Mumbai: HSBC Securities said the market is far too optimistic about the prospects of the aviation sector after the suspension of Jet Airways flights and is ignoring various longer-term risks.
While downgrading SpiceJet to reduce from hold and maintaining a hold on Indigo, the brokerage said the rise in airfares because of Jet going out of business has pushed up consensus earnings forecasts too much.We think the sweet spot is temporary.
Investors appear to be ignoring a number of medium- to long-term risks, which could hit profits, said HSBCs analysts Achal Kumar, Andrew Lobbenberg and Parash Jain in a client note.The challenges for the sector include the impact of new IFRS 16 accounting standards, China-US trade tensions, and an unfavourable currency outlook among others.HSBC raised its target price on InterGlobe Aviation, which runs Indigo, to Rs 1,580 from Rs 1,100 and on SpiceJet to Rs 115.0 from Rs 79.50.We believe the industry is a long-term structural winner as Indian aviation is highly underpenetrated, said the brokerage.
However, we think the market is getting ahead of itself.On Friday, Spicejet shares fell 2.2 per cent to Rs 143.
InterGlobe Aviation shed 0.6 per cent to Rs 1,660.50.
In the past three months, SpiceJet has risen roughly 85 per cent and Indigo has gained about 50 per cent.HSBC said both airlines are now trading near their all-time high valuations.The brokerages said airfares in India have risen 12-15 per cent over the past 4-5 months largely due to the suspension of Jet flights and the grounding of the 737 Max fleet, cutting industry capacity by almost 25 per cent.
Consensus earnings forecasts have risen by 136 per cent for Indigo and 56 per cent for SpiceJet since the start of 2019, it said.Our forecasts are almost 40 per cent below consensus as we think the market is overly optimistic about the increase in airfares and is missing some of the key challenges facing the industry, the brokerage said.