Spice Jet Corporate Finance Decision Analysis

Introduction - SpiceJet

SpiceJet is a low-cost airline headquartered in Gurgaon, India. It has a market share of 12.3% as of June, 2018. Established as air taxi provider ModiLuft in 1994, the company was acquired by Indian entrepreneur Ajay Singh in 2004 and re-built as SpiceJet. The airline operated its first flight in May 2005. It nearly shutdown in 2014 after a series of heavy losses, at this point several changes in business structure were made and in just under two years SpiceJet went on to becomes profitable.

The Balance Sheet 2018

The balance sheet of SpiceJet shows us that equity share capital is 599.45. Which has not changed since 2015. Which is book value.

Reserves and Surplus of SpiceJet stand -642.42 crore. This is the list of accumulated losses which have shown positive trends over the years.

Long term liabilities are 1068.04 crore and short term liability are 3096.89 crore. While Long term assets are 3199.61 crore and short term assets are 922.35 crore. Company is gradually reducing its long term liabilities while increasing short term liabilities over the years. They are also reducing long term assets.

The Investment decision

The investment decision is to invest in assets that can earn a return greater than the minimum excepted hurdle rate. The hurdle rate should reflect the riskiness of investment. The return should reflect the magnitude and timing of cash flow.

In other words the return on investment should be greater than risk adjusted cost of capital. Moreover Spicejet is putting in more funds in current investments (CAPEX) which is a good sign of growth and expansion as observed from their balance sheet. The company has currently sidelined international expansion and concentrating on profitability from domestic airlines.

Cost cutting, reduction of expense should be the focus. Sales maximization and cost minimization is more crucial to survive in this industry.

Returns on Equity and Return on Asset :

Sectoral Performance : The Sectoral Return on Assets 5.35 and Return on equity 20.77. Industrial performance : The Industry Return on Assets 6.21 and Return on equity 15.25. Industry performance depends on how well sector is doing. Similarly a company's performance to tied to the industry it is a part of. SpiceJet Performance : SpiceJet Return on Assets 5.34% and Return on equity is negligible as SpiceJet has been profitable only from the past one year, moreover 2018 first quarter earning showed loss of 38crore rupees. A company should grow with its industry any abnormal growth is not sustainable in the long run. SpiceJet is growing in accordance with industry.

Competitors performance : Analyzing with competitors Indigo (Interglobe Aviate) has Return on Assets of 15.58% and Return on equity of 36.38%. Indigo is the leading player in this sector and has huge portion of market share. In contrast Global Vectra Return on asset is 3.7% and Return of equity is 1.74%. Indigo is the lead player in Aviation Industry hence is doing very well. Even thought Global Vectra and SpiceJet have similar share price, Spicejet is doing better.

CAGR - The compound annual growth rate measures growth over multiple time periods. It is the growth rate from the initial investment value to the ending investment value. Industry performance : Industry CAGR (2016-26) 10.7% and Sales (2013-18) 6.45% and profit (2013-18) is 13.87%. The Aviation industry has faced serious issues regarding profits being eaten away due to rising oil prices and foreign exchange currency fluctuations. SpiceJet performance : SpiceJet went though a series of heavy losses uptil 2014, following that the next two years they changed their business strategy and since then their stocks have steadily climbed up to gain more than 800%. But due to these fluctuations a clear picture of CAGR for profits is unavailable and CAGR for sales is 6.85% . Competitors performance : Indigo the leading player in the industry has a sales CAGR of 27.27 % over a period of three years and a profit CAGR of 63.36% over a period of three years. A company should grow with its industry any abnormal growth is not sustainable in the long run. SpiceJet is growing in accordance with industry.

The Financial decision

Once the firm has taken the investment decision and committed itself to new investment, it must decide the best means of financing these commitments. Any investment needs financing and mix of debt and equity should be used to fund it. Equity is mode of financing which comes from investors. Expectations of investors becomes cost to company which eat away profits and increases business risk of the company.

Financing decision deals with minimizing cost and expense. Debt can be healthy if company has positive cash flow and NPV is positive. Which SpiceJet has achieved for the most part.

Thus company should use a right mix of debt and equity.

Equity is 599.45 crore and is debt 4164 crore

...