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Second Covid wave...

hurts recovery InterGlobal Aviation Ltd (Indigo) is one of the most efficient low cost carriers (LCC) with a market share of 54% in Indian aviation sector.

* Revenue declined by 25% YoY, but on sequential basis revenue grew by 27% QoQ, led by recovery in passenger growth.

* Profitability was impacted by higher fuel cost, depreciation, lease rentals, & lower other income.

* Q1FY22 profitability is likely to be impacted by Covid second wave given sharp drop in passenger growth in April & May.

* However, we expect passenger traffic to pick-up gradually starting from Q2FY22 & expect revenue growth to normalize in H2FY22 led by acceleration in vaccination and as impact of Covid second wave subsides.

* Faster replacement of old aircrafts with 15% more fuel efficient fleets will improve profitability in the medium term.

* Sale & lease back operations, cost rationalization and healthy cash position will help in tiding over the crisis situation. Further, the board has approved fund raising plans through QIP.

* We remain positive on the stock in the long term, given expansion of capacities, penetration into Tier 2-3 cities, focus on route optimization and likely market share gains post Covid era.

* We value Indigo at P/E of 18x on FY23E, however given near term earnings volatility and sharp movement of share prices, we downgrade Indigo to Accumulate with a target price of Rs. 1,984.

H2FY22 expected to be better...

Q4FY21 Revenue declined by 25% YoY, was better than expected supported by 70.2% load factor and higher fares. Q4 passengers was traffic was down by 46% YoY. But on a sequential basis revenue grew by 27% QoQ. Strong capacity addition was witnessed, as ASK grew by 26% on QoQ basis. During Q4, Indigo has taken delivery of 9 A321neo new aircrafts, while replaced 11 older A320ceo aircrafts. Currently, total aircraft under operations is 285.

With out break of Covid second wave, travel restrictions was placed in April & May leading to disruption in passenger traffic. The capacity deployment cap was reduced to 50% from 80% from December 2020. Considering this, Q1FY22 is expected to be weak. However, there is marginal improvement in passenger traffic in June. Currently, management is replacing older aircraft with new cost efficient ones, which is expected to improve operational efficiency. Going ahead, we expect strong revival in passenger traffic in H2FY22 led by increased vaccination drive and reduction in Covid cases.

Revival in H2FY22 expected...

Q4FY21, the reported loss was Rs1,159cr, while on a QoQ losses widened. EBITDA was impacted by higher fuel cost, supplementary rentals and higher other expenses. While profitability was impacted by higher depreciation expenses, (up by 31% YoY) and lower other income (-60% YoY). Passenger yields was steady on a QoQ basis at 3.7.

Going ahead, rise in crude prices and weak Q1FY22 will impact near term profitability. However, we expect passenger growth to revive staring from Q2FY22 and we may see accelerated recovery in H2FY22. Further, replacement of older aircrafts is likely to improve operating efficiency in the medium term.

Outlook and Valuation

We continue to maintain positive view on Indigo considering its strong liquidity position and cost efficient fleet operations, which will help Indigo in tiding over weak operational environment. Further, company has ability to infuse fresh capital to face any eventuality which may arise in near future. We expect revival in fortunes of domestic aviation industry in H2FY22E as the impact of Covid second wave subsides. We value Indigo at P/E of 18x on FY23E, however given sharp movement in stock prices, we downgrade to Accumulate with a target price of Rs1,984.

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