We downgrade IndiGo to ADD (from BUY earlier). The management is shifting focus from growth to conserving cash and is revising its full year capacity guidance to factor in the weaker demand environment. While we believe that IndiGo is better placed to withstand the downturn due to its dominant market share/scale, a healthier balance sheet (as compared to competition) and cost cutting initiatives (phasing out of older CEO planes), the overall demand outlook is challenging.
* 4QFY20 Financials:
Revenues grew marginally to Rs 82.9bn (+5% YoY). While yields were flat YoY at Rs 3.7, the ancillary revenue grew by over 30%, driven by higher cargo vols. The airline reported an EBITDAR loss at Rs 127mn due to the adverse environment and forex loss of Rs 10.1bn. Correspondingly, the net loss in the quarter came in at Rs 8.73bn.
* Call & other takeaways:
(1) The domestic corporate segment and international segment are expected to recover with a lag, while leisure travel may recover sooner. (2) Mgmt is reducing unit costs and ensuring that the capacity is right sized to the market. (3) IndiGo is reducing fixed costs, which are 40% of total expenses. There has been a 5-25% salary cut. Further, to preserve cash, IndiGo will skip dividends this year. As the older CEO planes are phased out, the airline will make savings in supplementary rentals (Rs 16.8bn in 4Q). According to mgmt, these measures would result in additional liquidity of Rs 30-40 bn over the year. The cash balance as of FY20 is Rs 203.7bn (4) The mgmt clarified that they do not intend to either buy any airline or sell out their airline. (5) Amidst a challenging environment, IndiGo will benefit from its market dominance as well as its focus on cost control.
* Indigo is revising full year capacity guidance:
The airline currently has 262 aircraft and will be revising its full year fleet targets shortly based on their demand assessments. The carrier will be retiring its 120 CEOs over the next 2 years while the airline can have a phased addition of the A320 NEO's as per their negotiation with Airbus.
We are lowering our EBITDAR estimates by 75/43% for FY21/22E to factor in the changed demand environment. We roll forward our TP to Mar-22 and set a revised TP of Rs 1,110 (we continue to value the stock on 6x EV/EBITDAR). Key risks: Any resolution of promoter differences on the upside, an increase in oil prices on the downside
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