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On the high road!

We attended IndiGo’s analyst meet at its iFly training center in Gurugram on 23rd March, 2023. Below are the key highlights from the meeting:

* Management boasts of one of the highest fleet utilization rates in the world and expects it to further improve over the next couple of years.

* Over the past six years, the company has doubled the number of domestic destinations to 77, while the number of international destinations has tripled to 26.

* In 3QFY23, the company operated 1,800 flights daily with On-Time Performance (OTP) of ~90% and its PAX stood at 22.3m. While the company forecasts strong overall demand in 4QFY23, yield is expected to reduce in the quarter due to seasonality. Nevertheless, it is still expected to remain above pre-covid levels.

Purple patch ahead for the Indian Aviation Industry

* As one of the fastest growing aviation markets globally, India is estimated to require 1,100 passenger aircraft by 2027.

* The government is taking several initiatives to support the growth of aviation. It plans to invest USD11.8b over the next four-year period to construct new Greenfield airports and develop existing brownfield airports, increasing the number of airports to 220 by 2025 from its current 140.

* 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 inclusive). The management also expects the number of passengers to increase to 100m in FY24 from 85m in FY23. Strategic pri

Strategic priorities for the company

* The management assures a continued focus on affordable fares (supported by cost leadership with CASK of 3.31), OTP, courteous and hassle free service (low cancellation rate of 0.2%), and unparalleled network.

* The company intends to develop people, processes, and technology in line with its growing size. Additionally, it is focusing on developing a three-point disembarking system and an innovative ramp design. The company has also developed an in-house ‘Partnership Booking Centre’.

* 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.

Valuation and view

* IndiGo’s fleet consists of 302 aircraft, including 23 A320 CEOs, 160 A320 NEOs, 78 A321 NEOs, 39 ATRs, and 2 A321 freighters (it added another freighter in 3QFY23). The company has an order book for ~500 aircraft currently.

* Management has been taking several pre-emptive measures to increase its global brand awareness, as it expects to capture a bigger share of growth from its international market in the coming years (due to the lower base right now). * In the domestic market, the company is expected to face some headwinds due to the volatility in crude prices and forex. Further, competition in the sector is expected to intensify with the resurgence of Air India and the entry of a new player Akasa Air. We value the stock at 7x FY25E EV/EBITDAR to arrive at our TP of INR2,110. We reiterate our Neutral rating on the stock.

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