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We downgrade Indigo to ADD from Buy, given the recent stock run-up and limited upside, though we remain constructive on the medium-to long-term outlook. Indigo posted 1QFY27 standalone EBITDA of Rs32.9bn, a 26% miss on elevated costs, fuel in particular. ASK grew 3% yoy to 43.5bn (1% miss) and PLF of 83.3% was below our 85% expectation; PRASK at Rs5.03 was a 4% beat (up 19% yoy), taking total revenue to Rs246bn (up 20% yoy), 2% above our expectation. CASK (excl fuel/FX) was 3% above estimate, while fuel expense came in 12% higher and was up 63% qoq. PBT was negative Rs3.8bn (vs our +Rs12.1bn estimate). The management flagged 1Q impact from the Middle East conflict and deliberate network optimization amid an exceptionally high-cost environment (fuel prices, currency depreciation, inflation) though strong pricing enabled partial pass-through. 2Q ASK growth guidance is muted, flat yoy, though PRASK should be up more than 25%; fuel outlook stays uncertain amid geopolitical volatility and its subsequent impact on oil and jet kero prices. The management reiterates full-year single-digit ASK growth guidance and a stronger medium term (double digit). We cut FY27E EBITDA by 7%, building in higher costs, while largely retaining FY28-29E earnings. We roll over to Jun28E EPS and raise TP by 6% to Rs5,500 from Rs5,200, maintaining the 20x target multiple. The Middle East scenario is the key variable for the outlook.

Results highlights

Reported net loss in 1QFY27 stood at Rs3.8bn vs our estimate of Rs11.5bn profits. Other income of Rs10.4bn was a 17% miss, and down 26% qoq. RASK was up 17% yoy/7% qoq to Rs5.66, while yield was up 21%/16% to Rs6.04. Employee cost was up 11% yoy, while supplementary rentals rose by 15%. Other expenses were up 18% yoy. D/A rose 5% qoq to Rs29.5bn, while finance charges were up 7% qoq. Total fleet shrank by 9 qoq to 432 as damp leases reduced to 7 from 20 qoq amid the capacity cut. Core gross debt rose 14% qoq, while free cash was up 8%, to Rs278bn and Rs390bn, respectively. PBT/ASK (excluding FX) of Rs0.07 was a miss vs our Rs0.25 estimate.

Management KTAs

Capacity deployment was dynamically reallocated toward markets where demand remained healthy. The airline continues to prioritize profitability over market share. The fuel price outlook remains highly uncertain and continues to depend on geopolitical developments. During early 2QFY27, fuel forward curves had moderated below 1Q levels, but the situation has again turned volatile. Excl fuel FX CASK growth in FY27 should be high single digit to early double digit. The long-term international expansion strategy remains firmly on track. 2Q ASK moderation is also on account of the suspension of select East Asian routes due to seasonality. The new CEO will join in the first week of August

Valuation

We value Indigo at a PER-based TP of Rs5,500 (~20x Jun-28E AEPS). Key risks: Adverse currency/fuel prices, economic slowdown, stake sale, and operational issues.

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