Published on 19/10/2020 10:07:27 AM | Source: Motilal Oswal Financial Services Ltd

Neutral InterGlobe Aviation Ltd For Target Rs.1,095 - Motilal Financial

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Business insights from AR20

Economic outlook – Indian economy to remain robust

* According to the recent IMF estimates (Jun’20), India’s GDP growth for 2021 is estimated at ~6.0%, higher than the global economic growth of ~5.4% for 2021.

* INDIGO has highlighted that medium-to long-term growth prospects for the Indian economy remain robust, and the return of normalcy in airline travel would depend on multiple factors:

   * Under-penetration of airline travel in India currently

   * Rise in the working-class population

   * Expansion in the middle-income demographic group in the country

* In FY20, for INDIGO, ASK growth stood at +19% YoY and RPK growth at +18% YoY. This resulted in PLFs of ~86% (in line with INDIGO’s LT average).


INDIGO undertaking various COVID-19 pre-emptive measures

* INDIGO targets additional liquidity of INR50–60b through cost reduction initiatives, liquidity enhancement and improvement in the fleet mix. Most of the new aircraft would be financed through an operating lessor model, generating significant liquidity in FY21-FY22.

* As of March’20, INDIGO had a total of 27,812 employees – ~4,017 pilots and 6,573 cabin crew. Employee cost was up 47% YoY to INR47b in FY20. The company expects employee cost to be 30% lower v/s pre-COVID-19 levels by the end of FY21 with the undertaken payroll control initiatives.

* Considering the above-mentioned efforts and ASK guidance for 2Q/3QFY21 at 40%/50–70% of the previous year’s respective quarters, we have built-in loss of INR62.7b in FY21, with breakeven expected in 2QFY22.


At the end of Mar’20, total cash increased by ~33% YoY to INR203.8b (free cash of INR89.3b and restricted cash of INR114.5b). Total debt was INR227.2b, including capitalized operating lease liability of INR202.8b. INDIGO is optimizing its working capital management, along with various other cost-control initiatives. Also, the company plans on raising equity. For this purpose, it is planning a QIP of up to INR40b, which would strengthen it to face unforeseen challenges ahead.


Related Party Transactions: In FY20, INDIGO highlights that all transactions with its related parties were in the ordinary course of business. The company had not entered into any arrangement/transaction with related parties which could be considered material and required the approval of the Board.


INDIGO’s aircraft order snapshot: The Neo brings major benefits

* INDIGO served ~86 destinations, including 24 international destinations, with fleet capacity of 262 aircraft (A320neo: 100, A321neo: 14, ATR: 25, A320ceo: 123), clocking net additions of 45 aircraft during the year.

* INDIGO’s net order book stands at ~616 Neo aircraft (136 P&W engines and 280 CFM engines) as the total delivery of 114 Neo aircraft was taken up to the end of FY20. This includes order for 300 A320neo family aircraft (including A321 XLRs) placed in Oct’19.

* The company plans to replace (123) A320ceo aircraft with A320/A321neo (15% more fuel-efficient) to improve its fuel efficiencies. Moreover, the deployment of A321neo at airports with slot constraints would further aid in slot maximization. According to our EPS sensitivity, aircraft fuel savings of even 10% would translate into an EPS change of ~14% for INDIGO in FY22.

* Most of the new aircraft would be financed through an operating lessor model, generating significant liquidity in FY21-FY22


Cargo business: A new learning from COVID-19

* In FY20, passenger ticket revenue grew ~25% YoY to INR314.5b, and ancillary revenue saw growth of ~30% YoY to INR39.5b. Additionally, in 4QFY20, ancillary revenue growth was at 30% v/s total capacity growth of ~4%.

* The company has 10 (converted aircraft) cargo planes with up to 20 tonnes of flying capacity and is now looking at the Cargo business as a new full vertical.

* Domestic cargo traffic increased at a CAGR of 8.3% over FY09–16 and international freight traffic at 6.9% during the same period. As per IBEF, domestic freight traffic is expected to grow at a CAGR of 7.5% over FY16–23 (v/s international at 7.1%).


Financial performance for FY20

* In FY20, for INDIGO, ASK growth stood at +19% YoY and RPK growth at +18% YoY. This resulted in PLFs of ~86% (in line with INDIGO’s LT average).

* Total revenue stood at INR358b (+25% YoY), driven by an increase in passenger yield and increase in unit ancillary revenue. RASK for the year was up 6% YoY to INR3.7.

* Yield (INR/RPK) stood at INR3.8 v/s INR3.6 in FY19, primarily benefitting from higher yields in 1QFY20 led by the cessation of Jet Airways’ operations.

* Aircraft fuel expenses increased by ~6% YoY to INR126b, against capacity growth of 19% YoY, and offset by reduction in ATF prices and increase in the number of fuel-efficient NEO (+42) aircrafts. Also, fuel as a % of revenue decreased to ~35% in FY20 v/s ~42% in FY19.

* Employee costs increased by 47% YoY to INR47b. During the year, net employees addition was ~4,200+ with ~464 pilots, ~1,384 cabin crew, ~657 engineers and ~3,007 airport, customer service and security staff graduated.

* Supplementary rentals increased by ~41% YoY to INR112b (v/s INR79b in FY19), on account of reassessment of supplementary rentals during the year.

* Thus, CASK increased by 6% YoY to INR3.7, while ex-fuel it was INR2.4.

* Foreign exchange losses increased to INR15.5b (v/s INR4.7b in FY19), primarily driven by mark to market losses on the capitalised operating lease liability, as a result of IndAS 116.

* Other Income primarily comprises of financial income on the cash and other non-operating income increased ~16% YoY to INR15.4b in FY20.

* INDIGO reported loss of INR2.4b in FY20 v/s gain of INR1.6b in FY19.

* Company’s net worth at the end of FY20 stands at INR58.6b.


Valuation and view - Aviation space remains preposterous

* INDIGO in its annual report highlighted that, average daily flights in China had recovered by 47% YoY as of May’20, based on recent data published by the Civil Aviation Administration of China (CAAC). Recovery was higher for domestic flights at 53% YoY in May’20.

* As per DGCA data (July’20), INDIGO has been the biggest gainer in terms of market share post the resumption of operations. Its share climbed to ~60% of domestic market share from ~48% over Jan–Feb. The company has gained market share from Air India, GoAir, and other operators, while SJET’s market share remains consistent at 15–17%.

* However, we continue to believe that in the long run, Aviation would witness continued headwinds in terms of surplus capacity, the lack of confidence among passengers to resume travel, and demand in business travel.

* Aviation industry in India is about to complete its first three months of operations post the COVID-19-led operational lockdown, however passenger traffic still remains at ~20% of pre-COVID levels (i.e., ~-82.2% YoY in July’20).

* The fare bands were recently further extended to the end of Nov’20, and we believe that (in line with the company’s ideology); the permanent enforcement of fare bands could be a huge dampener on the Aviation industry as a whole, weakening sentiment for the regulated Aviation market.

* INDIGO is undertaking various pre-emptive measures to focus and strengthen each of its business verticals to emerge stronger from the current crisis. However, due to the current uncertainties in the industry, we await further developments and clarity on the company achieving its targets. We remain Neutral on the stock.

* Our estimates are highly sensitive to (a) ticket yield, (b) PLF and (c) crude price assumption; material change to any of these will impact our estimates.



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