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Strengthening balance sheet a long-term positive

InterGlobe Aviation (IndiGo) will remain one of the biggest beneficiaries of the eventual recovery of air traffic from the covid-induced depression. Confidence in balance sheet has been significantly restored with availability of funds from QIP (Rs30bn), SLB and credit lines (Rs45bn) and the already-existing free cash of Rs71bn totalling to Rs146bn. This should help IndiGo sail through another challenging year in the event of a strong covid hit akin to FY21.

The cost structure remains competitive with induction of neos (42%/14% of fleet is A320/321 neos as of FY21 and total neo share could rise to 90% by FY23-end). The cargo freighter initiative (A321ceos) diversifies the revenue stream and can contribute total revenues in FY23. Upgrade to BUY (from Hold) with a revised target price of Rs2,000 based on 20x FY23E EPS of Rs100.

* Confidence in balance sheet restored. Cash burn reduced from Rs300mn per day in Q1FY21 to Rs250mn in Q2FY21, Rs150mn in Q3FY21 and Rs190mn in Q4FY21. However, there will be higher cash burn in Q1FY22 due to the impact of covid second wave. There are signs of the second wave receding and there is pick-up in vaccination efforts. Even if there were to be a covid impact in FY22 similar to FY21, IndiGo remains well placed in terms of cash on balance sheet. The combination of fundraising through QIP (Rs30bn), SLB and credit lines (Rs45bn) and existing free cash (Rs71bn) gives available cash resource of Rs146bn.

* We factor-in a covid-hit FY22E and a normal FY23E. Compared to 46bn ASK in FY21, we factor-in 72/96bn ASK in FY22E/FY23E (FY20 ASK was 96bn) with PLFs of 80%/88% in FY22E/FY23E. We factor-in RASK/CASK (including depreciation / interest) to move from Rs3.72/3.74 in FY20 to Rs4.24/3.89 in FY23E. We expect CASK (ex-fuel) to move from Rs2.45 in FY20 to Rs2.67 in FY23E. Ancillary revenues are likely to reach 18% of total revenues in FY23E driven by cargo initiatives, which has lifted our FY23 RASK estimates. While crude (factored-in at US$60/bbl for FY22E/FY23E) remains a risk, there could be higher RASK considering pent-up demand and no major aircraft addition over next 3 years in the overall system.

* Upgrade to BUY with a target price of Rs2,000 (Rs1,515 earlier) based on 20x (unchanged) FY23E EPS (core EPS earlier) of Rs100 (unchanged). We now base multiples on normal earnings and not core income (this excludes investment income). This is due to the strategic importance of cash in the business (even more after covid) and the fact that SLB gains will largely flow through other income in the P&L apart from lower depreciation.

* Successive covid waves and increase in crude prices pose risk to earnings.

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