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Best domestic consumption play

* We upgrade INDIGO to BUY as we believe that benign Brent crude prices amid the ongoing geopolitical turmoil and favorable domestic demand bode well for the company. We assign a TP of INR6,550 premised on 10x FY27E EV/EBITDAR. The stock currently trades at a P/E of 20x FY26 EPS and 9.7x FY26E EV/EBITDA. We estimate a CAGR of 28%/38% in EBITDA/PAT during FY25-27E.

* We lowered our Brent assumption for FY26-27E to USD65/bbl (from USD70/bbl), based on the following factors: (1) there is going to be a gradual unwinding of OPEC+ voluntary cuts from Apr’25 and (2) IEA projects that global supply is likely to exceed demand and the demand-supply gap is set to widen as voluntary cuts unwind from Apr’25. For INDIGO, aircraft fuel accounts for ~40% of total expenses; therefore, softer crude prices bode well for the company.

* INDIGO has been on an upward trajectory after Covid – gaining market share in the domestic market (aided by the insolvency of GoFirst in May’23), expanding its international and cargo business, adding new destinations/routes, signing codeshare agreements, and procuring delivery of aircraft from OEMs. These factors have helped the company maintain profitability for the past two years and will continue to drive its performance in the coming years.

INDIGO to benefit from an upswing in Indian aviation

* India’s aviation sector is on a strong growth trajectory, with domestic passenger traffic expected to double by CY30. This surge is underpinned by a growing middle class, rising income levels, and continued infrastructure development. INDIGO, as the leading carrier, is well-placed to leverage this opportunity through aggressive fleet and route expansion.

* India is quickly becoming a major market in international air travel, as the country is projected to become the 5th largest outbound tourism market by CY27. Over 50 countries now offer visa-free or visa-on-arrival access to Indian travelers, boosting global travel demand. INDIGO is expanding its international footprint by adding new destinations and increasing codeshare alliances with global airlines. ? The Indian government has committed to investing USD25b for airport expansion and modernization by CY27. With the number of operational airports having doubled in the last 10 years, improved infrastructure supports INDIGO’s long-term growth. In addition, government policies encouraging domestic aircraft production and Maintenance, Repair and Overhaul (MRO) services create a favorable environment for the airline’s consistent expansion.

Strategic initiatives drive profitability

* INDIGO has undertaken an ambitious fleet expansion by placing orders for 925 aircraft set to be delivered by CY35—one of the largest in global aviation history. The inclusion of A321 XLR and A350 wide-body aircraft will strengthen its long-haul and mid-haul capabilities, boosting international reach. This aligns with its broader strategy to grow its global presence and offer greater connectivity options.

* The airline is also intensifying its push into international markets, with plans to raise its overseas capacity share to 40% by FY30 (~28% currently). By deploying long-range aircraft on underserved global routes and leveraging strategic codeshare agreements, INDIGO aims to establish itself as a go-to carrier for international flyers. At the same time, it continues to outperform domestic peers on operational parameters such as punctuality, aircraft utilization, and cost control, supported by a fuel-efficient fleet and a well-optimized route network.

* Financially, INDIGO has posted strong numbers in FY24/FY25TD, driven by effective cost and revenue management. Additionally, the airline is growing its ancillary revenue through offerings like IndiGo Stretch, the BluChip loyalty program (recently joined hands with Accor), and its cargo business—enhancing profitability while elevating customer experience. In 4QFY25, we expect an EPS (including forex) of INR34.5 as the company maintained its FY25 guidance during its analyst meet in Mar’25.

INDIGO- an airline for the future

* INDIGO is charting a path to double its operational scale by CY30, aiming for a fleet of over 600 aircraft and targeting 200m passengers annually. Further bolstering its international ambitions, INDIGO is set to begin receiving A350-900 deliveries from CY27, positioning itself for stable long-haul growth.

* Technological upgrades are playing a central role in INDIGO’s transformation with the integration of AI-powered tools like 6ESkai, 6E Digi Breathalyzer, and BagWatch. These innovations aim to enhance customer satisfaction, boost employee productivity, and ensure operational precision.

* In FY26, INDIGO anticipates strong capacity growth in early double digits, supported by a steady aircraft delivery rate of more than one per week in CY25, underpinned by confidence in supply chain consistency. It looks to add 14 new destinations in CY25 and increase its employee base to more than 3k.

Valuation and view

* INDIGO has adopted a completely different operational strategy after Mr. Pieter Elbers joined the company as the new CEO in Sep’22. He has over 30 years of experience working at different positions at KLM Royal Dutch Airlines. His wealth of experience has not only helped INDIGO compete with global majors but also consistently increase its market share in the domestic market. This could also pose as a ‘Key Man’ Risk.

* INDIGO serves over 100m passengers and adds one aircraft a week (on average). It has expanded its international share to ~28% in FY25 of Available Seat Kilometers (ASK) through strategic airline partnerships. The company focuses on strengthening its global presence via loyalty programs and proactive brandbuilding efforts while continuously refining schedules to enhance reliability and attract a larger share of international travelers.

* The stock is trading at ~20x FY26E EPS of INR257.9 and ~10x FY26E EV/EBITDAR. We upgrade the stock to BUY with a TP of INR6,550, based on 10x FY27E EV/EBITDAR. Key downside risks: 1) delays in wide-body aircraft deliveries or rising AOGs; 2) sharp volatility in crude or rupee could pressure margins if not passed on; 3) a higher share of business-class seating or premium fleet may dilute INDIGO’s cost advantages.

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