SpiceJet Target Price Cut By HSBC Citing Operational, Financial Challenges

HSBC Global Securities has reduced SpiceJet Ltd.'s target price as the carrier grapples with severe operational and financial challenges, with unclear growth and profitability prospects.

The target price was reduced to Rs 26 apiece from Rs 40 apiece earlier with a 'reduce' rating on the company.

The brokerage has also raised questions about the potential use of SpiceJet's plan to raise Rs 3,000 crore through a qualified institutional placement.

While the airline intends to allocate part of this capital for debt repayment and fleet expansion, past performance casts doubt on its commitment to these goals, say analysts.

Despite raising over Rs 1,000 crore recently, SpiceJet has failed to increase its fleet or place new aircraft orders, prompting concerns that the new funds might be diverted to cover ongoing losses and working capital needs.

The airline's ability to expand its operations is further hindered by a severe shortage of available aircraft. SpiceJet faces significant delays in receiving Boeing aircraft due to ongoing issues with FAA approvals, with new deliveries unlikely before 2029-2030. This issue is exacerbated by the high cost of wet leasing aircraft, which could further strain the company's financials without guaranteeing profitability.

Operational headwinds are also substantial. Currently, SpiceJet operates just 21 aircraft, and it faces court cases related to unpaid engine leases, which could ground additional planes. The airline's unit costs are troublingly high, with ex-fuel costs 47% above those of its competitor Indigo and fuel costs 22% higher.

HSBC Global believes SpiceJet's market capitalisation of $583 million appears excessive in comparison to its peers. For instance, Akasa, with a 4.7% market share and a healthier balance sheet, has been valued at just $350 million. This makes SpiceJet's current valuation seem inflated, especially given its modest 3% market share and challenging operational environment.