Aviation shares surge; IndiGo, SpiceJet up over 5%

Shares of aviation companies have rallied by up to 9% on the bourses in noon deal trade on back of heavy volumes in an otherwise weak market.

Interglobe Aviation (IndiGo) surged 9% to Rs 921 on the BSE on back of over two-fold jump in trading volumes. Till 12:46 PM, a combined 2.20 million shares changed hands on the BSE and NSE against an average sub one million shares that were traded daily in past two weeks.

SpiceJet soared 7% to Rs 65.50, while Jet Airways gained 4% to Rs 561 on the BSE in intra-day trade.

Except, Jet Airways (up 10%), the remaining two stocks – IndiGo (up 4%) and SpiceJet (down 2%) had underperformed the market as compared to 10% rally in the S&P BSE Sensex till yesterday.

Declining crude prices, the sharper focus by the government, higher disposable incomes, and the cost-benefit advantage over the Railways are some of the key factors in the turnaround of the aviation sector.

“The sharp decline in prices of crude oil is the greatest benefit for the aviation sector. Fuel comprises almost 40% of costs. With the almost 40% plunge in crude-oil prices (from the FY15 average), the benefit to these companies is tremendous. Fuel cost (as percent of revenue) is down from 46% in FY15 to 30% now,” according to analyst at Anand Rathi Share and Stock Brokers.

The brokerage house initiates coverage on Indigo with a Buy rating and a target price of Rs 1,200.

“With an around 35% share, Indigo is poised to grow along with the Indian aviation sector. We believe that the recent correction has priced in the delay in deliveries of the new aircraft, and expect the management to be more cautious ahead,” analyst said in a report dated March 1, 2016.