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Painful recovery to follow larger losses

Interglobe Aviation (Indigo) posted a 20% YoY higher net loss of INR14bn, in line with our estimate. Yield surged 9.5% YoY led by strong 105% YoY PAX growth, offset by increase in ATF cost (up 56% YoY). A 77.5% YoY rise in ASKM led to EBITDAR of INR3.4bn (-16.6%YoY). Takeaways: i) Domestic utilisation was ~61% pre-covid in Q2FY22, and management expects ~75% in Q3FY22, ~100% by end-FY22.

New airports in tier 2/3 cities and stable cargo income (+16% QoQ) softened the slump. Corporate travel is back to ~50% of pre-covid. ii) Net fleet add should be flat in FY22, but 15% fuel- and lease-efficient NEOs will replace CEOs in FY23 vs ~75% now. iii) Cash burn fell 39% QoQ to INR200mn/day and will likely be INR150mn in Q3FY22 as RPKM rises.

Better yields and stable cargo revenue offset increase in ATF cost

While RPKM surged 93% YoY in Q2FY22, we expect it to increase further in H2FY22 with more capacity coming in as the government removed the cap on fleet capacity. Although not fully comparable, average revenue booking/day in October (peak season) is now equal to pre-covid levels of Jan-20 (off season). PLF remained modest at 71% in Q2 (~76% in Oct’21) and management expects a mild gain in Q3FY22 led by both seasonal benefits and economic recovery.

Yields rose 9.5% YoY led by pentup demand, especially in the international market (Kuwait, Oman) wherein prices were higher and demand stable. International capacity has also increased to 68% (currently one–third of pre-covid). Cargo revenue increased 16% sequentially to ~20% of total revenue and is likely to rise further with planes being added. Corporate travel recovered to 50% (currently) of pre-covid and should touch ~100% by Jun-22E. High ATF prices (+56% YoY) are still a concern and would see a similar trend in Q3.

Cost rationalisation remains key with adequate liquidity

Indigo has taken adequate steps for strong cost rationalisation as its CASK dipped by 1.5% YoY/18% QoQ. It managed to cut fixed cost; cash burn dropped to INR200mn/day in Q2FY22 (-39% QoQ). Total cash remains at INR165bn, largely alleviating immediate liquidity concerns.

Outlook and valuation: Recovery priced in; retain ‘HOLD’

The stock is adequately pricing in a sharp recovery as it has outperformed even its robust US peers by ~2x since pre-covid, Jan-20. We expect competitive pressure to persist—Tata’s purchase of India’s prime international franchise Air India during trough cycle, and competition rapidly adding Airbus NEOs would blunt Indigo’s cost edge. Retail ‘HOLD’/SN’ with a TP of INR1,986 (8x FY23E EV/ EBITDAR).

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