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Recommendation Date : 13-Aug-2010 Last Update Date : NA
Airlines :
Airline Stocks To Offer Exceptional Returns Due To Huge Entry Barriers.
An airline is a sector in which few will ever think of making an investment in. In addition, given limited players in this segment, it is one of the least researched sectors. That’s why believe that few have been able to identify the potential that the sector offers in India. However we believe that for Indian Aviation the opportunity lies in the midst of difficulty. Despite successive losses faced by the industry over last few years we are very confident that with the increasing demand supply gap the pricing power is returning fast to the sector, giving a boost to the company’s margins and the stock prices. During 2003-2008, the sector grew at CAGR of 19.14%, at a multiple of approximately 2.5 to the GDP. During 2008-2010 the sector demand has been absolutely flat. That’s when India’s GDP has grown by over 15% in real terms. With the economy moving back to high growth path and with individuals and business doing well, we believe that the latent demand of earlier years will result in high growth in FY11 and FY12, similar to FY07 & FY08 where the industry grew by phenomenal 44% & 24% respectively. While such spike in demand has been seen in other sectors like automobile, it is yet to be seen in airline. India’s aviation at best has just scratched its surface. India’s air passenger per capita are at .09 is still abysmally low as compared to .30 in China, and 4.69 in US. The huge untapped market size, the booming economy, rising disposable income, huge & fast growing middle class – almost the size of US and increasing business opportunities in small towns, all would provide a further fillip to the demand for air services. While we are confident of the demand upsurge, we are not so confident on the supply side. The downturn in demand seen during FY09 has made the industry wiser and now while the demand is growing over 25%, lack of infrastructure and cautious outlook, both from the Industry & the lenders has limited new capacity addition to mere 5%-7%, a trend that is expected to continue for atleast a few more years. The industry is facing a severe infrastructural bottleneck, a concern that has been voiced by the Civil Aviation Minister Praful Patel himself. He endorses our view that there is limited, if any, possibility of adding a new flight unless it is added at an odd-hour of the day. Given the strong anticipated demand growth we believe that this gap will continue to increase on major trunk routes even after considering airport upgrades. Because of the aforesaid reasons, we believe the Aviation Industry has big surprises in store for the hoary industry skeptics and would offer exceptional returns over medium to long term.
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