No qualms on survival is the investment thesis
Based on the existing free cash, cost cutting measures and additional Rs50bn liquidity available, InterGlobe Aviation (IndiGo) remains well positioned to weather the Covid-19 impact. This is the singular, yet, very germane investment thesis considering the robust long-term potential of Indian air traffic and the weak market position of competitors. We value IndiGo at 20x core FY22 earnings (exinvestment income) of Rs18bn and add expected free cash balance of Rs130bn in FY22. Our target price stands at Rs1,270 (unchanged). Maintain BUY.
* Free cash dips Rs14bn QoQ (Rs75.2bn in Q1FY21 from Rs89.3bn in Q1FY20). IndiGo had a cash burn (total fixed costs less the contribution from flights in operation) of Rs400mn per day in April, which has subsequently declined to Rs300mn in June. Assuming there was an average Rs350mn/day of cash burn in the quarter, the total Q1 cash burn would be ~Rs31.5bn. We estimate cash receipt of ~Rs6.5bn from the sale and leaseback of 12 neo aircraft received in Q1FY21. Hence, net of SLB profits, cash loss would be Rs25bn. This translates to total savings of Rs11bn through vendor/lessor negotiations, which would lead to Rs14bn of ultimate cash decline QoQ.
* How long will free cash last? Based on Q1FY21 run rate and considering IndiGo is following a strategy of continued induction of neos, the present free cash of Indigo will last for (1) four quarters even without any vendor negotiations and (2) seven quarters including the impact of negotiations seen in Q1FY21. There is additional available liquidity of Rs50bn through sale and leaseback of owned aircraft and other cost cuts. Hence, we believe, there are no qualms on survival for IndiGo.
* CASK should improve in FY22 (estimated Rs3.50) over FY20 (actual Rs3.74). This is primarily driven by lower maintenance and fuel expense of neos and cost savings. We factor CASK ex-fuel of Rs2.43 in FY22 compared to Rs2.45 in FY20. Our CASK includes all operating cost along with fuel and depreciation. Fuel CASK is expected to decline from Rs1.3 in FY20 to Rs1.07 in FY22E (assuming Rs50,000/kl of ATF vs Rs35,000 in June2020).
* Market share increase has slowly started playing out, can gain further momentum. Jun’20 market share for IndiGo stood at 53% vs 48% in Jan’20.
* We factor RASK of Rs3.65 for IndiGo in FY22E compared to Rs3.72 in FY20. We factor ASK growth of 10% between FY20 and FY22 with passenger count dropping from 74mn in FY22 to 69mn in FY22 (26mn in FY21).
* CASK should improve in FY22 (estimated Rs3.45) over FY20 (actual Rs3.74). This is primarily driven by lower maintenance and fuel expense of neos and cost savings from employee and other expense. We factor CASK ex-fuel of Rs2.37 in FY22 compared to Rs2.45 in FY20. Our CASK includes all operating cost along with fuel and depreciation. Fuel CASK is expected to decline from Rs1.3 in FY20 to Rs1.07 in FY22E (assuming Rs50,000/kl of ATF vs Rs35,000 in June2020).
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