Large Cap : Buy InterGlobe Aviation Ltd For Target Rs.2,281 -Geojit Financial Services Ltd
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Forex impacted 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.
• Q1FY23 earnings was impacted by higher fuel prices and adverse currency movement.
• Revenue growth was higher than expected led by strong leisure and pick-up in corporate travel. Aircraft utilization was ~80%.
• In the backdrop of normalization of passenger traffic, Indigo’s capacity both international and domestic has reached to precovid levels.
• Expect tourism & corporate travel growth momentum to continue. While given Indigo’s capacity expansion, penetration into Tier 2-3 cities and focus on route optimization will help them to gain further market share
• ATF prices have started to moderate, while higher capacity utilization, cost rationalization, stable ticket price and faster replacement of older aircraft will bring down cost.
• Given healthy cash position and likely improvement in earning, we value Indigo at P/E of 17x (6.1x EV/EBITDA) and maintain to Buy with a target price of Rs. 2,281.
Strong revenue growth
Q1FY23 Revenue grew by 327% YoY, albeit at lower base, was better than expected, supported by 80% load factor and healthy ticket prices. Load factors were driven by strong rebound in leisure & corporate travel. Further, international travel has normalised and has reached its precovid levels, which was growing at faster rate. Capacity addition continue to remain strong, with ASK touching almost similar to pre-covid levels. Indigo has returned 6 older A320ceo aircrafts and added 3 new A320neo & 9 A321 neo, during the quarter. Currently, total aircrafts under operations are 283. Going forward, we expect passenger traffic to gather further pace led by revival in corporate, festive & holiday travel and strong international traffic. Q2FY23 is seasonally quarter, but H2FY23 growth expected to be strong.
Fuel cost to moderates…
Despite strong top-line growth, Indigo reported a loss of Rs.1065cr. Key reasons are higher fuel cost and adverse movement in currency. Fuel cost to sales was at 47% vs 40% YoY & QoQ. While Rs. 1,400cr of forex loss also added to woes. Going ahead, we expect profitability to come in near term given moderation in ATF prices, stable ticket price and strong load factors. We don’t expect any further adverse moment in forex similar to Q1FY23. 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 market leadership position, ability leverage to its network, cost efficient fleet and healthy cash position. Domestic & international traffic is back to pre covid levels. While moderation in fuel prices and stable ticket prices will improve earnings going ahead. We value Indigo at P/E of 17x on FY24E, (6.1x EV/EBITDA) and maintain BUY with a target price of Rs.2,281
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