Published on 10/10/2017 12:17:07 PM | Source: Motilal Oswal Securities Ltd

Indigo`s FY17 annual report highlights PBT declining 24% to INR21.4b due to weak - Motilal Oswal

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INTERGLOBE AVIATION FY17

INDIGO’s FY17 annual report highlights PBT declining 24% to INR21.4b due to weak operating performance. PBT was, however, supported by higher other income at INR7.9b, 37%of PBT). Further, deferred incentive recognized increased to INR5.3b (FY16:INR3.6b).Operating cash flow improved to INR37.7b (FY16: INR30.0b) due to rise in supplementary rent payables by INR8.3b and incentives on aircraft acquisition by INR7.1b. Sale (at INR6.1b) and lease back of aircraft acquired from IPO proceeds helped FCF to remain high at INR41.4b (FY16: INR28.5b). Dividend payout ratio remained high at 89.2% (FY16: 99.7%). In FY18, INDIGO raised INR25.3b by diluting 6% of the equity to pursue change in its business strategy to owning more aircraft. This could impact dividend payouts and return ratios. Net unhedged forex exposure was high at INR57.0b (1.5x of NW). Non-core assets at INR93.4b (2.4x of NW) led to RoCE of 21.4% despite high RoIC of 70.0%.

 

Declining yield, rising fuel costs impact EBITDA: INDIGO’s yield declined 10% to INR3.5 leading to fall in revenue per available seat kilometer (RASK); while, the load factor increased 100bps to 85%. Rising crude oil prices led to increase in aircraft fuel expenses to INR63.4b,34% of revenue (FY16:INR47.8b,30% of revenue). EBITDA declined 31% to INR21.4b. Profitability was, however, supported by recognition higher other income at INR7.9b (FY16:INR5.2b). Further, deferred incentives recognized increased to INR5.3b (FY16:INR3.6b).

Rising supplementary rents and incentives boost cash flows: Contribution of working capital changes to OCF increased to INR21.1b (FY16: INR3.1b), boosting OCF to INR37.7b. Increased deferred incentives, supplementary rent payables and forward sales added INR18.6b to OCF. In the last five years, incentives and net supplementary rent payables contributed INR12.7b and INR29.3b, respectively to operating cash flows.

High dividend payout; equity dilution to acquire aircrafts: INDIGO has consistently maintained its dividend payout (at 80-100%). The company has declared dividend of INR14.8b (FY16:INR19.8b) including dividend tax. Also, it has raised INR12.1b through an IPO in FY16 (5% dilution) and INR25.3b through a QIP in FY18 (6% dilution) for the acquisition of aircrafts.

Low R&M and S&D cost a differentiator; may increase: Short-term lease of six years and single kind of aircraft in its fleet helped INDIGO to gain an edge over peers in terms of repair and maintenance (R&M) expenses. Though 200bp higher for FY17, INDIGO’s R&M was INR6.9b – 4% of revenue, still the lowest among peers. Also, its S&D cost at INR1.2b (1% of revenue) are lowest amongst peers, due to low cost of global distribution system. Owning of aircraft, introduction of ATR fleet, and foray into long-haul international operations could increase these costs.

 

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