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Strong yields, but sustainability is a concern

* INDIGO reported an in line adjusted loss at INR10.6b, led by better than estimated yield (at INR5.2), with an in line RPK. A lower PLF (at 79.6%), due to modest demand, has kept RASK under check (up 19% QoQ) in 1QFY23.

* The management said its international flight operations in 1QFY23 stood at pre-COVID levels. It expects the same to grow in coming months with the easing of international travel protocols.

* According to our airfare tracker, the 30-day domestic forward prices dipped sharply (down 7% MoM) in Aug’22. The 15-day domestic forward prices also dipped by 8% MoM due to additional capacity and a decline in ATF prices.

* Corporate travel and tourism are back to pre-COVID levels and are likely to gradually improve in coming months. The Cargo business remains strong, and the management expects it to remain stable going forward. Bangladesh and Vietnam are emerging as major cargo destinations at present, with the Chinese economy normalizing.

* Yield was higher in 1QFY23, despite higher per unit fuel prices (up 102% YoY) and a depreciation in the INR v/s the USD (which led to a higher forex loss of INR14.2b). However, the management expects yields to contract from current levels, given the entry of new and established players (Akasa Air and JETIN), which may result in heightened competition.

* Factoring in the same, we reduce our FY23/FY24 yield estimate marginally to INR4.6/INR3.95 and decrease our EBITDAR estimate by 2% each.

* Despite the current state of precariousness in the industry, the stock trades above pre-COVID levels. We maintain our Neutral rating on the stock, with a TP of INR2,006, at 8x FY24E EV/EBIDTAR.

PAT is in line, led by better yields and modest PLF

* Yields stood at INR5.2 (est. INR4) v/s INR3.5/INR4.4 in 1Q/4QFY22.

* RPK came in line at 21.9b (up 232% YoY and 40% QoQ), with PLF at 79.6% (est. of 82%). ASK was in line at 27.5b (up 146% YoY and 35% QoQ).

* Revenue stood at INR128b (17% higher than our estimate). EBITDAR stood at INR6.6b (34% higher than our estimate). Reported loss (of INR10.6b) was in line v/s a loss of INR16b in 4QFY22.

Valuation and view – maintain our Neutral rating

* Free cash increased to INR83b in 1QFY23 from INR56.2b in 1QFY22. The management is comfortable with its overall cash position.

* INDIGO inducted three fuel-efficient A320neo and nine A321neo aircraft. It returned the six older ceo ones. Most of the ceo aircraft will be returned by Dec’22. It capitalized lease assets of INR344.7b, and had a total debt of INR392.7b as of 1QFY23.

* Total capacity deployed will translate into an ASK of 55-60% in FY23E. The management highlighted double-digit growth (~15%) in FY23 from preCOVID levels (in FY20).

* We expect the international market to grow faster than the domestic market for INDIGO. The same will touch 40% of its total share over the next five years.

* Despite the near-term challenges, INDIGO will take additional pre-emptive measures. However, the resurgence of airlines (Air India and SJET), the upcoming Akasa Air, and the established JETIN will reduce INDIGO’s market share going forward. We value the stock at 8x FY24E EV/EBITDAR to arrive at our TP of INR2,006. We maintain our Neutral rating owing to the limited upside of 2% from current levels.

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