by 27% and the TP to Rs 49 (earlier: Rs 67) at 8x Q2FY24E EV/Ebitdar.