Cost structure set for accelerated improvement

We remain positive on InterGlobe Aviation (IndiGo) due to the following reasons: (1) Healthy balance sheet with free cash of Rs89bn in FY20, (2) improving cost advantage over peers led by accelerated retirals of ceo fleet and continued delay in MAX resumption, and (3) possible market share gain in FY22 with added earnings support from benign crude prices. IndiGo has several support levers available for generating liquidity support which will ensure sustainability in a Covid impacted FY21. We value IndiGo at 20x core FY22 earnings (ex-investment income) of Rs18bn and add expected free cash balance of Rs130bn in FY22. Our revised target price stands at Rs1,270 (Rs1,842 earlier). Maintain BUY.

* Cash flow has several supports available. The management indicated that they will continue to take delivery of new aircraft as scheduled (IndiGo took delivery of 42 aircraft in FY20) while aiming to return the 123 ceo fleet over the next two years. This will ensure steady stream of cash flow from SLB profits. Non-usage of ceo aircraft in 2020 will also lead to deferral of fresh provision for supplementary rentals for the ceo fleet. Stoppage of dividend, lower employee cost (salary cut in the range of 5 to 25% across the organization except for certain employees with lower pay grades, deferral of merit based salary increments and leave without Pay for the months of May, June and July) and vendor negotiations will help generate additional liquidity of Rs30-40bn over the remaining FY21.

* FY21 remains largely uncertain; resumption of flights is a positive. Capacity flown, PLFs, fuel remain largely uncertain in FY21. As such, the earnings remain largely uncertain. Our loss estimate of Rs37bn in FY21 factors recovery from Covid in 2HFY21 along with graded recovery in capacity flown and PLFs.

* 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).

* We factor RASK of Rs3.73 for IndiGo in FY22E which is flat compared to FY20E. Fares will get support from lower capacity and expected demand recovery offset by possible lower PLFs. We factor ASK growth of 10% between FY20 and FY22 while keep passenger count flat to factor a drop in PLF in FY22.

* Maintain BUY. Strong Balance sheet remains main investment thesis as earnings remain uncertain in FY21. Management insights on cost reductions, available liquidity support and accelerated modernization of fleet provide additional positives.

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