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Sectoral tailwinds to ensure profitable quarters; Upgrade Indigo

Passenger traffic for Oct’22 increased 10.2% on a monthly basis to 11.4mn, with recovery close to ~93% of pre-covid levels. Nov’22 trends indicate a daily passenger traffic rate - averaging at par with pre-pandemic levels - ~0.39mn vs ~0.37mn in Oct’22. Operations across airlines are expected to remain buoyant during 3QFY23, given a seasonally strong festive quarter. Last reported domestic PLF for Oct’22 witnessed an increase MoM across all airlines with Indigo’s PLF at ~82% (+0.1ppt MoM) while Air India’s PLF increased to ~83% (+3ppt MoM). Tata group airlines reported the highest on-time performance during Oct’22 of 90.8%/89.1%/89.1% in case of Air India / Air Asia / Vistara while Indigo reported an ontime performance of 87.5%. ASK’s across airlines are expected to improve during the quarter with airfare trending broadly flat QoQ (as per JM fare indicator). Further, lower ATF prices - down 7% QoQ as of 3QTDFY23, partially offset by Rupee depreciation could likely result in improved margins

Indigo’s stock return over 3m/6m/1y has been dismal at 6%/7%/2%(underperformed benchmark indices over the last 5 years) driven by sectoral headwinds of higher crude/rupee depreciation/slower demand comeback. We have had a SELL rating for the above mentioned reasons. However, with the onset of the festive season, sharper recent demand comeback, relatively stable crude/INR – we expect the sector to fare much better than its recent past possibly delivering positive PAT numbers for the next quarters. We upgrade our rating on Indigo to HOLD (TP – INR1,860/sh) from SELL (INR1,680/sh) earlier as we introduce and roll forward our fair value based on FY25 estimates. Indigo’s ability to maintain market share and run glitch-free superior operations in the face of stiff competition from TATA group will be the key determinant for a sustainable sharp rally in the name (impending promoter Gangwal stake sale), in our view.

* Daily passenger traffic continues to improve: Passenger traffic for Oct’22 increased 10.2% on a monthly basis to 11.4mn, with recovery close to ~93% of pre-covid levels. Nov’22 trends indicate a daily passenger traffic rate - averaging at par with pre-pandemic levels - ~0.39mn vs ~0.37mn in Oct’22. Operations across airlines are expected to remain buoyant during 3QFY23, given a seasonally strong festive quarter.

* Tata Grp. airlines gain market share: Indigo’s market share stood at 56.7% during Oct’22 while Tata group company’s market share increased to 25.9% (+1.2ppt MoM). Vistara continues to enjoy the second largest market share at 9.2% (+1.6 ppt YTD). Air India has embarked on an ambitious five year transformation plan ‘Vihaan.AI’ to establish itself as a world-class global airline and increase its market share to at least 30% vs current 9.1%. Recent news articles suggest Tata Sons have reportedly started the process to bring all its airlines under one umbrella of Air India. Through this consolidation, Tata Sons will have a low-cost carrier and a full-service airline under Air India.

* 3Q to be a profitable quarter for airlines: ASK’s across airlines are expected to improve during the quarter with airfare trending broadly flat QoQ (as per JM fare indicator). Further, lower ATF prices - down 7% QoQ as of 3QTDFY23, partially offset by Rupee depreciation could likely result in improved margins.

* Upgrade Indigo amidst sectoral tailwinds: Indigo’s stock return over 3m/6m/1y has been dismal at 6%/7%/2%(underperformed benchmark indices over last 5 years) driven by sectoral headwinds of higher crude/rupee depreciation/slower demand comeback. We have had a SELL rating for the above mentioned reasons. However, with the onset of the festive season, sharper recent demand comeback, relatively stable crude/INR – we expect the sector to fare much better than its recent past possibly delivering positive PAT numbers for the next quarters. We upgrade our rating on Indigo to HOLD (TP – INR1,860/sh) from SELL (INR1,680/sh) earlier. Indigo’s ability to maintain market share and run glitch free superior operations in the face of stiff competition from TATA group will be the key determinant for a sustainable sharp rally in the name, in our view.

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