IGI Logo

Concerns over demand growth and yield surface

* INDIGO reported in-line ASK (15.3b), PLF (72%), and RPK (11b), while yield came in lower than est. at INR3.7, resulting in lower-than-expected revenue.

* The factors highlighted in our report (12th Dec’20) are at play – an increase in crude oil prices, along with decline in yield, and the slowing of domestic passenger growth going forward (compared with over the last seven months) would impact companies’ profitability.

* Passenger demand and yield were stronger over Oct–Nov’20, but crashed in Dec’20 on reports of new COVID cases. Additional deployments of aircraft by competitors have also led to pressure on yields.

* As per daily passenger data published by MoCA, domestic passenger demand has barely improved MoM in Jan’21 at ~59% of last year’s levels (v/s ~57% in Dec’20). Also, airfares have further declined ~14% MoM in Jan’21 (Dec’20 saw a drop of ~21% in airfares since peaking in Oct’20).

* Even INDIGO has highlighted concerns over yield. However, the company expects to maintain better yield with plans such as a) retiring older CEO aircrafts and replacing these with NEO aircrafts – which are 10–15% more fuel-efficient and b) adding more domestic routes (added 7 new routes) – improving regional connectivity, aiding yield on non-metro routes. We build yield of ~INR3.9 for FY22–23E (~5% premium to the last five-year average).

* We continue to believe in the various pre-emptive measures undertaken by INDIGO to come out stronger from the current crisis. Also, the company has decided not to raise funds through the approved QIP (current total cash of INR183.7b, with free cash at INR74.5b).

In-line ASK and RPK; yield lower than estimated

* In 2QFY21, ASK was in line with our est. at 15.3b (-41% YoY), with PLF at 72% (v/s our est. of 73% – up from 65% in 2QFY21); thus, RPK stood at 11.0b (-3% est.; -51% YoY).

* Yield came in below est. at INR3.7 v/s our est. of INR4 (-5% YoY). Thus, revenue came in at INR49.1b (-13% est.; -51% YoY) – RASK was at INR3.2.

* Employee cost was up 8% QoQ (but down 37% YoY) at INR7.4b (in line with est.) – CASK was at INR3.6. EBITDAR was in line with est. at INR9b.

* The company reported PAT loss of INR6.3b v/s our est. loss of INR5.4b.

* Capacity guidance (ASK) for 4QFY21 is 75-80% YoY.

Valuation and view

* As demand growth remains constrained, on account of the aforementioned factors, and airlines deploy further capacity from the currently constrained 80% (by MoCA), we believe PLF would remain at ~80% in FY22. As a result, FY22 RPK is expected to be ~7% lower v/s FY20.

* Despite the current state of uncertainty in the industry, INDIGO’s stock performance over the past one year is up ~10%. We value the company at 16x (~33% premium to global peers) FY23E EPS to arrive at Target Price of INR1,525 – no significant upside to CMP. Maintain Neutral.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer