FSA Assignment

on
Aviation Industry

InterGlobe Aviation Ltd. vs SpiceJet Ltd.

Academic Group 44
Pooja Gupta PGP-19-213
Rahul Lakhotia PGP-19-219
Ranjit Nair PGP-19-221
Sucharitha S PGP-19-235
Yash Sanghavi PGP-19-239
Executive Summary
In the past few months, the entire world has been fighting the battle against the pandemic and as a result,
various industries have been facing the heat. Indian aviation industry is 3rd largest domestic market in the
world right now. It has had its fair share of downfall as well mostly with the uncovering of poorly
administered providers like Jet Airways and Kingfisher. This industry is highly susceptible to external
factors like the aviation fuel price, which forms the major part of its operational cost. The fuel prices in the
years of 2018-19 skyrocketed (~70%) which left the entire industry into tenterhooks. Also, this industry has
huge competition in terms of price with major share held by 2 low-cost carriers. Companies like SpiceJet,
which were trying to recover from its earlier hiccups fell flat due to the fuel prices and high foreign
exchange rates, followed by the pandemic. Profit making companies like IndiGo also got caught off foot.
Even if the industry appears dreary in the short run, the long-term prospect is very appealing, because of the
strong GDP recovery 7.8% in 2021-2022 as reported by IMF. With the increasing disposable incomes and
opportunity arising out of under-penetration, the demand for travel by flight is bound to increase. Thus, an
investor looking into long term gains and returns may find value in investing in the airline industry.
Banks have already faced a lot of bad loans in aviation sector due to Jet Airways and Kingfisher, and are yet
trying to recover. With this context, and with banks just getting out of a vicious round of increasing NPA’s,
not many banks will be keen to lend to SpiceJet, which has negative retained earnings, poor solvency, huge
pending loans and mounting losses. The ability of SpiceJet to carry on as a going concern has also been
called into question by the company’s auditors. However, looking at the various financial ratios of IndiGo,
showing consistent growth, profits and solvency, it seems to be a good option for the banks to lend to
IndiGo, so that it can recover from the crisis.
The management can try to bring down costs of services by trying to reduce the fuel prices. They can do this
by hedging fuel, i.e. purchasing fuel at a lower predetermined price for a later delivery. This can ideally
improve the bottom line of the P&L. These companies can make better asset utilization by rebalancing the
route networks by focusing on those with the highest revenue and further maximising the flight occupancy
to reduce the cost per seat per mile. To improve the leverage, IndiGo can try getting loans at a lower rate as
its debt ratio is already low at around 1.45. SpiceJet can investigate raising capital by equity as its debt ratio
is poor now. SpiceJet should also investigate sourcing money through long term sources rather than short
term, a strategy that is being applied by IndiGo that can help reduce the interest expenses.
To stay ahead of the competition, firm should focus on a multitude of parameters. They can maximise
revenue by expanding to newer markets, leveraging technology for route optimisation and expanding their
business line to freights and cargo. They also need to revisit their books for unfavourable contracts if any
and undertake effective re-negotiation on them. Investing in human resources is one important factor for
airline industries as there is a dearth of skilled pilots and results into underutilisation of routes. Investing in
new automation technology also can help bring down the operational costs. Reducing the debt figures on the
balance sheet is one point of consideration for both firms in-order to fight the tremors in the industry and so
that it can outlast as major market players.

Liquidity Ratios

Apart from an aberration in FY18, a trend analysis of the current ratio brings that IndiGo Current Ratio
(0.84) is higher than both the SpiceJet (0.71) and the industry average (0.54). This highlights IndiGo’s
superior liquidity and working capital management and puts it at a lesser risk of not being able to meet its
short-term obligations. Receivables are growing in line with sales and as per historical trends, which is
reassuring and indicates that the company is not at added risk of bad debts. The increased cash balance is a
sign of a good business but the spurt in loans and advances to subsidiaries may indicate money being
diverted for non-core / personal activities. This Ratio for SpiceJet, though increasing, is lagging both that of
IndiGo and the industry, which highlights its precarious liquidity position. The jump in the current ratio is a
positive sign and is helped by the increase in receivables. We need to ascertain the company’s ability to
recover these receivables. The increase in trade payables i.e. jump of 87% for IndiGo and 80% for SpiceJet
is also a cause of concern and should be monitored in the coming years to ensure that it does not get out of
hand.

The quick ratio shows that the inventory levels of both companies seems to be stable. The quick ratio of
IndiGo is better than both the industry and SpiceJet, once again highlighting its superior liquidity position.
The quick ratio for SpiceJet is in line with the industry and is increasing, indicating an improved liquidity
position.

Solvency Ratios

We see a steep deviation in the debt ratio of SpiceJet from -1.86 in FY17 to -24.85 in FY18. This is because
of a 42% increase in the borrowings in FY18 from FY17. The ratio is negative because of the negative
owner’s equity. However, the industry average was -3.6, showing that the industry as a whole is not
performing well on Owner’s Equity. IndiGo’s debt ratio in the same period was about 1.44, which is much
better than industry standards.

In terms of interest coverage ratio, SpiceJet showed a substantial decline, from 20.2 in FY17, to 1.6 in FY18,
to -.38 in 2019. The ratio also declined for the industry, with an average of 1 across 3 years. SpiceJet was
doing a lot better than the industry standards but saw a steep decline over 3 years. The increased borrowings
in FY18 led to an increased interest expense and hence reduced the interest coverage ratio. Added to this, in
FY19 the major causes for this decline was because of operational expenses due to a severe increase in
aviation fuel prices by over 42% and a fall in the price of Indian Rupees by 8% in the international market.
Even for IndiGo, this ratio declined from 11.4 in 2018 to 2.19 in 2019 for similar reasons.

Profitability Ratios

The profits of IndiGo & SpiceJet took a massive hit owing to crude oil prices and the rupee depreciation in
the FY19. This impact can be visible due to decreased EBITDA Margin and Net profit margin of both
SpiceJet and IndiGo in FY18. Apart from that, the worldwide grounding of Boeing 737 MAX post the two
tragic incidents led to SpiceJet grounding its 13 Boeing 737 MAX aircraft, thus increasing its costs further
and directly hitting the P&L with a loss of (3,160.83) million rupees. Also, IndiGo, with its larger fleet size
of 200+ could capture the increasing market demand, by 27% growth in Average Seat Kilometres (ASK)
(17% industrial growth) as against SpiceJet could increase its ASK by only 14%. But, the Load Factor of
SpiceJet (92%) was better than IndiGo (86.2%). All these factors intertwined have affected the Cost per
Available seat kilometre (CASK) for IndiGo, increasing by 13.9% in FY19 from FY18.

Their Owner’s Equity of SpiceJet is constantly negative because of its 2014 crisis. They started making
profits, until FY19, but could not outweigh the earlier losses till date. This is reflected in the negative ROE
for the year 2017 and 2018 with -0.7 and -13 respectively. RoE for IndiGo on the other hand decreased by
27% (0.43 to 0.39) from 2017 to 2018 along with a 4% increase in PAT and 87% increase in shareholder
funds. The ROE for IndiGo reduced to 0.02 in FY19 from 0.31 in FY18, because it made 93% loss in FY19
as compared to FY18. IndiGo failed to utilize its equity well to make profits, due to high expenses in terms
of fuel and lease costs. The downward trend hints to the increasing depreciation of leased aircrafts due to
IndiGo’s addition to capacity at the CAGR of 22% over the last 5 years. Also, cost items like aircraft and
engine lease rentals, dominated in foreign currency badly impacted profits. 

Return on Asset (RoA) for the both companies have also been on a decline since the past few 3 years. A
huge decline in 2019 from 2018 specifically due to aforementioned reasons. Increasing fleet size, ground
support equipment and vehicles (investment in PPE) and reduction of PAT can be attributed to the
decreasing RoA.
Efficiency Analysis

Both IndiGo and SpiceJet had a comparable high receivable turnover multiple i.e. above 65 and low DSO of
about 5 days in FY19. These airlines collect revenue on an immediate basis hence only a small part of the
total sales remain as trade receivables on the balance sheet. Industry average Days Sales Outstanding is ~20
days which is almost 4 times more than that of the two firms which means both the airlines are efficient in
this parameter.

The Inventory turnover multiple for SpiceJet (average ~10) was larger than that of IndiGo (~6) for the past 3
years. This is due to the high passenger load factor that SpiceJet is clocking i.e. over 90% for past 4 years.
More the load factor, lesser the Inventory on hold and hence better the Day Sales Inventory. SpiceJet is
efficient in terms of turning its inventory to sales at a DSI of 36 days for FY19 in comparison to IndiGo at
54 days. Industry standard of 24 days for FY19 is lower than both IndiGo and SpiceJet.

The payable turnover multiple measures the efficiency of the firm in terms of paying its suppliers. IndiGo
had a better payable turnover i.e. ~14 for FY19 than SpiceJet at ~7 for FY19. This shows that IndiGo is
maintaining a healthy supplier relation in comparison to SpiceJet. On an average IndiGo takes 25 days for
paying its suppliers and SpiceJet takes 48 days considering past 3-year data. Not being able to pay suppliers
regularly might be a point of worry for SpiceJet as it forms almost 14% of the Cost of services.

The Working Capital Turnover ratio for airline industries tends to be on the lower side due to the large
expenses required to run the business. IndiGo was able to generate huge sales almost 3 times of that of the
capital employed in FY19 which is a good sign for any investor. In comparison, SpiceJet had WCTR of -4 in
FY19 as Current Liabilities was more than Current Assets on the balance sheet. The company is raising its
money through short terms term sources and holding onto payables to keep the business running. Negative
WCTR is a worrying parameter in the long run.

DuPont Analysis

Each year, though the company makes substantial revenue from operations that is steadily increasing by
79.11% from FY16 to FY19, its average total assets are 47.38% lesser than the same. Overall, FY18 seems
to be one of the better years for SpiceJet since it had made a profit and the negative balance of retained
earnings had come down by 25.73% from FY17. It had also surpassed industry standards of -0.02 of return
on assets, with a value of 0.1613. However, this only seems like a brief respite, as the negative balance of
Total Equity increases by 8.16 times in FY19. The company has not been able to maintain a credit balance
of retained earnings, and thus seems to have very little cushioning to protect itself from unprecedented
shocks to the business or the sector as a whole. True to this, it has been severely impacted right from the
beginning stages of the pandemic in 2019-20, as its losses have increased by 195.73% from FY19 to FY20.
The sharp U-turn from profits to losses from FY18 to FY19 could also be explained by the 71.64% increase
in Long-Term Provisions, since the company may be anticipating hits to profits in aircraft maintenance and
redelivery.       

The sizes of SpiceJet and IndiGo vary by a huge margin: IndiGo’s revenue from operations is 212.69% and
198.22% higher than that of SpiceJet in FY19 and FY20 respectively, and the latter’s Total Equity and
Retained Earnings also show a healthy positive balance YoY. It thus seems to have been able to absorb the
shock of the pandemic much better than SpiceJet. It has shown a consistent ratio of PBT to PBIT, averaging
around 0.88 in the years of profit. From FY19 to FY20, while sales have increased by 25.74%, expenses
have also increased by 25.34%, pulling the company into losses. The average Return on Assets ratio over
FY17 to FY20 at 1.228 has also been consistently better than the industry average of -0.03, and this may be
due to the returns to scale as IndiGo operates flights to many more foreign destinations, apart from domestic
ones, and thus has a much larger scale of operations compared to SpiceJet.