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Earnings recovery in sight...

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 grew by 89% YoY, was better than expected led by strong passenger growth & higher ancillary revenues.

• Strong EBITDA & Profitability due to strong utilization owing to recovery in passenger growth and better yields.

• Improved vaccination drive and decline in infections led to higher passenger load factor.

• Replacement of old aircraft with fuel efficient fleet is at an accelerated pace, which is expected to be completed by FY24, will bring down operating cost.

• Passenger traffic growth to pick-up at higher pace starting from FY23 given lower risk of infections, acceleration in vaccination and recovery in tourism & corporate travel.

• Capacity expansion, penetration into Tier 2-3 cities, focus on route optimization and likely market share gains post Covid era are key positives.

• Rise in ATF price is a key risk, but considering higher capacity utilization, cost rationalization, removal of capacity restrictions, relaxation in fare cap and healthy cash position, will limit the downside risk.

• We value Indigo at P/E of 15x (7.0x EV/EBITDA) and upgrade to Buy with a target price of Rs2,188.

Strong revenue growth Q3FY22

Revenue grew by 89% YoY, was better than expected supported by 80% load factor and higher fares. Q3 passengers grew by 35% YoY & 30% on a sequential basis. Strong capacity addition was witnessed, as ASK grew by 51% on YoY basis. During the quarter, Indigo has returned 16 older A320ceo aircrafts and added 10 new A320neo. Currently, total aircrafts under operations are 283. Increased vaccination drive, lowering of Covid infections and pick in corporate & revival tourism led to strong revenue growth. Further, relaxation of capacity also supported this growth. However, in January-22, industry passenger traffic witnessed a decline of 17% MoM given impact of Omicron. Going forward, we expect passenger traffic to gather pace led by lower infections, restart of international traffic, revival in corporate, festive & holiday travel. We expect capacity utilisation and revenue growth to pick-up stating from FY23.

Profitability to improve...

Fuel cost to remain elevated After 7 consecutive quarter of loss, in Q3FY22 Indigo reported profit of Rs.128cr and EBITDA was up by 112%. Despite higher ATF cost, profitability was maintained on account of higher load factors led by strong passenger growth. Passenger yields improved by 19% YoY to 4.41 led by higher fares. Going ahead, higher ATF price is expected to increase operational cost. January of 2022 witnessed 17% decline in domestic passenger growth, which is likely to have some impact on Q4FY22. However, given full removal of capacity cap, relaxation of fares and improved passenger growth on account festive and corporate travel, we may see accelerated recovery starting from FY23. Further, replacement of older aircrafts is likely to improve operating efficiency in the medium term.

Outlook and Valuation

In Q3FY22 aviation sector reported profit after 7 consecutive quarters of losses. With risk of Covid-19 declining, the sector is showing green shoots of revival. We continue to maintain positive view on Indigo considering its strong liquidity position and cost efficient fleet operations. Further, cost efficient fleet, ability leverage its network, market leadership position and healthy cash position will drive growth. Revenue & profitability situation to improve on an accelerated pace starting from FY23E. Key risk to this ATF prices. We value Indigo at P/E of 15x on FY24E, (7.0x EV/EBITDA) and upgrade to Buy with a target price of Rs.2,188.

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