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Indigo posted stellar >2x growth YoY in net earnings at Rs30bn in Q3FY24, a sizeable beat to our est., led by higher yields at Rs5.48, up 2% YoY. ASKs grew 27% YoY to 36.5bn (1% beat), as Indigo ended Dec-23 with a fleet size of 358 vs. 334 QoQ. Load factors were 130bps below est. at 85.8%; while RPK came in-line. Mgmt. has guided for Q4/FY24 capacity growth of 12%/>20% YoY; while AOG situation aggravated in Jan-24 to mid-70s, from high-40s in Q3 (total 136 aircraft on P&W engines) due to powder metal issue. Indigo is undertaking mitigation measures like purchase of ATRs, finance leases, damp leasing etc. It remains well-placed to navigate supply-chain challenges through its strong order book, robust balance sheet, and operational advantages. We largely retain FY25-26E EPS and raise FY24E EPS by 31% to build in current trends and roll over to Dec-25E with a revised TP of Rs3,500 (up 13%); retain ADD.

Result Highlights

EBITDA was a 34% beat at Rs52.0bn, led by an 8% revenue beat; while total opex was largely in-line. Indigo reported ASK growth of 3% QoQ, while RPK rose by 28% YoY and 6% QoQ to 31.3bn, implying an 85.8% PLF. Fuel cost per ASK was 4% above our estimate at Rs1.88, up 13% QoQ, while forex loss stood at Rs0.5bn. D/A rose 7% QoQ due to a lower residual value and useful life of A320ceos, while finance charges were also up 7%. Other income was up 9% QoQ. Non-fuel forex CASK was up 9% QoQ at Rs2.63, as supplementary rentals/ASK jumped 20% QoQ, while airport fee/ASK was also up 6%. Indigo’s fleet size saw 24 net additions QoQ to 358, driven by 11 incremental damp leases. Core debt rose 71% QoQ to Rs66.3bn. Total cash balance rose 6% QoQ to Rs324.3bn, with a similar jump in free cash reserves at Rs192bn, while lease liability was down 2% QoQ to Rs445.6bn. Indigo turned net-worth positive.

Management KTAs

Engine & supply-chain issues started 18 months ago with AOGs rising from the late 40s in Q3FY24 to the mid-70s by Jan-24 end due to P&W’s new powder metal issue (but lower than Indigo’s earlier estimates). Management maintains its capacity plans as it is taking mitigating measures. There will be some re-deliveries of the balance operational aircrafts with P&W engines as the 6-year timeframe is concluded. The company continues to work with OEMs to address the issue as inspection takes 240-300 days. There is seasonal weakness in yields on a QoQ basis but trends on a YoY basis remain steady for Q4, as seen for Jan-24. Yields in Q3FY24 were largely driven by strength in the domestic market with the absorption of higher fares and fuel charges. Mgmt. has also guided on new deliveries in early double digits for Q4FY24 and reiterated its one aircraft per week guidance for FY25. Indigo has entered into damp leases from Q3FY24; while the full-cost impact is expected to flow from Q4. Other operating income included some OEM claims as well. International ASK share rose to 27% in Q3.

Valuation

We value Indigo using DCF method, with a TP of Rs3,500 (17.4x its Dec-25E target P/E). Key risks: Adverse currency/fuel prices, recession, stake sale, and operational issues.

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