Buy InterGlobe Aviation Ltd For Target Rs3,000 - Emkay Global Financial Services
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Indigo displayed its dominant position and pricing prowess by introducing fuel charge to counter rising ATF costs, resulting in 8-12% fare hikes, on average. While competition has not followed suit so far, we observe that fares for key airlines, viz. Indigo, Air India and Vistara, remain in a +/-10% or Rs200-300 tolerance band for key sample routes, for many of which Indigo still offers the cheapest fares. We foresee the fuel charge improving Indigo’s theoretical yields by ~10% QoQ in Q3FY24E, ceteris paribus, with media reports also quoting unnamed company sources indicating Rs0.9-1.0bn weekly impact. Fuel cost/ASK was turning out to be 8-10% higher than our FY24 estimate, as Brent and jet kero spreads strengthened from August, but the fuel charge offsets this, up to USD90-95/bbl and ~USD30/bbl, respectively, with low risk of FY24 exforex earnings downgrade. We retain BUY on Indigo with TP of Rs3,000/share
Fares inch upward on fuel charge; yields healthy
Indigo introduced fuel surcharge in the Rs300-1,000 per ticket range wef 6-Oct-23, based on the distance travelled (in kms). This was levied to mainly pass-on the continuous monthly ATF price hikes, cumulating to ~30% from Jul-23 till Oct-23. Media reports indicated similar levy being contemplated by SpiceJet also, but no official announcements were made till date; neither have other airlines. Notably, Air India is not levying a separate fuel charge, though fare built-up for Vistara includes a ‘Q surcharge’, which implies a carrier-imposed rate to possibly recover additional costs like that of fuel. We conducted sampling on a few of Indigo’s routes and observed an 8-12% increase in fares due to introduction of fuel charge. A comparative analysis of current fares across Indigo, Air India and Vistara for the Delhi-Mumbai-Bengaluru route indicates that fares of Air India and Vistara are in a +/-10% band of Indigo’s fares, post-fuel charge. We foresee yields improving 10% QoQ in Q3FY24E, partly driven by strong seasonality and fuel charge. This could help to largely offset fuel-cost pressures in the near term.
Fuel cost remains ‘joker in the pack’, but Indigo protected to a large extent
Brent is currently trading at ~USD90/bbl, though jet fuel spreads have corrected by ~20% from the recent highs, pointing to some respite in the near term. We believe fuel cost/ASK could rise 10-12% H-to-H in H2FY24, if current prices prevail till FY24-end, hinting of an 8-10% increase to our FY24E fuel cost/ASK of Rs1.6. For Indigo, a 5% higher ATF price leads to ~Rs28/share EPS loss, ceteris paribus. Nevertheless, fuel charge was set at recent peak levels of USD90-95/bbl oil and USD29-30/bbl jet fuel spreads; hence, Indigo is protected to that extent. We maintain our ex-forex earning estimates
Outlook and Valuation
We value Indigo using the DCF methodology, with target price of Rs3,000/share, at 14.8x Mar-25E target P/E (PBT) and ~20x tax-adj. target P/E. Key risks: Adverse currency/fuel prices, recession, stake sale and operational issues.
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