Rating Rationale
July 07, 2020 | Mumbai
SpiceJet Limited
Ratings downgraded to 'CRISIL C/CRISIL D'
 
Rating Action
Total Bank Loan Facilities Rated Rs.1445 Crore
Long Term Rating CRISIL C (Downgraded from 'CRISIL B/Negative')
Short Term Rating CRISIL D (Downgraded from 'CRISIL A4')
Short Term Rating CRISIL A4 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the Rs 550 crore letter of credit facility of SpiceJet Limited (SpiceJet) to 'CRISIL D' from 'CRISIL A4' and the rating on the long-term bank facilities to 'CRISIL C' from 'CRISIL B/ Negative'. The rating on other short-term facilities have been reaffirmed at 'CRISIL A4'.
 
The downgrade factors in deterioration in SpiceJet's liquidity profile, as reflected in invocation of standby letter of credit (SBLC), which remained unpaid for more than 30 days as on June 29, 2020. SpiceJet's liquidity deteriorated because of disruption in operations.
 
Aviation is one of the most impacted sectors from the nationwide lockdown to contain the Covid-19 pandemic. All international and domestic flights were suspended from March 25, 2020. The central government allowed domestic flights to resume operations at one-third capacity from May 25, 2020; however, international flights remain suspended. Even after the lifting of the lockdown, social distancing norms and fear of enclosed spaces will keep the overall air traffic volume low for a while.
 
The ratings continue to reflect SpiceJet's stretched liquidity because of disruption in operations, susceptibility to volatility in aviation turbine fuel (ATF) price and foreign exchange (forex) rates and high fixed cost structure. These weaknesses are partially offset by SpiceJet's established position in the airline industry and efficient operations.
 
On June 12, 2020, CRISIL had reaffirmed its 'CRISIL B/Negative/CRISIL A4' ratings on the bank facilities of SpiceJet. There was a procedural delay of three days in making payment to a banker in June 2020 towards the SBLC facility. CRISIL noted that the delay was a one-off event on account of logistical challenges faced by the company in arranging the required documentation. CRISIL noted that the delay of three days arose because of temporary operational challenges amid the lockdown and should not be recognised as a default, in line with the Securities and Exchange Board of India circular(SEBI/HO/MIRSD/CRADT/CIR/P/2020/53) issued on March 30, 2020.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SpiceJet and its subsidiaries, including SpiceJet Merchandise Pvt Ltd and SpiceJet Technic Pvt Ltd. This is because all these companies, collectively referred to as SpiceJet, are in the same line of business and under a common management.
 
CRISIL has added the discounted value of future non-cancellable lease payments to arrive at adjusted debt, while such lease payments are added back to the operating profit to arrive at earnings before interest, tax, depreciation, amortisation and rentals (EBITDAR). Debt protection metrics, including leverage and interest coverage ratios, are calculated using adjusted debt and EBITDAR.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Weaknesses
* Liquidity weakened by disruption in operations
Fixed costs account for 30-35% of the costs of an airline. Therefore, suspension of domestic as well as international flights in April and May 2020 significantly impacted the liquidity of airlines, including SpiceJet. The company incurred cost on fixed expenses, such as salaries, rent and aircraft leases, against nil revenue during this time. SpiceJet took steps such as deferring some of these payments, but the impact on liquidity has been significant.
 
* Susceptibility to volatility in ATF price and forex rates and high fixed costs inherent in the airline industry
ATF accounts for 35-40% of the total operating cost of players in the industry. ATF price is directly linked to global crude oil prices and is, therefore, volatile. Moreover, players have limited ability to pass on price increase to passengers because of intense competition and the likely adverse impact on passenger load factor (PLF). While significant decline in ATF price will partly cushion any loss incurred on account of high fixed cost, any support to the operating margin because of benign ATF price after normal operations have resumed will be a key monitorable.
 
Operations are also susceptible to forex fluctuations, as lease rentals and maintenance cost, which account for 35-40% of the operating cost, are denominated in USD. The ability to pass on any large increase in operating cost will remain constrained by intense competition in the sector.
 
Strength
* Established position in the airline industry and efficient operations
SpiceJet's domestic market share increased to 15.3% in February 2020 from 13.7% a year earlier, as Jet Airways discontinued operations from April 2019. The market position strengthened because of the availability of additional aircrafts from Jet Airways despite grounding of 13 of its own Boeing 737 MAX aircrafts after security concerns in April 2019. Furthermore, the company has been allotted slots vacated by Jet Airways, largely on metro and Tier-I routes, complementing its already strong presence in routes connecting Tier-II and III cities.
 
Moreover, during the lockdown, SpiceJet significantly ramped up its air cargo operations. The company's continued focus on the segment and its contribution to the overall cash flow will remain monitorables.
 
SpiceJet reported PLF above 90% over the eight months through February 2020, driven by efficient fleet utilisation. Furthermore, the company has put in concerted efforts into building a strong brand by focusing on on-time performance and minimal cancellations. Its ability to maintain a healthy market share and strong operating metrics upon resumption of normal services will be a key monitorable.
Liquidity Poor

Cash accrual was negative in fiscals 2019 and 2020. Moreover, high fixed costs and disruption of operations in April and May 2020 further weakened liquidity, which will remain poor on account of expected fall in occupancy because of the Covid-19 pandemic.

Rating Sensitivity factors
Upward factors
* Sustained improvement in liquidity on account of better cash accrual or fresh fund infusion
* PLF at 85-90%, indicating faster-than-expected recovery (as domestic flights are operational now)
 
Downward factors
* Continued weak liquidity profile impacting the debt servicing ability
* Cash loss because of high operating cost and low occupancy
About the Company

SpiceJet is promoted by Mr Ajay Singh, who held more than a 60% stake in the company as on June 30, 2018. SpiceJet is a low-cost carrier and the fourth largest airline in India by the number of domestic passengers carried.
 
Incorporated as an air taxi provider in 1984, it diversified into domestic aviation services in 1993 and was renamed Modiluft Ltd in 1994. The company got its current name in 2005, when services were relaunched after being shut down in 1996. SpiceJet operated its first flight in May 2005. Mr Kalanidhi Maran acquired a controlling stake in the company in June 2010, through the Sun group. The stake was sold back to Mr Ajay Singh in January 2015. The airline operates a fleet of Boeing 737 and Bombardier Dash aircrafts.
 
For the nine months ended December 31, 2019, the company reported operating revenue of Rs 9,508 crore and net loss of Rs 120 crore against operating revenue of Rs 6,587 crore and net loss of Rs 357 crore in the corresponding period of the previous fiscal.

Key Financial Indicators (Standalone)
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs crore 9129 7811
Profit After Tax (PAT) Rs crore -316 567
PAT Margin % -3.5 7.3
Adjusted debt/adjusted networth Times NM NM
Interest coverage Times -0.05 5.21

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity Level Rating assigned with outlook
NA Term Loan NA NA 13-Mar-19 250 NA CRISIL C
NA Term Loan NA NA 21-May-20 75 NA CRISIL C
NA Packing Credit in Foreign Currency NA NA NA 350 NA CRISIL A4
NA Letter of Credit^ NA NA NA 550 NA CRISIL D
NA Letter of Credit^ NA NA NA 220 NA CRISIL A4
^Bank guarantee is a sub-limit
 
Annexure - List of entities consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
SpiceJet Merchandise Pvt Ltd Fully consolidated Common line of business
SpiceJet Technic Pvt Ltd Fully consolidated Common line of business
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  675.00  CRISIL C/ CRISIL A4  12-06-20  CRISIL B/Negative/ CRISIL A4  19-07-19  CRISIL BB-/Positive/ CRISIL A4  09-10-18  CRISIL BB-/Negative/ CRISIL A4    --  -- 
        27-03-20  CRISIL B/Negative/ CRISIL A4      07-08-18  CRISIL BBB/Stable/ CRISIL A3+       
                03-05-18  CRISIL BBB/Stable       
Non Fund-based Bank Facilities  LT/ST  770.00  CRISIL A4/ CRISIL D  12-06-20  CRISIL A4  19-07-19  CRISIL A4  09-10-18  CRISIL A4    --  -- 
        27-03-20  CRISIL A4      07-08-18  CRISIL A3+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Letter of Credit^ 220 CRISIL A4 Letter of Credit^ 770 CRISIL A4
Letter of Credit^ 550 CRISIL D Packing Credit in Foreign Currency 350 CRISIL A4
Packing Credit in Foreign Currency 350 CRISIL A4 Term Loan 325 CRISIL B/Negative
Term Loan 325 CRISIL C -- 0 --
Total 1445 -- Total 1445 --
^Bank guarantee is a sub-limit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Approach to Recognising Default
CRISILs Criteria for Consolidation
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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