Great businesses tend to exceed expectations thanks to strong fundamentals, quantitative and qualitative information that contributes to the economic well-being and the subsequent financial valuation of a company. But knowing fundamentals are not enough to be successful in the financial markets. According to Sir Warren Buffet, apart from knowing “What to do?”, one shall also have knowledge of “What not to do?”, to reduce significant chances of making mistakes. The case of Jet Airways is there to tell you what not to do in the market.
Jet Airways became public in 2005, so in our study we are going to analyse it from 2005 till date. There are about 17 parameters on which we will study this stock and try to derive a conclusion whether this is a good pick now or we need to be cautious about this whenever we hear about it from now onwards.
Before we proceed, just see the above image. On listing stock opened at ₹1155 & after that hit a high of ₹1339 on the same day. Next month in April, 2005 stock hit a lifetime high of ₹1383. Fact remains: numbers don't lie - till date that price never came. Poor people who bought the stock are hoping and praying for the price to increase, understand why their prayers are unanswered?
Till date we have been discussing that we need to pick stocks which have Low PE (Price to Earnings Ratio) less than 15-25, as the value in their prices is still present and it has not been unlocked. But let’s today study this PE with a different angle.
PE stands for = Current Market Price / Earnings Per Share (CMP/EPS).
There are 2 factors contributing in PE, one being the price of the stock and another being the earning per share. So if PE is low for a particular stock we should analyse whether that low PE is due to high earnings with comparatively low prices or vice versa.
For Jet Airways the PE is 21.83, so on this parameter Jet is looking decent, but now lets also check this on other parameters.
If any company is having stable earnings with growing time, there is a SIGN OF CONCERN.
Let’s look at the figures in the above table. In 2005 at time of listing the company was making sales of 4338.01 crores and over that sales they generated operating profit of 27.91% and net profit of 9.03%, which are decent numbers if not extra ordinary, but if we look at the current scenario, company is making sales of 21,492 crores (they have increased it by 13.10% CAGR in past 13 years), but their operating profit is almost similar to 2005 i.e. 1034 Cr. or precisely has even eroded by 1.21% on CAGR basis. The Net Profit figures are also same as in 2005 but the margin in 2017 has been reduced down to 1.817%.
We can draw 2-3 conclusions from these numbers.
a. Although company has managed to increase sales but the Operating or Net Profit are stagnant since last 13 years. This symbolises a lot of their revenue is consumed under the expenses (Operating or Non-operating).
b. The current margin of 1.81% is way too less as compared to businesses and bank rates provided in INDIA today.
c. This level of Operating Profit and Net profit margins are just contributing in Wealth Destruction of Share Holders rather than its creation.
With these figures it is not easy for this company to survive for longer duration in the market.
Let’s also compare the peers of Jet airways to have a better idea of the sector this company is working into.
INTERGLOBE AVIATION LTD. (Indigo Airlines)
The numbers of Interglobe Aviation are speaking for themselves. Comparing this to Jet, company’s sales are growing 15.08% CAGR which was similar to Jet, but the game changer here is that their Operating and Net Profit are also growing at 19.05% and 16.08% respectively, (which was not a scenario in Jet). The Net profits of the company are continuously growing and company has never seen losses even in severe turmoil where as Jet encountered losses for 7 years. With this comparison it is clear that Indigo Airlines in this sector is performing absolutely better than Jet and giving us the results and actually doing their duty i.e. Increasing Shareholder’s Wealth.
Dividends are part of the profits that are distributed to shareholders. So if any company is paying good amount of dividend it can be assumed that they will be making good amount of profits every year and must be having high amount of cash to distribute it.
If we see, Jet Airways hasn’t given any dividend since March 2008 (i.e. 9 years). There can be only 2 logical reasons if a company is not paying out dividends. First being that company is confident about their business and they think that reinvesting in this business will provide them higher returns rather than investing that amount somewhere else. Second, the company is not making enough profits. The numbers are clearly showing that, Jet as a company was into losses from March 2008. They are struggling to generate enough cash to distribute as dividend. Hence, resulting in erosion of both capital appreciation & dividend income for shareholders.
FCF here means Free Cash flow, i.e. Cash Flow from Operations – Investment on Fixed Assets.
FCF = 2531-267
Debt to Free Cash flow or D/FCF shall not be greater than 3x in any case, if the results are greater than 3 that is a big sign of worry.
Debt includes both Long term as well as Short Term Borrowings.
Debt = 6210.33 + 3021.06
= 9231.39 Cr.
D/FCF = 9231.39/2264 = 4.077x
As in case of Jet; Debt to burden is greater than 3 which is a sign of BIG CONCERN.
For a smooth running, if a business is having short term debt and also holds cash reserves equal to short term borrowings that is a good sign for the business as the business can pay out the lenders easily and is saved from any situation like falling in debt trap, or losing control from his business.
Let’s check Jet on this parameter:
Short term borrowing = 3021 (Fig in cr.)
Cash and Bank Balance = 1477
= 1544 Cr
They are falling short of 1544 Cr. just for short term borrowings which have to be paid in a year’s span, and if company is not able to pay this, it might be converted to long term debt and a Debt Trap has started preying company in it.
This ratio signifies the hold and strength of a business in its market. This tells us that how much control and power this business holds in hand. The ratio guides us that in how many days are creditors paid in a particular business. If the product is strong or business has a position similar to Monopoly (with largest market share or a differentiated product), then it will definitely have a higher payable day as any business would like to earn interest for number of days it is possible to delay the payment.
But if payable days are high, does it always signifies that the business holds a stronger position?
There can be a situation where business doesn’t have that amount of money to pay the creditors that is the reason that the payable days are increasing or higher in number.
In this case the Creditors Days (Days Payable Outstanding) are 231.12 days, signifying that any creditor who has supplied anything to Jet gets its payment in 7.7 months. As we have already seen the cash position of Jet, we can conclude that it is the second option due to which the creditor days are higher for Jet.
Increments in secured loan year on year basis concludes only one issue with the company, that it has fallen into the debt trap and now they don’t have earnings which can bring them out of this trap.
With Jet if we look in 2005 they had borrowings worth 2964.84(Cr.) and in 2016 it has increased to 10812.8(Cr). It has grown at a CAGR pace of 11.39%, more than its net profit, and that is the reason for current situation of this company.
If for any company its sales are increasing we find it really good sign, but if we think logically an increase in sales should also simultaneously increase the cash reserves of the company. As company is increasing its revenue and after all deductions if profit is increasing definitely some contribution would be made in cash also.
Change in Sales = (21167.33-19573.43)/19573.43 = .0814 = 8.14%
Change in Cash & Bank Balances = ((147765/198508)-1)*100 = -25.56%
In the case of Jet Airways, sales are increasing by 8.14% as compared to last year sales, but if we look at cash is decreasing by 25.56%, which is a sign of danger as company is burning the entire cash into expenses and is not able to retain any into business, so even increasing sales will not benefit the business.
In our previous discussions, we always have focused on the companies having negative working capital, and in that parameter Jet Airways becomes a part of, as it has negative working capital of -4425.11 (Cr.) but we also need to check whether that negative working capital is due to advances from customer or for other reasons. If not, it is sign of worry that company doesn’t have money to meet its day to day activities. Jet Airways is not having advances from customers.
As we look into its balance sheet for working capital we see no advances, but deficiency of Cash and high amount of short term loans, which clearly suggests that company is short of money and is unable to manage its day to day expenses.
If, Net Working Capital/Sales (NWC/ Sales > 1) is greater than 1 that is definitely a sign of worry. Even though in Jet’s case, it is still less than 1 but early concerns are visible.
Debtors Receivables is that ratio which tells us, in how many days’ business gets its money back from its debtors. This should be less than 90 or max 120 days, as any duration longer than this tells that the money is held by debtors for longer duration, business doesn’t have any controlling power on them, and it will always face problem of being cash deficit.
In case of Jet this ratio is 28.03 which is good, but when we look at condition of Cash and Creditor Payable days (231.12 days) we can conclude that Jet earns money, but is unable to pay its creditors as it burns down all the earned money in expenses.
In any scenario if your trade receivables (debtors) are increasing, it is not considered as a good sign as your money is being stuck in market for longer duration on which business would have earned something, but if percentage of sales are increasing at a faster pace than that of debtors, that can be considered good.
For e.g. if the sales increased by 15% but debtors increased by 5%, that is still bearable as rest 10% sales will be in form of Cash and that is contributing to our business and anyhow we will recover this 5% also in some time.
Let's have a look at the percentage increase in trade receivables of Jet Airways:
[ (1625.48/1379.60) - 1 ] x 100 = 17.82%
Percentage Increase in Sales:
[ (21167.33/19573.43) - 1 ] x 100 = 8.14%
As the figures suggest trade receivables are increasing at a faster pace than sales, which is not a good sign.
Looking at the case of Jet, we can see that it has contingent liabilities of ₹5250.97 (Cr.) which it might have to pay anytime in coming future but looking at the current scenario of cash, we can conclude that the company doesn’t have the capacity to pay that.
Price to free cash flow is calculated as (MCAP/ NET Cash Flow). If Price to free cash flow is less than CMP, that is a good sign. Lower it is better it is, but it should not be negative as in case of Jet airways. In Jet it is -10.66. Negative PCF indicates that the company is having net negative cash flows.
This Ratio guides us about Financial condition of company; that whether it can pay back the debt it has or does it have any chances of filing bankruptcy.
Score below 1.1 - Company has high chances of Bankruptcy
Score between 1.1 – 2.6 - Grey area chances are there of improving or even downgrading
Score above 2.6 - Condition is good (Green Signal)
The Altman Z score of Jet Airways is 0.65.
We shall just not look at the amount of earnings but also focus on quality of earnings or from where is that income coming from in the company.
Net Profit = Operation Profit - Interest Cost - Depreciation + Other Income
Net Profit = ₹1034 - ₹840 - ₹887 + ₹1083 = ₹390
This shows us that the current year net profit of ₹390 (Cr.) is attained by other income. It is other income which helped this profit figure to remain on positive side, otherwise like previous years it would have been a negative. If we exclude other income, company has incurred net loss of ₹693 Cr.
If we look at 13 Years Average net profit of Jet Airways :
The company has incurred net loss of ₹5880.55 Cr. Clearly, company is not able to manage operations properly.
In Economics, we have studied that prices of complimentary goods affect prices of other commodities also. In case of Jet Airways, they are highly dependent on ATF which is directly related to Crude oil, so if crude oil is going to be cheap they will be able to procure ATF at lower cost thus increasing their profit margins (we have seen in above parameter), but what if prices of crude oil starts increasing again & goes towards it’s highs of 2013 i.e., 7784 which was hit on 28th Aug, 2013, earnings of Jet will again plunge down. The impact could be clearly seen in the income statement of March, 2014. Jet reported it’s all time high Net loss of ₹3667.85 Cr.
Let’s have a look at both Crude Oil & Jet Airways chart using technical analysis.
If we clearly notice the two charts, we can see that crude is forming Inverted Head and shoulder, so if by any chance it breaks the neckline; this is going to be bullish and prices of crude will start surging.
Jet on the other hand is making Top Head and Shoulder technically, which is completely reverse of what we saw in Crude. This suggests in coming time if the neckline is breached the stock will plunge down and not give any chance to investor to come out of the trap.
Note: After 7th October 2015 Crude oil started falling in international market, so that benefitted Jet as they incur heavy expenditure towards ATF (Air Turbine Fuel). On 11th Feb 2016 Crude made its life time low of 1805 and it was during that time, Jet made its year high by touching ₹796. Interestingly, Nifty was bleeding in Feb 2016(Hit a low of 6825) & Jet was at trading at 52 weeks high. As on 11th July, 2017 Nifty has hit all time high of 9830 & Jet Airways is not even able to cross its last year high (Jet Airways high on 11th July, 17 is ₹624). So the conclusion is very clear, dependence on crude is very high.
To end, after analysing all the above parameters we can say that Jet can be one of the Future Penny Stock; subject to company failing to improve its operational efficiency which looks a sign of concern as of today. When analysing any company, we should also keep in mind these factors and judge companies over them as they show us the true picture and will save us from investing our money into wrong place.
"Time is the friend of the wonderful business, the enemy of the mediocre."- Warren Buffett
Special Thanks to Dev Veer Vikram Garg for helping me in compiling lecture notes. Do post your feedback on the case. Your feedback is important. Thanks for reading it :)
Varun is the director of Profit Idea. He is a multi-skilled experienced professional in academics, corporate and administration fields. He has over 10 years of corporate training experience in the field of finance & provides training for CFA, MBA, Stock Market (Derivatives, Fundamental & Technical Analysis) & various other financial subjects. He is also associated with various institutes, boards & banks. Varun holds financial and investment qualifications from Delhi University, Yale University, London Business School, Indian School of Business, Columbia University and IESE Business School.