Train to notice what one sees – Je …

What can you learn from the mayhem in Jet Airway’s stock price over the last 8 months?  The stock was priced at INR 883 in January 2018 is now available at INR 261 per share. This essentially means that equity share-holders who had been invested since the beginning of this year have lost 70% their hard-earned money during the corresponding period.

While the promoter was keen that the airline cut its costs for obvious reasons, the recent news regarding deferment of 1^st quarter results along with the quitting of audit panel, finally being ratified by the management hurt the shareholders more. One thing which got me thinking over the whole episode:

Was it possible to avoid this turmoil to begin with?

After all, to know what to do and not to, we first need some genuine understanding how reality is – how things are and what works and not. To understand reality, it is important to get a long-term view of the business.

1. Long-term Profitability: The company has incurred losses in 8 years of the last 10 years since March 2009, though the revenue increased at a CAGR of 7% over the corresponding period. This clearly demonstrates that sustainable profitability is one of the key determinants in choosing a good business to invest in. 
2. Historical Return on Investment: The company had invested close to INR 15,000 crores over the last 10 years, equally funded by both debt-holders and equity holders. Cumulative earnings available for both debt and equity-holders for the corresponding period was approximately INR 1,800 crs, approximating to a total return of 12% on capital, which means 1.2% return on capital per year.  With government secs yielding close to 7% – 8% p.a., investing in g-secs would have been obviously better – So much for the opportunity cost!!!
3. No pricing power: Commoditized industry like an airline, where the loyalty of customers shift basis the pricing of the tickets and the offers which they get, it is fool-hardy to imagine that airlines would have any pricing power. The flurry of offers during festive seasons, summer vacations, etc, among the airlines has only increased during the years. The air-fares between cities have remained constant over the years, with fixed costs increasing slowly due to inflationary conditions. Increase in revenue due to volume growth is like putting money in savings account continuously to keep generating returns.
4. No control on raw material costs: Profitability of airline business in any year is hugely dependent upon the crude prices, since it constitutes a major chunk of the total expenses for them. The raw material cost is obviously, is not under their control, which essentially means that they are poised to have wild oscillations of profitability and losses, basis the crude price movement. Jet was profitable in FY 2016 and FY 2017 primarily due to favorable crude prices. All good things eventually come to an end!!

After all, it is important to train oneself to notice what one sees or what others may overlook!!!

Disclaimer: Please note that these are my personal views. I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014. All investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.