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* INDIGO reported a PAT of INR9.2b, lower than our expectation, on account of higher-than-expected fuel and employee costs. Revenue passenger kilometers (RPK) came in at 25.6b. Passenger load factor (PLF) was higher at 84.2%, with available seat kilometers (ASK) of 30.4b (est. 29.6b) and the yield at INR4.9 (est. INR5.4) in 4QFY23.

* The yield was lower QoQ due to seasonality, while capacity growth stood at 19% in FY23 as the company targets growth in the mid-teens range in FY24. The management does not expect lease costs to increase substantially, but there could be a marginal increase due to rising interest costs.

* That said, according to our airfare tracker, the 30-day domestic forward prices are up by 12% QoQ in 1QFY24 till date and the 15-day prices are up by 20% QoQ in 1QFY24 till date. The total number of domestic passengers has also crossed pre-Covid levels in Jan-Apr’23, which suggests strong travel trends in the domestic aviation market.

* In order to harness the expected demand growth, the company plans to increase its fleet size to 350 in FY24 from 306 in FY23, while also adding 10- 15 new destinations (both domestic and international). The management also expects the number of passengers to increase to 100m in FY24 from 85m in FY23.

* We increase our revenue estimates by 12%/17% for FY24/FY25 because of the strong pricing trend being seen in ticketing revenue. We keep other estimates largely unchanged. The stock continues to trade above its preCovid levels. We reiterate our Neutral rating on the stock with a TP of INR2,135 at 7.5x FY25E EV/EBIDTAR.

Miss due to higher-than-expected fuel costs and employee expenses

* The yield stood at INR4.9 v/s our estimate of INR4.8 (INR5.4 in 3QFY23 and INR4.4 in 4QFY22). RPK came in at 25.6b (+64% YoY, +4% QoQ), with PLF at 84.2%. ASK was at 30.4b (+49% YoY, +6% QoQ).

* Thus, revenue stood at INR141b (+7% est., +77% YoY, -5% QoQ). EBITDAR came in at INR28.9b (est. of INR42.9b, -9% QoQ). PAT stood at INR9.2b v/s our estimate of INR21.2b (INR14.2b in 3QFY23).

* Free cash of INR121.9b in 4QFY23 v/s INR77.6b in 4QFY22; capitalized lease liability of INR415.4b, with total debt of INR448.5b in 4QFY23.

* For FY23, Revenue grew 110% YoY at INR544b and EBITDAR jumped 709% at INR68b with EBITDA at INR64b (up 1,123% YoY). However, INDIGO reported a net loss of INR3.2b (v/s net loss of INR62b in FY22).

Valuation and View

* INDIGO is working to increase its international presence through strategic partnerships (codeshare agreement with Turkish Airlines) and loyalty programs. The company’s loyalty program subscriber base has increased 4.5 times from FY21 levels.

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