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Scathing concern over yields resurface

* INDIGO reported a miss on our estimates owing to lower than expected RPK (-51% QoQ) and yield (-6% QoQ). Other expenditure was also higher.

* Air passenger demand in May’21 touched last year levels (Jun’20), averaging 2.1m passengers, impacted by the second COVID wave.

* As per monthly revenue bifurcation given by the company, revenue in Apr’21 stood at INR15.4b, at INR6.7b in May’21, and at INR9.6b in Jun’21 (including other income). INDIGO expects revenue in Jul’21 to recover to Apr’21 levels (passenger traffic has recovered to 0.16m passengers per day v/s an average of 0.19m in Apr’21).

* The cash burn increased to ~INR350m/day in 1QFY22 (from INR190m/day in 4QFY21) for INDIGO. Free cash reduced 25% YoY to INR56.2b in 1QFY22 (from INR71b at the end of FY21). INDIGO is looking to generate an additional liquidity of INR55b in FY22, of which it actualized INR14b in 1QFY22. The board has also approved a QIP of up to INR30b.

* Yield was down owing to lower traffic demand in 1QFY22. INDIGO said yields would continue to remain under pressure until demand recovers. Even as per our airfare tracker, airfares in May’21 tumbled to last year levels and are hovering around average floor bands since the start of Jun’21. Factoring in the same, we lower our FY22E/FY23E yield estimate to INR3.65/INR3.7 from INR3.8/INR3.8.

* As guided in the previous concall, INDIGO expects air traffic to recover to Feb’21 levels (of 0.3m passengers per day; -37% YoY) by the end of 3QFY22. We build our RPK assumptions in line with the said guidance. Corporate travel was ~20% of INDIGO’s total revenue before COVID-19 and is likely to improve to 13-14% gradually ahead (currently ~10%).

* Despite the current state of precariousness in the industry, the stock continues to trade above its pre-COVID levels. We maintain our Neutral stance on the stock with a TP of INR1,600.

Operational parameters below our estimate; losses widen

* ASK stood at 11.2b (-18% est., -42% QoQ), with PLFs at 58.9% (est. 53%), resulting in RPK of 6.6b (-9% est., -51% QoQ). Yield was lower at INR3.5 (6% lower than our estimate of INR3.7; -23% YoY and -6% QoQ).

* Revenue stood at INR30.1b, with RASK at INR2.68 (-26% YoY, -17% QoQ). CASK stood at INR5.52 (-68% YoY, +44% QoQ), with CASK ex- fuel, at INR4.43. Ancillary revenue was strong at 30% of ticketing revenue.

* Forex loss of INR2.9b, lower financial income of INR1.5b, and higher fuel cost impact of INR5.4b (adjusted for capacity) led to higher cost.

* Company posted an operating loss of INR14.7b (est. -INR10.5b and INR5.5b in 4QFY21). RASK-CASK stood at -INR2.84, resulting in a PAT of -INR31.8b (est. -INR24.3b, -INR28.5b in 1QFY21 and -INR11.6b in 4QFY21).

Valuation and view – maintain Neutral

* The company had a total cash of INR171b (free cash at INR56b, -25% YoY; restricted cash at INR115b, +5% YoY) at the end of 1QFY22.

* Debt, excluding capitalized operating lease liability, increased by 143% YoY to INR58b. Capitalized lease liability grew 23% YoY to INR259b.

* INDIGO retired eight aircrafts QoQ (it has a fleet size of 277 aircrafts). It returned 15 A320ceo aircrafts, and inducted two A320neo, two A321neo, and three ATR aircraft. The management said the total fleet count would remain flat over the next two years as older A320ceo planes are retired.

* Despite near term challenges, management continues to believe that INDIGO will emerge from the pandemic stronger than before, with the various preemptive steps already undertaken. Fuel cost is expected to fall further with the addition of NEO aircrafts (NEO aircraft share increased to 59% in 1QFY22 from 56% in FY21 and 43.5% in FY20 in its total fleet).

* Risk to our call could be a sharp turnaround in the domestic passenger market demand, which would drive a faster recovery. We maintain our Neutral rating.

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