IGI Logo

Indian skies to retain indigo hue

We initiate coverage on InterGlobe Aviation (Indigo) with BUY and DCF-based Mar-24 TP of Rs2,560. Domestic pax would cross pre-Covid levels in FY24 and log 12% CAGR thereafter till FY30E. While Indigo’s market share should cool down from the current highs of 57% as Tata Group ramps up and other smaller/new players also add capacity, it would remain in the formidable 47% range in the long term. Our Brent estimate of USD85/75 in FY24/25+, on the back of subsiding geopolitical issues with reduction in ATF refining-marketing margins, implies lower fuel costs for Indian airlines. Indigo, with its cost leadership, is well-poised to play the competition, as current yields hover at all-time highs. While prevailing supply constraints can add to near-term pressure, smaller/new players would see greater impact. Indigo with its robust cash position and market leadership would have better negotiation power over lessors and suppliers.

Expect the Indian aviation growth story to continue post-Covid:

We estimate domestic pax traffic to cross pre-Covid levels (141mn in FY20) by FY24 (at 165mn) and clock 12% CAGR in FY24-30, implying 2.1x of real GDP growth (vs 1.8x in FY10-20). Indigo’s domestic market share would reduce from the current 57% (as Tata Group’s fleet size more than doubles by FY30, similar to Indigo’s), but it should still command a market-leading 47% share, which is 10% pax CAGR over FY24-30. We believe Tata would dominate internationally.

Fuel cost pressure to subside, as geopolitical conditions drive current ATF prices: Current ATF prices are elevated at ~Rs120/ltr, up 1.5x YoY. The Russian war, besides pushing up Brent, has driven refining cracks to +USD30/bbl (historical: USD14), while OMCs reeling under losses elsewhere also raised marketing margins, to +USD40/bbl (vs USD25). As geopolitical issues subside, we expect ATF prices to normalize, down to Rs83-84/ltr. Indigo’s newer fuel-efficient aircraft and added tier 2/3 routes (lower tax) would grant further support. Every 5% cut in ATF prices would raise Indigo’s EPS by +Rs22/sh, ceteris paribus.

Indigo’s market-cost leadership places it in a strong position over rivals-suppliers: Indigo’s ex-fuel-forex CASK has been the lowest in India (40-50% below rivals’, pre-Covid) as well as internationally (as a % of RASK). With current yields at an all-time high, Indigo would be in a strong competitive position to adjust ticket prices, protect market share and drive profitability. A healthy cash balance of ~Rs200bn also implies strong negotiation power vs lessors-suppliers amid current engine-OE issues (would affect smaller/new players more).

Expect positive bottom-line hereon; initiate coverage with BUY: We expect the robust yields in H2FY23 to support earnings amid steady PLF and fall in fuel costs, while FY24 as a full year should be back in the black with ~Rs30bn PAT, wherein some moderation in yield would be offset by lower CASK. We initiate coverage on Indigo, valuing it on DCF method (FY25-34), building Rs4.6-4.7 long-term yield, Rs3.9-4.0 CASK, fleet expansion to 652, ASK CAGR of 9%, PLF of 85-86% and WACC/TG of 12.7%/4%. Our TP of Rs2,560/share implies FY25E target P/E of ~21x. Key risks: Adverse currency/fuel-prices, global recession hitting air travel and severe operational issues.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer