IGI Logo

Supply outlook and rising costs to limit spreads; risk/reward unfavourable

Rising crude prices and no major structural capacity cuts may limit InterGlobe Aviation’s (IndiGo) spreads to Rs0.34 in FY23E, as per our estimate (which includes depreciation and interest cost). Entry of new players (LCC segment is getting crowded), delay in recovery of international travel (operating at one-third of precovid levels), longer absence of high-yielding corporate travel and low cash balance do not provide any rationale for increase in multiples. Maintain SELL with an unchanged target price of Rs1,650 based on 20x FY23E EPS of Rs82.4. We factor-in Brent crude prices at US$70/bbl in FY23E, hence MTM loss will lead to cut in earnings

* Incremental positives on traffic recovery with daily passenger count improving from 62k in May’21 to 235k late Sep’21. Additionally, the government has also increased the allowable flying capacity to 100% in Oct’21 from 85% in Sep’21 and 50% in Jun’21. Currently, IndiGo is operating at 85-90% of pre-covid capacity in the domestic segment. These have been well backed by PLF improvements of 74%/73.6% in Aug/Sep’21 as festive season firms up. Improving vaccination count, controlled covid cases and pent-up travel demand remain macro positives. IndiGo has been able to reach new highs of domestic market share at 56% in FY22-TD vs 48/55% in FY20/FY21. Guidance of 40% higher operating ASK QoQ is a positive.

* However, there are multiple headwinds including: (1) high Brent crude prices (currently at US$84.5/bbl); (2) no sight of international travel recovery (this segment was projected to be ~25% of total capacity for most Indian airlines by FY23E, hence create an oversupply in the domestic market); and (3) most airlines are being able to work with lessors on lease payment restructuring, hence no structural supply cuts are in the offing. Short-term capacity cuts remain tactical measures.

* IndiGo’s RASK is unlikely to charter beyond Rs4.3 in FY23E considering there are no structural capacity cuts in the system and new players are entering the market. This is also seen empirically as IndiGo’s RASK has never crossed Rs4 historically. Sharp increase in RASK is also difficult considering the delay in recovery of corporate travel where prices are higher. Leisure travel can be dampened by higher prices and beyond a certain price, alternate modes like rail and road become more attractive. Fuel/ASK is unlikely to go below Rs1.16 in FY23E if we factor-in Brent crude at US$70/bbl (currently: US$84.5/bbl). This is post factoring-in 15% efficiency from a completely neo fleet and possible gain from using A321s. Cost ex-fuel/ASK is likely to achieve efficiency, hence we estimate it to grow at only 5% CAGR between FY19-FY23E. Therefore, the best-case spread (also our estimate) for IndiGo remains at Rs0.34 per ASK in FY23E.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer