Another auditor trouble in offing? Jet Airways clarifies on delay in Q1FY19 results

At a time when corporate governance is on top of the mind of investors, the latest development at Jet Airways needs attention. The airline on Thursday informed stock exchanges that the audit committee has refused to approve company's June quarter results. Before any concrete reason for the deferment of results could have come out, a report today in The Economic Times claimed the chairman of audit committee and Jet board member Srinivasan Vishvanathan has resigned.

However, an official statement from the company clarified that he has not quit, but his term of office came to an end at the AGM held on Thursday. He further said the Q1 results were not declared as the management and the auditors need more time to finalise the accounts.

"The Audit committee on their request agreed to accord them further time to finalise the accounts and directed that the finalised accounts be placed before the Audit Committee thereafter," he said, adding this is not the first instance in corporate India of deferment of quarterly financial results by a company. "There have been similar deferments and such deferment of the financial results is dealt with under the relevant regulations. It is unfortunate that facts are being distorted and not being correctly conveyed in news reports."

Steep erosion in stock price

Jet Airways share price plunged a whopping 8 per cent on the BSE on Friday. It had touched its fresh 52-week low of Rs 261.60, down 13 per cent during the day. The stock has fallen over 66 per cent so far this year. By comparison, the BSE Sensex rallied over 11 per cent during the same period.

Jet Airways failed to reward investors even in the long run as the stock dipped over 41 per cent in the last ten years, while Sensex advanced a whopping 150 per cent. Jet Airways' rivals are in no better position either. InterGlobe Aviation, the parent of low-cost airline IndiGo, and SpiceJet tanked 10 per cent and 37 per cent, respectively, on a year-to-date basis.

Financial troubles galore!

The airline companies are in a soup as the rising global crude oil prices and the resultant jump in the price of aviation turbine fuel ate into the margins of airlines. ATF constitutes approximately 35-40 per cent of operational cost of an airline in India. For Jet Airways, it is 29 per cent of the overall costs.

The sharp depreciation in rupee, rising debt to purchase new aircrafts and the consistent price war among peers have also deteriorated the financials of the companies even as domestic passenger traffic has been recording strong growth.

According to Kotak Institutional Equities, the average monthly volume growth for domestic passenger traffic remained 21 per cent between January 2015 and June 2018, a compound annual growth rate (CAGR) of 19 per cent, which is far ahead of most consumer staple and discretionary products.

However, continued softness in yields of the airlines is surprising.

"We note that yields of the leading airline companies have continued to languish for the past few quarters and have not even kept pace with inflation, let alone the sharp increase in input costs," said the brokerage in a report dated August 6, 2018.

Target prices see downgrades

Global brokerage HSBC downgraded the target prices for IndiGo, Jet Airways and SpiceJet after IndiGo reported a massive 97 per cent drop in its net profit for Q1FY19, sending a distress signal to the entire aviation sector. SpiceJet is scheduled to report its Q1FY19 earnings next week. HSBC downgraded InterGlobe to Hold from Buy, cutting target price (TP) to Rs 925 from Rs 1,475. Jet Airways got downgraded to Reduce from Hold with TP now at Rs 150 from Rs 375. SpiceJet was downgraded to hold from buy with TP now slashed to Rs 102 from Rs 165. HSBC believes the headwinds in the aviation sector will continue to keep the volatility alive in the aviation stocks, and any strength in the yield should be the next catalyst.