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Indigo reported consecutive quarters of profit in Q4FY23 and performed well on unit metrics and pax, while PBT of Rs9.2bn missed our est. by 22%. It was the 3% higher-than-expected ASK at 30.4bn that led to increased absolute expenses and lower RASK (3% miss). Pax volume rose 5% QoQ, despite Q4 being a lean quarter, while yields at Rs4.85 reported a 3% beat. Mgmt. has maintained its key FY24 guidance, with AOGs continuing in the 35-40 range. However, we believe targets would be beaten, given peer issues amid strong air traffic recovery. Mgmt. stated yields and PLFs would likely increase QoQ in Q1FY24. We raise our FY24/25E PAT by 40%/16%, factoring in better spreads and vols. We also build in conservative fuel prices, that can surprise positively. Maintain BUY with a revised (up 4%) Mar-25E DCF-based TP of Rs2,700.

Result Highlights

Indigo reported total pax growth of 61% YoY/5% QoQ to 23.4mn in Q4FY23, while RPK rose by 64%/5% to 25.6bn (2% beat). Fuel cost per ASK was in-line at Rs1.85, down 8% QoQ; while forex gain stood at Rs2.5bn. D/A rose 1% QoQ, while other income fell 8%. Non-fuel forex CASK rose 2% QoQ to Rs2.62 due to an 11% jump in supplementary rentals/ASK and higher airport fees. Indigo’s fleet size stood at 304 as of Mar-23 end, with two freighters and one B777 on wet lease now. Core debt fell 4% QoQ to Rs33bn. Total cash balances rose 7% QoQ to Rs234bn, with a 15% jump in free cash to Rs122bn, while lease liability was up 1% QoQ to Rs415.5bn. In FY23, Indigo reported EBITDA loss/net loss of Rs94.4/3.2bn, with 71% YoY PAX growth, load factor rising by 800bps to 82%, and a 21% jump in yields, while MTM forex loss expanded to Rs29.6bn.

Management KTA

Indigo has witnessed steady demand and healthy yields in Q1FY24 to date. It has added one more B777 on wet lease on the Mumbai-Istanbul route. Indigo has maintained ASK growth guidance of 17-18% YoY for FY24, while Q1FY24 is expected to increase by 5- 7% QoQ. Pax target is 100mn, while net fleet adds would be 40-50. The pending order book is 500 aircrafts, with the current avg. fleet age of ~3.5 yrs. The third freighter is expected by Q3FY24. Currently, Indigo is connected to 33 European destinations (recent ones include Edinburgh and Sofia) through codeshare. International routes are slightly more profitable as compared with domestic routes. Indigo’s all new additions are CFM LEAP engines, thereby reducing P&W’s share in the overall mix. The lease extensions have impacted maintenance costs, while Indigo has guided for supplementary rentals of Rs0.70-0.77 per ASK going ahead. Indigo intends to further improve utilization levels, adopt digital initiatives (incl. cloud-based platforms) to optimize operations, expand in Central Asia-Gulf, develop unique routes and focus on the freight business. Lease rentals remain stable, given Indigo’s strong position and relations.

Valuation

We value Indigo using the DCF method with a TP of Rs2,700 (18.4x Mar-25E target PE). Key risks: Adverse currency/fuel prices, recession and severe operational issues.

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