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Q1FY23 was a big stride for InterGlobe Aviation (IndiGo) with regards to revenue, operation and balance sheet normalisation. We are particularly optimistic on the superlative business position of IndiGo among Indian airlines. This is based on better modern fleet (only 35 aircraft remain 320ceo out of 281 total fleet) and stronger balance sheet (net cash of Rs35bn as of Q1FY23). This will enable IndiGo to better capitalise the strong expected demand in domestic as well as international segment. RASK of Rs4.67 in Q1FY23, near normalcy in international segment are positive surprises. We factor RASK/CASK ex-fuel/fuel CASK of Rs4.45/2.5/1.95 in FY23E and Rs4.49/2.79/1.42 in FY24E, respectively. We upgrade the stock from HOLD to BUY based on this stronger business position of IndiGo. Our revised target price of Rs2,360 (earlier: Rs1736) valuation is now based on 25x (20x earlier) FY24E EPS of Rs94.4 (earlier: Rs86.8). Fuel price and currency pose both upside and downside risks.

* Q1FY23 was a big stride towards revenue normalisation. The capacity deployed in the quarter ending June 2022 was around 35% higher than Q4FY22 and 7% higher than pre-covid capacity. The unit revenue in Q1FY23 was Rs4.69 (company disclosure), up 18% QoQ. Yields also improved 19% QoQ to Rs5.24 and load factors increased by 2.9 points to 79.6%. This resulted in the highest ever quarterly revenue of Rs130bn

* Q1FY23 was also a big stride towards operational normalisation including international segment. IndiGo resumed scheduled international operations to most pre-covid destinations and the company is now roughly operating at pre-covid international levels. The company launched new service to Bahrain on 1st August and plans to launch Ras Al Khaimah soon. Domestically, it added Deoghar (company indicated strong load factors to Deoghar from Delhi and Kolkata as per booking trends) as its 74th domestic destination. Along with network expansion, it has put up a host of initiatives to enhance customer experience including initiatives by its digital team, expanded meal offerings and launched new airport products

* Q1FY23 had also restored significant balance sheet strength: IndiGo’s free cash has increased from Rs71/77.6bn in FY21/22 to Rs83bn in Q1FY23 while restricted cash has reduced from Rs115bn in FY21 to Rs105bn in FY22 and increased to Rs108bn in Q1FY23. Financial debt has reduced from Rs52bn as on Mar’22 to Rs48bn in Q1FY23. Operating lease liability has increased from Rs317bn to Rs345bn in Q1FY23.

*RASK surprises on the upside to Rs4.67 in Q1FY23. We factor RASK of Rs4.45/4.49 in FY23/24E. Ancillary revenue will receive a boost with the introduction of two freighters in Oct’22.

* Cost print improved on fixed cost absorption in Q1FY23 but is expected to increase ahead, as per the management commentary. We factor ~Rs2.8 CASK ex-fuel in FY24E compared to Rs2.18 in Q1FY23. Fuel/currency movement continued to remain significant headwind which led to sequential increase in CASK by 6.1% to Rs5.08 (company disclosure). CASK ex-fuel ex-forex for Q1FY23 decreased by around 18.1% as compared to Q4FY22 to Rs2.38 (company disclosure) primarily due to better absorption of fixed cost. However, costs will increase ahead on business normalcy (heads like salary restoration) and inflation (heads like maintenance). Additionally, replacement of A320s with A321 will increase depreciation and finance cost (new aircraft with higher lease tenure will have higher capital lease obligation compared to old aircraft). Hence, we factor Rs2.8 CASK ex-fuel in FY24E compared to Rs3.3 in FY22.

* Q2FY23E profit outlook remains weak in line with seasonality but will have 70- 80% capacity increase YoY. We now factor 112/129bn ASK in FY23/24E, which is an upgrade.

* IndiGo remains committed to long haul international traffic. XLRs are currently expected in 2024-2025 and will allow to capture non-stop international traffic, which is now only served through one-stop competing hubs. 

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