Rumours Suggest Emirates Buying Stake In Spice Jet

The Indian aviation segment has remained quite vibrant in the last one year. Be it the failure of Kingfisher Airlines, be it the Jet Airways and Etihad deal or be it the entry of Air Asia in the Indian markets, the sector had made it to the news domestically as well as internationally. New into the league is the news about Emirates trying to buy stake in Spice Jet. The rumours about the possible stake sale to Emirates have been there in the news since long, and gathered some more momentum after the Jet-Etihad deal got cleared by the FIPB. What added support to the rumours was the entry of Air Asia which suggests the Indian skies have got a great potential.

According to the sources, Emirates is in the final round to acquire promoter holding in Spice Jet. The deal would be finalised at around Rs 48 per share. Sources also suggested that the acceptance ratio would be higher for this deal. Now against the CMP of Rs 22 per share, the offer price of Rs 48 per share is naturally a good one. However the basic issue here is that Emirates, in the last week denied any stake buying in Spice Jet. So there is a big question mark on whether the deal is really happening. We tried to get in touch with the company but could not get any response.

We are of the opinion that according to the policy changes, where the government had increased the foreign investment limit in the aviation sector to the level of 49 per cent, there is good scope for an investment in Spice Jet. The FII holding in the company is only 3.80%. But what is worrisome is the fact that the FII holding in the company has come down in the past three quarters. From 5.22% in December 2012 it has declined to 3.80% in June 2013.

But again, there is some concern over the debt levels of the company. The total debt levels of Spice Jet is Rs 1429 crore. Naturally there is need of funds to service debt. But the management has always stated that the loan book is higher on account of its expansion strategy to enter Tier II and Tier III cities and that the company would be able to service the debt. Here we are of the opinion that, with the cost of funds increasing, there is need for bringing down the total debt. Hence one cannot completely overlook the rumour of the stake sale.

We feel if the deal happens, it will provide a positive impetus to the scrip on the bourses as the price set for the open offer is at a substantial premium. But if there is no stake sale (as Emirates has continuously denied the reports in the past also), it would result in decline in stock price as it has gained some ground in the past few trading sessions. We suggest high risk taking investors to go ahead to buy the scrip with a stop loss at Rs 20 per share.