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Working Paper

PROJECT STUDY ON FUNDAMENTANL ANALYSIS OF

JET AIRWAYS

GUIDE FACULTY

Ms. BINDU NAIR

CREATED BY

ANKIT KAPOOR 37/2005

In Partial Fulfillment of Three Year Part Time Course PostGraduate Program In Management

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT

SHASTRI SADAN, SECTOR III, R.K.PURAM NEW DELHI

110022

1



ACKNOWLEDGMENT

A project work is always an amalgamation of the effects ideas &cooperation of a number of entities. This project is a culmination of

the help and support provided to me by my project guide.

I am highly indebted to Mrs. Bindu Nair for her guidance and directionin the completion of this project.

I also wish to place on record my gratitude to the authors of variousbooks, articles and publications, which I have consulted during thecourse of this project study and which have been duly acknowledgedby me in this project.

April 6, 2008

Ankit kapoor

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Objective Of The Project

“The basic Objective of this Project is to provide FUNDAMENTANL

ANALYSIS OF JET AIRWAYS. A technique that attempts todetermine a security’s value by focusing on underlying factors that

affect a company's actual business and its future prospects taking into

consideration the qualitative and the quantitative aspects of the

concerned company.”

Methodology

The methodology that will be followed for the study will be:

Collection of secondary information

Studying the models used for fundamental Analysis

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Executive Summary

This report aims at evaluating Jet Airways analysis on the fundamental

part taking into consideration the qualitative and the quantitative aspect

of the company’s performance and future prospects. It attempts to

determine a security’s value by focusing on underlying factors that

affect a company's actual business.

The company analyzed on the basis of qualitative aspects include,

Industry analysis i.e. how good or bad the industry is performing. What

are the future plans of the aviation industry supported by the

government policy. What are the kind of cost structure that suits India.

The project also determines what all benefits and constraints does the

government policy have to the aviation industry.

After doing the industry analysis, company analysis has also been done

taking into consideration what all benefits does the company have and

what competitive edge does the company have over other market

players.

At the end quantitative aspect of the company where analyzed by doing

the financial analysis of the company. For doing the financial analysis

free cash flow approach have taken into consideration. Ratio analysis of

the company has also been done to view the performance of the

company.

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Index

Company Background…………………………………...…………...6

Aviation Industry Analysis………………………..……………….…8

Future Plans…….……………………………..……………….…10Parking slot availability: key to success….…..…………………12

Low cost structure……………………………..…………………14

Comfortable aircraft rollout plan……………..………………...16

Conducive policy environment…………………..………………18

Concerns…………………………………..…………………………20Route dispersal guidelines constrain profitability…………..….20

Infrastructure constricting growth……………..…….…….…...20

Further competition cannot be ruled out………...….…….……21

Airline functions need re-engineering…………………..…....….21

Company Analysis…………………………………………………...22Global routes: new vistas for growth…………………….……...22

Most promising business model amongst peers…………….…..22

International operations to boost revenue………………………24

Robust rollout plan…………………………………………….…25

Key Demand Drivers……………………………………………..28

Well positioned in terms of right slots available………………..18

Investment Concerns………………………………………………..30JetLite lesser returns………….………………………………….30

Govt. policies may mar international rollout plans……........….30

Financial Analysis………………………..………………………….32Free Cash Flow Analysis…………...…………………………….32

Assumptions and Explanation…………...………………………32

Financial Ratios……………………………………………………..35Debt-Equity ratio………………………….………………….….35

Current Ratio…………………………….………………………36

Interest Coverage Ratio………………………………………….37

Fixed-Asset Turnover……………..……………………………..38

Price-Earnings Ratio (P/E Ratio)……………………………….39

Result…………………………………………………………………40

Recommendation…………………………………………………….40

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Company Background

Jet Airways, India's largest private sector airline, has grown over the years to become the

preferred carrier in the country. Subsequent to its acquisition of Sahara in April 2007, ithas now become the only private airline having rights to fly international routes. Having

started its international operations in 2004, it currently flies to eight international

destinations, including Europe, the US and Asia. The airline operates one of the youngest

aircraft fleets in the world with an average age of 5.3 years. It has a total fleet size of 65

comprising 4 Boeing 777-300ER, 49 Boeing 737-400/700/800/900, 4 Airbus A330-200

and 8 ATR 72-500 turboprop aircraft.

The airline won the Galileo Express Travel and Tourism Award in the 'Best full Service

Carrier' category for the 4th consecutive year in Nov 2006, apart from a host of other

prestigious awards.

Jet Airways acquired Sahara (now JetLite) in April 2007 for Rs14.5bn making it a 100%

subsidiary. JetLite has been mandated to operate as a value-based, low-cost carrier and

complement Jet Airways' operations.

Fact Sheet

Management Mr. Naresh Goyal - Chairman

Fleet size 71

Network Jet Airways currently operates 350 flights daily to 54 destinations

in India and beyond, including New York (JFK), New York

(Newark), Toronto, Brussels, London Heathrow, Singapore, Kuala

Lumpur, Colombo, Bangkok and Kathmandu.

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Key Milestones

1993 : Start Of Operations

2004 : Commencement of International operations

2005 : IPO

2007 : Sahara acquisition

// Sources of Company Background company website

http://www.jetairways.com/

http://www.hdfcsec.com/

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Aviation Industry Analysis

The civil aviation sector in India is riding a high growth phase. The country is rapidly

developing its aviation infrastructure to take-on expansion in passenger and cargo

movements. The current infrastructure consists of 126 airports, of which 11 aredesignated international airports. In 2006-07, Indian airports handled 96 million

passengers (including both embarked and disembarked) and 1.4 million tone cargo.

//source of data Airport Authority of India.

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//source of data Airport Authority of India.

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Future Plans

The Indian aviation sector will attract investments to the tune of US$150bn in the next 10

years. This investment will be required for airport modernization, fleet acquisition andsetting up of MRO and other facilities, such as pilot training institutes etc.

The ambitious vision for Indian Airports for 2020 is of:

• 100 million passengers

• Cargo in the range of 3.4 million tone per annum

// Source IATA

http://www.iata.org/

A substantial rise is a direct effect of the low cost fares that have changed the face of

Indian civil aviation sector. In India, demand for low-cost travel has skyrocketed, with

domestic flight operations in this segment showing an heavy increase in the number of

consumers.

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In light of this fast paced development of the Indian civil aviation industry, opportunities

exist for airlines and organizations involved in airport infrastructure & management,

passenger & cargo handling, and related services. The Indian government's decision to

allow private sector participation makes India a very attractive market and destination for

airport equipment manufacturers and service providers from across the globe.

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Parking slot availability: key to success

An important feature of the international airline industry that is re-defining domestic

industry is the airport dominance effect. World travel experience suggests that

international passengers (substantially more than on the domestic market) travel to or

from concerned airlines' hub airports. This kind of airport dominance contributes

substantially to airline profitability in the form of inherently higher fares and service

charges. Add to this the fact that cost is better rationalized at hubs. Clearly, airport

dominance contributes more than route dominance to an airline's ability to perform better.

India too is being influenced by the airport dominance effect, as the country's geographic

land mass (which easily rivals Western Europe) offers wide network cover. In India,

airport dominance is played through night parking slots that allow airlines to place their

aircrafts to optimally enplane early travelers of the day. A look at parking slot

distribution shows most aircrafts are parked at the Mumbai-Delhi route, which accounts

for about 46% of total parking bays available. These are the major traffic hubs. They

account for about 42% of the total passenger traffic. Any airline wishing to have a

profitable business cannot ignore this airport dominance effect.

//Source Airport Authority of India

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Jet has positioned itself as a dominant player in the Mumbai-Delhi sector. Because it has

premium parking slots in this sector, its airport handling charges are among the lowest at

8%.

13



Low cost structure suits India

Air Deccan entered the Indian market in FY04 with its low cost strategy, and within

a year of its operation took away market share from FSCs.

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Since then, there have been five low cost carriers in the country, with each of them

clocking better load factor than FSCs. Clearly, there has been a shift in customer taste

towards LCCs. However, many customers have been let down by some of these LCCs

due to poor service.

While the business class and the elite continue to prefer FSCs, the mass market in India is

expected to favor LCCs that can deliver a requisite level of service.

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Comfortable aircraft rollout plan

Boeing foresees that India will need 856 aircrafts at an estimated cost of US$72.6bn over

the next 20 years. Airbus plans to invest more than US$1bn in the Indian aviation

industry in the next 10 years. Jet Airways, India's largest private airline, has placed an

order for 20 Boeing 737-800 series aircrafts. SpiceJet has ordered 10 next-generation

Boeing 737-800 aircrafts, valued at a list price of more than US$700m.

Indian carriers have collectively ordered for approximately 480

aircraft through 2012

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Of the above orders placed with Airbus, Indian Airlines' order is intended at replacing itsageing fleet, while Indigo has ambitious plans to increase its fleet size to 100 though we

don't expect it to take delivery of all the aircrafts it has ordered for. Indian carriers have

collectively ordered for approximately 480 aircrafts through 2012 against their current

fleet size of 280 aircrafts. Over 135 aircrafts were added in the last two years alone for

scheduled services, with another 50 being added for general aviation services. Over the

next 12 months, Kingfisher Airlines is expected to be the most aggressive in terms of

fleet expansion.

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Conducive policy environment

Ample opportunity for the aviation industry to participate in

India’s rapid economic progress

The government is attempting to reform the domestic aviation industry, as it assumes

increasing importance in a globally connected world. Aviation contributes to nearly 95%

of all international arrivals and nearly 40% of EXIM trade by value. Increased air

connectivity is therefore vital for trade, business and tourism. As per conservative

estimate made by International Civil Aviation Organization (ICAO) planners, for every

Rs100 spent on air transport, the expenditure triggers Rs300-350 to be spent additionally

in the economy. This presents ample opportunity for the aviation industry to participate in

India’s rapid economic progress. In view of such a possibility, the government has put in

place certain policy framework, under which it has given ample leeway to airlines to

grow. The current guidelines stipulate:

India still has feeder routes that remain unexplored due to various

reasons

• 100% FDI permissible for existing airports; FIPB approval required for FDI

beyond 74%

• 100% FDI under automatic route is permissible for green-field airports

• 49% FDI is permissible in domestic airlines under the automatic route, but not by

foreign airline operators

• 100% equity ownership by Non-Resident Indians (NRIs) permitted

• AAI Act amended to provide legal framework for airport privatization

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• 100% tax exemption for airport projects for 10 years

The government's 'open sky' policy and rapid growth in air traffic have resulted in the

entry of several new privately-owned airlines and increased frequency/flights for

international airlines.

The government is mulling an allocation of Rs521bn in the 11th Plan period to boost the

country's aviation infrastructure. This is nearly four times the 10th Plan allocation of

Rs130bn. Most of the outlay will be met through internal resources of various

organizations connected with airport infrastructure. The government is also undertaking a

number of steps to ensure faster growth in the aviation sector, including opening more

international routes for private carriers, relaxing conditions to fly abroad and ensuring

greater private participation in aviation infrastructure. Revenue optimization

opportunities through unexplored feeder routes still exist, The tried and trusted demand

curve that relies on the principle of reduce price and induce demand can be the next focus

area. India still has feeder routes that remain unexplored due to various reasons such as

rigid route dispersal norms, lack of airports and elitist pricing by airlines.

The key to revenue optimization is to test these very routes to feed passenger flow intomainstream hubs. Raising per departure revenue through low pricing and tempting people

who have never flown to fly at least once can be a potent business strategy. For instance,

Haj pilgrims traveling by air. Religious tourism within India can similarly be tapped by

airlines. Yet another example could be that of students flying abroad for higher studies.

The idea is to tap the vast student population traveling abroad from their hometowns in

India to pursue higher studies. Once some of these non-travelers are initiated to flying

once, they can be looked at as prospective travelers once or twice a year, considering that

income levels are rising.

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Concerns

Route dispersal guidelines constrain profitability

As per a Directorate General of Civil Aviation (DGCA) order on route disbursal

guidelines, it has been stated that a scheduled air transport service provider operating

Category I routes is required to deploy at least 10% of ASKM on Category II routes and

at least 50% of ASKM on Category III routes. Subject to approval from the DGCA,

concerned operator could meet this obligation by providing services either by aircraft

available in its fleet or with aircraft in any other operators' fleet on mutually agreed terms

and conditions.

Category II comprises routes to destinations like J&K, North-East states and the islands

of Andaman & Nicobar. Category III comprises remaining routes. Simply put, Category

II routes are un-remunerative, and constitute about 6% of the capacity of an airline and

can easily drain out 1.2% to 1.5% of an airline’s margin.

Infrastructure constricting growth

The tremendous growth anticipated in the aviation industry is possible only if the

country's infrastructure is in place. The industry is already facing problems of congestion

during peak hours at major airports. The current airport infrastructure in the country is

inadequate to support the tremendous expansion in fleet announced by major players. The

ministry of civil aviation has decided to modernize and upgrade 35 non-metro airports

across India at an estimated investment of US$ 800m. Any delay in the development of

these airports would be a major constraint for the industry's rich fortunes ahead.

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Further competition cannot be ruled out

Events that keep passengers away from air travel could trigger another round of

price cutting

While there are well intentioned government policies and controls like FDI norms,

license control, landing slots and flight schedule allocations that allow ample opportunity

for airlines to remain profitable, but the sheer growth in airline capacity can induce

competition. This has happened in FY06 and FY07, and its recurrence cannot be ruled

out. The need to fill aircrafts with maximum revenue passengers is the key to making

profits. Events that keep passengers away, including a slower than anticipated GDP

growth, may trigger another bout of competition.

Airline functions need re-engineering

With IT now providing innovative solutions, airlines can now use these to emerge

from their inefficiencies

Over the years, airlines have been straddled with legacy business processes with hardly

any effort at re-engineering innovative solutions. With the IT industry providing a

commendable backbone, airlines can now emerge from the inefficiency they have been

restrained with. Innovative strategies and new technologies may well offer cost savings,

but at the same time they can be hard to implement given the cost.

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Company Analysis

Global routes: new vistas for growth

Jet Airways, the oldest private carrier in the industry having a fleet size of 71 and a

market share of 22.5%, is considered the most preferred carrier in the country. The

recently bagged 'Best Full Service Carrier' by Galileo Express Travel Award and the Best

Airline Award by TTG Travel Asia (4th time in the last five years) speaks volumes of its

world-class in-flight service and high levels of reliability among domestic carriers.

Post the acquisition of Sahara (now JetLite), Jet is the only private carrier having rights tofly on international routes. JetLite would fly as a value based low cost carrier. The

business model of Jet now has a mix of low cost carrier (LCC) and a full service carrier

(FSC) that works best in a growing country like India. Jet also transitions between

regional (short haul) and international carriers (long haul) and is poised to emerge as a

strong player in either forms of business.

Most promising business model amongst peers

After a concerted effort at revamping its business operation, results of which are now

visible in the form of a new modernized logo and a contemporary color scheme, Jet

Airways is now able to connect with a wider audience in the aviation space.

Jet's business model now has a mix of LCC and FSC, which seems to work best in a

growing country like India. The airline also transitions between regional (short haul) and

international carriers (long haul) and is poised to emerge a strong player in either forms

of business.

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Jet domestic competitors (FY07)

Jet international competitors (FY07)

This business model works best in a growing country like India, where not only will

domestic passenger travel growth far outstrip GDP growth, but also inbound/outbound

travel size increase considerably. India's sheer geographic size under a single time zone

presents unique opportunities for regional carriers. Besides, the national designated

carriers are still under-deployed (aircraft departure-wise) in comparison to foreign

airlines.

This situation will be potentially more promising for Jet than other carriers, as it now has

sufficient fleet expansion capacity on the cards.

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International operations to boost revenue

Post the acquisition of Sahara, Jet is the only player in India having international flying

rights, besides Air India and Indian Airlines. The airline has significantly ramped up itsinternational operations. From a modest revenue of Rs587m in the first year of its

operation in FY05, Jet has come a long way and achieved a revenue of Rs13.57bn in

FY07.

With robust top-line growth, Jet has achieved steady state-seat factor across major

locations. Rights to fly in the lucrative Gulf region and the recently launched flights to

North-America via Brussels would further drive the airline's international revenue.

Despite increasing competitive pressure, which saw the industry run into estimated losses

of close to US$400m, Jet has managed to report a PAT of Rs280m in FY07. With the

entire industry continuing to report losses in H1FY08, Jet has reported a net profit of

Rs593m (helped by profit from sale and lease back operation) as against a loss of

Rs1001m in the same period last year.

24



However, including the performance of JetLite, Jet's estimated losses are at Rs 6.6bn in

FY07E.

Jet has taken on itself the responsibility of turning around JetLite by first bringing about

an operational improvement through adequate fleet utilization. Jet has already put into

service 7 of the 10 aircrafts that were not operational at the time of its acquisition.

Through the new management's expertise and operational efficiencies we expect JetLite

to be profitable in the near future.

Robust rollout plan

The company has chalked out a very ambitious fleet expansion plan. With its current fleet

size of 65, the airline expects to almost double it to 112 by FY11. During the same

period, JetLite's current fleet of 24 aircrafts would be strengthened by 50% to 36 aircrafts

by FY11, thus taking its total capacity during that period to 148 aircrafts. Currently, 19 of

JetLite's aircrafts are in flying condition (14 at the time of acquisition), while the rest are

expected to be fit for flight by the end of Q3FY08.

25



Fleet expansion plan of Jet

Fleet expansion plan of JetLite

26



Key Demand Drivers

International market under-served by Indian carriers

With just a single designated national carrier (Air India) serving international passenger

traffic until recently, international markets were clearly under-served. Indian Airlines was

allowed to fly certain international routes (primarily to Gulf countries) to cater to the

major traffic on this sector. Given the inadequate size of its fleet, this airline could hardly

deploy seats upto 50% permitted under most bilateral agreements.

As can be seen from the above chart, Indian carriers carried only 29% of the total

international passengers in FY06. With Jet now flying international routes, it can

comfortably deploy the permitted ASKMs. This may mean market share losses for some

foreign airlines. We expect these airlines to react with discount fares, just to recover the

lost share through better seat factors. But as routes mature, we expect competition to be

less intense, leaving enough room for Jet to manoeuvre a reasonable profit.

27



Well positioned in the Indian market with the right slots available

Mumbai and Delhi have been the major hubs of Indian aviation. Together they handleabout 42% of total passengers flown to any destination (including international). Clearly,

all airlines have to deploy their best seats on this sector, either in terms of prime flight

timings or prime departure terminals or prime check-in counters. More importantly, an

aircraft rolling out of its night parking bay, need to fly empty to commence its first flight

of the day, as it entails burning of costly fuel. Jet has been able to get hold of prime

parking slots in these two cities, thereby being able to serve its customers with the all

important peak hour flight between Mumbai-Delhi.

For Jet, the Mumbai-Delhi sector has been a key revenue driver, accounting for 11.3% of

its total revenue in FY07 and 11.8% in H1FY08. It is not only a revenue generating

sector, but also a significant profit generating sector for Jet.

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29



Investment Concerns

Jet Lite may prove to be a drag on returns

Jet Lite may not contribute to profits for the next couple of years

Jet has taken on itself the responsibility of turning around JetLite by first bringing about an

operational improvement through adequate fleet utilization. Of the 24 aircrafts that JetLite

has, Jet has been able to press into service 21 so far.

The grounded aircrafts add to costs that Jet can ill afford at this juncture. Moreover, even

with the 21 aircrafts in air, JetLite has been reporting huge losses. We do not expect JetLite

to be a profit contributing division for the next couple of years.

Govt. policies may mar international rollout plans

The liberal govt. policies could bring in relatively new players into the

industry; this could hamper Jet’s prospects.

As per government diktat to airline operators, Indian carriers can service international

destinations with their own flights, provided it has accumulated five years of domestic flying

experience. Moreover, the carrier needs a minimum fleetsize of 20 aircrafts to be able to fly

to foreign shores. This may not be what many consider to be an 'open sky' policy. Hence, the

government of late has been intending to further liberalize these conditions, thereby allowing

relatively inexperienced carriers to fly abroad. This may mar Jet's international rollout plan,

as it braces for increased competition on foreign shores.

Jet had balanced its fleet expansion on the premise of having a first mover advantage (first

among private carriers) on international routes. The airline also took the lead in acquiring

Sahara Airlines, hoping to add further distance (of years) between itself and other competing

30



private airlines. All these plans could come unwound in the event of the government pressing

forth with its liberal policies.

31



Financial Analysis

Free Cash Flow Analysis

Financial Year 2003 2004 2005 2006 2007 2008E 2009E 2010E 201

SALES 2875.68 3447.42 4338.01 5666.55 7005.13 8751.55 10933.37 13659.13 17064

PROFIT -244.45 163.11 391.99 452.04 27.94 238.80 298.33 372.71 465

DEPRECIATION 473.27 515.15 457 406.41 414.1 1264.34 1579.55 1973.34 2465

FIXED ASSETS 3244 3127 2641 4788 7292 10109.17 12629.45 15778.05 19711

WORKING CAPITAL 545.7 545.72 1076.38 2489.08 1180.77 2107.38 2632.77 3289.13 4109

Change in fixed assets -117 -486 2147 2504 2817.17 2520.28 3148.60 3933

Change in working capital 0.02 530.66 1412.7 -1308.31 926.61 525.38 656.37 820

Free cash flow -2240.65 -1167.78 -1458.92 -1822

Discounting rate 1.38 1.91 2.65 3

PV Free cash flow -1620.06 -610.49 -551.45 -498

NPV -3280.13

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WORKING NOTES

2003 2004 2005 2006 2007

CURRENT ASSETS 1207.16 1398.72 2156.27 3889.14 3402.32

CURRENT LIABILITIES 661.46 853 1079.89 1400.06 2221.55

WORKING CAPITAL 545.7 545.72 1076.38 2489.08 1180.77

Dividend 0 0 25.9 51.8 51.8

G 25.99%

Sales Cagr 0.24931

NPR 0.02729

Depreciation rate 0.12507

Sales turnover ratio 1.15513

WCR 0.2408

Market price 530

Ke 0.38306

Assumptions and Explanation:

• All of the fundamental analysis has been done on the basis of

secondary data only. No contact with the management has been

made for the purpose of research, However few of the analyst were

contacted for the same.

• Since the analyst lacks the ability and skills to quantify the

qualitative aspects of the industry and future growth prospects the

company has been valued for future earnings, profitability and

efficiency in the same manner in which it has performed in the past.

• The analyst has taken the neutral view towards the company.

Neither the analyst is too optimistic nor to pessimistic about the

analysis of the company. So, same efficiency and profitability

33



figures have been taken for future prediction of the profitability of

the company.

• Future sales figure have been calculated taking the same CAGR

taking into consideration the sales of past five years.

• Profit has been calculated by the average net profit ratio of last five

years

• To calculate the expected fixed assets of the company sales

turnover ratio for previous years was calculated and then with the

help of expected sales figures, Fixed assets were determined.

• To calculate the expected depreciation on fixed assets of the

company average depreciation rate for previous years was

calculated and then with the help of expected fixed Assets figures,

Depreciation was determined

• Future Working capital has been calculated as the percentage of

sales.

• Cost of Equity has been calculated with the help of dividend

Capitalization model for which the growth rate of dividend was

taken for last three years. As no dividend was paid before that

period.

34



Financial Ratios

Debt-Equity ratio

The debt-equity ratio is a leverage ratio that compares a company's total liabilities to its

total shareholders' equity. This is a measurement of how much suppliers, lenders,

creditors and obligors have committed to the company versus what the shareholders have

committed.

Formula:

A high debt/equity ratio generally means that a company has been aggressive in financing

its growth with debt. This can result in volatile earnings as a result of the additional

interest expense.

A ratio greater than one means assets are mainly financed with debt, less than one means

equity provides a majority of the financing.

If the ratio is high (financed more with debt) then the company is in a risky position -

especially if interest rates are on the rise.

In the above figures we can see that the Debt-Equity ratio was very high in the year 2003

which has been minimized to a very large extent in the year 2005, 2006 and 2007. Still

this would expose the company to risk such as interest rate increases and creditor

nervousness. One way to improve their situation would be to issue more debt and use the

cash to buyback some of its outstanding shares.

35

Name Mar-07 Mar-06 Mar-05 Mar-04 Mar-03

Debt-Equity Ratio 2.58 2.02 3.47 72.01 28.54



Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations

Formula:

The ratio is mainly used to give an idea of the company's ability to pay back its short-

term liabilities (debt and payables) with its short-term assets (cash, inventory,

receivables). The higher the current ratio, the more capable the company is of paying its

obligations. A ratio under 1 suggests that the company would be unable to pay off its

obligations if they came due at that point. While this shows the company is not in good

financial health

In the above case if we see the company’s current ratio can give a sense of the efficiency

of a company's operating cycle or its ability to turn its product into cash. They have a

ratio of above over past five years, thus showing its ability to pay back its short-term

liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

If the company have trouble getting paid on their receivables or have long inventory

turnover can run into liquidity problems because they are unable to alleviate their

obligations.

36

Ratio Mar-07 Mar-06 Mar-05 Mar-04 Mar-03

Current Ratio 1.34 1.64 1.39 1.45 1.57



Interest Coverage Ratio

A ratio used to determine how easily a company can pay interest on outstanding debt.

The interest coverage ratio is calculated by dividing a company's earnings before interestand taxes (EBIT) of one period by the company's interest expenses of the same period:

Formula:

The lower the ratio, the more the company is burdened by debt expense. When a

company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may

be questionable. An interest coverage ratio below 1 indicates the company is not

generating sufficient revenues to satisfy interest expenses.

In the above scenario we can see that the interest coverage ratio for the year 2007 is just

0.3 which depicts that the company does not enough earning to pay off its interest on

debt. Thus, the company is not generating sufficient revenues to satisfy interest expenses.

The Interest coverage ratio prior to this was quite fine as it was above 1.0; thereby

providing a sense of the safety margin a company has for paying its interest for any

period. A company that sustains earnings well above its interest requirements is in an

excellent position to weather possible financial storms. By contrast, a company that

barely manages to cover its interest costs may easily fall into bankruptcy if its earnings

suffer for even a single month.

It is usually said, an interest-coverage ratio of 1.5 is generally considered the bare

minimum level of comfort for any company in any industry. Thus this company does not

have a sound financial position.

37


Interest Cover Ratio 0.3 2.65 3.29 1.46 0.04



Fixed-Asset Turnover

This ratio is a rough measure of the productivity of a company's fixed assets (property,

plant and equipment or PP&E) with respect to generating sales. For most companies,

their investment in fixed assets represents the single largest component of their total

assets. This annual turnover ratio is designed to reflect a company's efficiency in

managing these significant assets. Simply put, the higher the yearly turnover rate, the

better.

Formula:

Generally speaking, the higher the ratio, the better, because a high ratio indicates the

business has less money tied up in fixed assets for each dollar of sales revenue. A

declining ratio may indicate that the business is over-invested in plant, equipment, or

other fixed assets.

In this case the company do not have a higher Fixed asset turnover ratio, Yes it is

increasing every year thus it means there is a effective utilization of assets every year. It

would be correct to say that the company’s fixed asset turnover ration is good as the

major part of the investments of such companies are in air-planes as a result it can be said

that the company’s fixed asset turnover ration is good.

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Fixed Assets 1.43 1.24 0.89 0.75 0.78



Price-Earnings Ratio (P/E Ratio)

A valuation ratio of a company's current share price compared to its per-share earnings.

Formula:

In general, a high P/E suggests that investors are expecting higher earnings growth in the

future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the

whole story by itself. It's usually more useful to compare the P/E ratios of one companyto other companies in the same industry, to the market in general or against the

company's own historical P/E. It would not be useful for investors using the P/E ratio as a

basis for their investment to compare the P/E of a technology company (high P/E) to a

utility company (low P/E) as each industry has much different growth prospects.

If we compare the Price-Earnings Ratio (P/E Ratio) of previous years we can easily

figure out that the P/E ratio of the company decreased this year badly. Thus considering

the current P/E ratio it is not recommended to purchase this share.

39

Year Ratio

2007 20.98

2006 35.03

2005 27.2



Result

After taking the neutral view towards the company and calculating the

future free cash flows by taking into consideration same efficiency of

assets, same profitability for the company and same growth rate for

revenues, The company will report negative cash flows in the future. So

the company will not be able to generate enough cash after laying out the

money required for maintaining or expanding its asset base. The company

will not be able to pursue opportunities that enhance share- holder value

like developing new products, make acquisitions, pay dividends and

reduce debt.

Recommendation

Taking the value of the company calculated through free cash flow

approach, Interest Coverage Ratio, Price-Earnings Ratio (P/E Ratio), Debt-

Equity ratio into consideration the stock becomes a sell or avoid in the

long run in terms of its financial performance that it will report in the

future years. However there could be some unexpected events or catalyst

that could provide investors with positive returns in the short run but in

the longer term the stock becomes a sell or avoid.

project jet air1

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