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Second COVID wave delays recovery by a year

* INDIGO reported an in line ASK (19.2b), PLF (70%), RPK (13.5b), and yield (INR3.7), while miss to our estimates was led by higher fuel cost.

* Air passenger demand touched a record high in Feb’21 after the lifting of COVID-related restrictions, although the second wave impacted demand in May’21. Cash burn rose to INR190m in 4Q (from INR150m in 3QFY21).

* Cash burn is expected to be higher in 1QFY22 as daily passenger demand falls to ~80,000 passengers from the highs of ~300,000 at the end of Feb’21. INDIGO expects Feb’21 demand to return by the end of 3QFY22.

* The second COVID wave has impacted recovery by three quarters. Factoring in the same and due to higher crude cost (at USD60/bbl in FY22E v/s USD44 in FY21), we estimate losses of INR53b in FY22.

* The company had free cash of INR71b at the end of FY21. Amid potential losses, it plans to generate additional liquidity of INR45b in FY22 via sale and lease back and credit lines. The board of directors has approved a QIP of up to INR30b (shareholder approval process has already started).

* Starting Jun’21, MoCA lowered the domestic airline capacity cap to 50% (from 80% earlier), in line with the sharp drop in demand. The ministry also increased the airfare floor bands by ~15% (in addition to the ~15% increase announced over Feb-Mar’21). Thus, as per our airfare tracker, there is an increase of 13-16% since the start of Jun’21; as airfares in May’21 tumbled to last year levels and were hovering around average floor bands.

* The management said yields are very low right now and should improve going forward. Fuel cost fell ~10% YoY in FY21. Company expects a further fall with the addition of NEO aircrafts (share of NEO aircrafts in its total fleet increased to 56% in FY21 from 43.5% in FY20).

* The biggest concern is a low customer load factor due to lack of demand, which is likely to reverse with the increase in the pace of vaccination. For instance, pent up demand led to a sharp increase in daily passengers in the first week of Jun’21. Despite the current state of uncertainty in the industry, the stock is up ~30% compared to Jan’20 (pre-COVID) levels. We maintain our Neutral rating with a TP of INR1,575/share.

Operational parameters in line; EBITDA miss on higher fuel cost

* Operational parameters were in line, with ASK/RPK at 19.2/13.5b (-17%/- 29% YoY). PLF stood at 70.3% (v/s 72% in 3QFY21). Yield at INR3.7/RPK (3% higher than our estimate, flat YoY and QoQ).

* RASK stood at INR3.24 (6% higher than our estimate). Revenue fell 25% YoY to INR62.2b. CASK was 10% higher than our estimate at INR3.84 (-8% YoY) due to higher fuel cost. Fuel-cost/ASK stood at INR1.01 (v/s INR0.76 in 3QFY21). CASK ex-fuel, stood at INR2.83 (6% higher than our estimate).

* EBITDAR stood at INR6.2b (-32% QoQ), with EBITDA at INR5.5b (-34% QoQ and a loss in 4QFY20). RASK less CASK stood at -INR0.6 (+38% est. estimate) as other income stood lower at INR1.4b (-59% YoY, -40% QoQ). This resulted in a loss of INR11.6b (est. loss of INR8.5b; -33% YoY, -85% QoQ).

ASK/RPK fell 53%/62% YoY in FY21

* ASK/RPK fell 53%/62% YoY to 45.5b/31.6b, with PLF at 69.5% (v/s 85.8% in FY20). Yield stood lower YoY at INR3.76 (v/s INR3.81 in FY20), despite the imposition of airfare bands since the resumption of operations in FY21.

* RASK/CASK was INR3.2/INR4.5 in FY21 (v/s INR3.7/INR3.7 in FY20). CASK, excluding fuel, was INR3.65 in FY21 (v/s INR2.4 in FY20).

* EBITDAR stood at INR2.6b (-94% YoY), with EBITDA loss of INR0.3b (v/s gains of INR40b in FY20). This resulted in loss of INR58.3b (v/s -INR2.5b in FY20).

Valuation and view

* The company had a total cash of INR185.7b (free cash fell 21% YoY at INR71b, restricted cash flat YoY at INR115b) at the end of FY21.

* Debt, excluding capitalized operating lease liability, increased 69% YoY to INR41b. Capitalized lease liability up 27% YoY to INR257b.

* INDIGO added nine new A231neo aircraft and retired 11 A320ceo aircraft in 4QFY21. Thus, net aircraft additions fell by two aircraft QoQ to 285 planes as of 31st Mar’21. On a YoY basis, the company added 23 net new aircraft, retiring ~23 A320ceo aircraft in FY21.

* The management said the total fleet count would remain flat over the next two years as older CEO aircraft (~111) are retired by Dec’22. It expects total number of seats to rise with the induction of A321neo planes.

* Cargo business recorded an increase of ~10% YoY in FY21 and is becoming an important piece in the company’s overall business. Four dedicated cargo freighters are expected to join the cargo fleet, with induction of the first freighter expected in 1HFY22.

* Risk to our call could be a sharp turnaround in domestic passenger market demand, which would expedite the recovery. Maintain Neutral.

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