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Near term concerns to stay...

long term positives to out-weigh

InterGlobal Aviation Ltd (Indigo) is one of the most efficient low cost carriers (LCC) with a market share of 43% in Indian aviation sector.

* Revenue declined by 51% YoY, but on sequential basis revenue grew by 79% QoQ, led by improvement in passenger growth.

* Resumption of flight operations, cost rationalization and healthy cash positions is helping the company in tiding over crisis situation.

* With passenger traffic gradually reaching to pre-Covid levels, revenue growth to normalize in FY22 led by better utilization of fleet and relaxation in price caps.

* Management focus expansion of international footprints and deeper penetration into Tier 2-3 cities, to drive growth in near future. While replacement of old aircraft with 15% more fuel efficient fleets will improve profitability in the medium term.

* Strong balance sheet position compare to its peers, focus on route optimization & cost rationalization and likely market share gains, we remain constructive on the stock in the long term.

* We roll forward to FY23E and value Indigo at P/E of 18x with a target price of Rs1,804 and upgrade to Buy.

FY22 expected to better...

Q3FY21 Revenue declined by 51% YoY given operation of ~70% capacity and lower load factor. Indigo’s passengers traffic de-grew by 47% YoY, while the passenger load factor (PLF) was at 72%. With capacity deployment restrictions in place the seat capacity was lower by 41% YoY.

Having said that, revenue growth saw a strong jump of 79% QoQ as the domestic passenger growth witnessed significant improvement, grew by 97% QoQ indicting likely recovery in near future. Passenger traffic across major metros and urban centres has already reached pre-Covid levels. Currently, management is in process of replacing older aircraft with new cost efficient ones within 2 years which is expected to improve operational efficiency.

During the Q3, Indigo has taken delivery of 11 new aircrafts. However, net addition was only 5 aircrafts, as 6 older aircrafts where replaced with better fuel efficient planes. Currently , total aircraft under operations is 287. With resumption of aircraft operations, we believe that passenger traffic is expected to normalise gradually over a period of time and starting from FY22 the revenue growth is expected to normalise.

Going ahead, with Government easing of restriction of seat capacity deployment to 80% and relaxation of price caps on air fares, we expect revenue growth to improve. Management has guided deploying of 80% capacity in Q4FY21. We expect revenue to grow to by xxx% CAGR over FY21E-23E.

Profitability to normalise starting from FY22E ...

Q3FY21, the reported loss was Rs628cr, QoQ the losses has halved. Yields declined by 4.7% YoY due to higher capacity addition in the industry and weak pricing. Further, employee & other cost increased on account of increase in capacity addition while revenue growth was sub-optimal. Going ahead, rise in crud price and seasonally weak quarter will continue to impact near term profitability. However, there is significant improvement in passenger growth leading to normalisation of revenue growth. While easing of fare cap is expected to cushion increase in fuel cost. Further, replacement of older aircrafts is likely to improve operating efficiency in the medium term.

Outlook and Valuation

We remain constructive on indigo over long term, given its strong balance sheet position which is expected to help the company in tiding over weak operational environment and expanding its market share. Replacement of older aircraft with cost efficient ones and lower fuel cost is expected to improve profitability. We believe that near term headwinds has been already factored in the stock prices. We roll forward to FY23E and value Indigo at P/E of 18x on FY23E, and upgrade to Buy with a target price of Rs1,804.

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