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Stronger yield; high fuel costs a challenge

IndiGo reported Q3FY22 PAT at Rs1.3bn vis-à-vis our estimate of loss of Rs3.8bn led by higher yields and lower non-fuel costs. ASK/RPK grew 50%/66% QoQ to 23bn/18.3bn, with load factor at 79.7% (up 860 bps QoQ). RASK improved by 25% YoY to Rs4.1 (estimate: Rs4). CASK ex-fuel came in at Rs2.6 (below estimate of Rs2.8). Unit fuel cost grew 13% QoQ/90% YoY to Rs1.42 due to sharp rise in ATF prices (up 73% YoY). EBITDAR came in at Rs20bn (estimate: Rs14bn). While we factor strong traffic recovery in FY23/FY24 with elevated spreads (RASK – Fuel) vis-à-vis historical trends, valuations at 11.6x/10x FY23/24E EBITDAR leave little room for error especially given higher crude prices. Indian airlines historically have found it difficult to maintain both volume expansion and elevated margins at crude prices above $70/bbl. Maintain REDUCE with a revised PT of Rs1,910.

Reports profit led by strong yields and lower costs; strong guidance on yields

IndiGo reported profit for the first time post Covid, driven by strong yields and lower unit costs. PAT stood at Rs1.3bn vs. our loss estimate of Rs3.8bn. Ticket yield grew sharply by 19% YoY to Rs4.4 and was above our estimate of Rs4.36. RASK grew by 25% YoY to Rs4.1 and was above our estimate of Rs4 due to higher fares and marginally higher load factor. While there would be imminent weakening in yields during Q4FY22 due to demand disruption, directionally, the company expects the current yield environment to sustain going forward. IndiGo’s domestic traffic improved sharply by 52% QoQ to 16.3m pax in Q3FY22. Ancillary revenues grew by 40% QoQ to Rs11.4bn.

Improved fleet utilization to drive unit cost reduction; remains optimistic on cargo business

IndiGo’s fleet utilization was 10.7hrs/day which can improve to 13-13.5hrs/day once international travel normalises. This can provide additional capacity from existing fleet and drive reduction in unit costs. IndiGo remains optimistic on its cargo business and plans to ramp-up its freighter fleet to 11 from 3 presently. Gross debt (ex-capitalized leases) reduced by Rs4bn QoQ to Rs44bn while free cash grew by Rs14bn QoQ to Rs78bn in Dec-21.

Domestic pax recovery to continue with a blip in Q4; to retire entire CEO fleet by Dec-22

After strong recovery in traffic in Q3FY22, we have seen significant moderation in Jan-22 due to rising Omicron cases. Domestic pax for the industry declined sharply by 43% MoM to 207k/day in Jan-22. However, IndiGo has seen some initial signs of recovery in traffic in Feb so far which should further pick-up here on. Ban on scheduled international travel continues but there are likely to be more bubble agreements going forward. IndiGo inducted 2 ATRs and 18 NEOs and retired 16 CEOs, taking its fleet to 283 as of Dec-21. IndiGo plans to continue to add NEOs and retire the balance 56 CEOs by Dec-22 which would further improve its fuel burn and lower maintenance costs. Net Fleet capacity unlikely to grow much in FY23 but effective capacity will increase due to higher utilization of the aircrafts

Traffic recovery imminent but valuations leave little room for error; maintain REDUCE

IndiGo, with its free cash balance of Rs78bn and wherewithal to raise further liquidity remains in a comfortable position to tide through Covid disruptions. While traffic recovery is imminent, we remain concerned over the sustainability of present levels of unit profitability in a high crude price environment. Valuations of 11.6x/10x FY23/24E EBITDAR leave little room for error. Maintain REDUCE with PT of Rs1,910 (10.5x average FY23-24E EBITDAR).

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