InterGlobe Aviation Ltd shares went through turbulent times last week. InterGlobe runs the IndiGo, India’s largest airline. The stock declined as much as 13% on the BSE in the past three days after the dispute between the two founders escalated. However, for investors, come 19 July, IndiGo’s June quarter results announcement should bring cheer and perhaps soothe some anxiety, even if only temporarily.
Both IndiGo and its smaller competitor, SpiceJet Ltd are expected to have a good landing for the first quarter, as fares remained strong owing to capacity constraints in the industry. Jet Airways had shut operations in April. Plus, some capacity got sucked out of the system owing to the global ban on the Boeing 737 Max 8 aircrafts. As such, yields remain a key measure to watch out for both airlines when June quarter results are announced.
To be sure, these factors have also adversely affected domestic passenger traffic growth lately. However, that may not turn out to be a big worry. “Although domestic passenger traffic growth was flat over April-May, higher yields and load factors are expected to more than compensate for the loss," say analysts from Prabhudas Lilladher Pvt. Ltd in their June quarter preview.
Year-on-year growth in IndiGo’s yields during the quarter is expected to be better than that of SpiceJet. “IndiGo would benefit more than SpiceJet on increase in fares as it has increased exposure to metro routes whose fares outperformed, owing to Jet Airways financial woes," pointed out analysts from Elara Securities (India) Pvt. Ltd in their aviation preview note on 9 July.
“Moreover, SpiceJet’s fares would underperform over that of IndiGo’s as the former has aggressively increased available seat kilo-meter (ASKM) capacity in the domestic routes by ~54% year-on-year mostly in the non-metro metro routes," added the broker. Besides, the ban on the Boeing 737 Max 8 aircrafts affected SpiceJet operations, while IndiGo didn’t have any of those aircraft in its fleet.
What’s more, fuel prices didn’t misbehave and were flattish on a year-on-year basis. This, along with a better pricing environment, should ensure a lucrative quarter for airlines. Prabhudas Lilladher expects IndiGo & SpiceJet to report Ebitdar margin of 26.5% and 20% respectively. Ebitdar, a key measure of profitability for airlines, refers to earnings before interest, tax, depreciation, amortization and lease rentals. For perspective: during the June 2019 quarter, IndiGo and SpiceJet eked out an Ebitdar margin of 15.8% and 16.3%, respectively.
Not surprisingly, the improved business environment reflects in the share prices. IndiGo and SpiceJet shares have increased by 16% and 40% so far this calendar year. Going ahead, yields need to be closely monitored. For IndiGo, the respite in sentiments owing to the results could well be temporary. As this column highlighted last week, if the promoter battle prolongs, it may eventually affect valuation multiples.