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PAT-beat surprise in an exacting Qtr from lower opex

Indigo reported surprise profits in Q2FY24 at Rs1.9bn (SA) (Street/Emkay: net loss of Rs2.3/11.1bn). Revenue beat estimates by 3%, driven by 3%/4% higher RPK/ASK at 29.4/35.3bn (fleet size expanded QoQ to 334 vs 316), besides a rise in claims, etc. Adj. SA EBITDA of Rs26.6bn was 61% above estimate due to 9%/11%/17% lower employee cost/airport fee/supplementary rentals. Yield/RASK fell 14%/17% QoQ to Rs4.44/4.25, at 1% below estimate. Mgmt reiterated FY24 ASK growth will be north of midteens YoY (Q3: 25%). While engine recalls due to the P&W powder metal issue (AOGs to rise from CY23-end) have goaded supply-related concerns, we stay constructive on Indigo, given its strong ASK guidance, dominant position (to attain leases at better rates & claims from suppliers) and robust order book, with some relief on fuel rates. We cut only FY24E EPS by 6%, on higher forex loss and rollover to Sep-25 with new TP of Rs3,100; BUY.

InterGlobe Aviation: Financial Snapshot (Standalone)

Result Highlights

Indigo’s EBITDA surpassed our estimate by 61%, coming in at Rs26.6bn, led by a 3% revenue beat and 5% lower opex. Indigo reported ASK growth of 28% YoY/8% QoQ to 35.3bn in Q2FY24, while RPK rose 34%/2% to 29.4bn, implying a PLF of 83.3% on a higher ASK base. Fuel cost per ASK was 3% lower than our estimate, at Rs1.66, but up 4% QoQ, while forex loss stood at Rs6.2bn. D/A and finance charges rose 7-10% QoQ, while Other Income was up 17%. Non-fuel forex CASK was down 8% QoQ at Rs2.4, as supplementary rentals/ASK fell 19% QoQ, while airport fee/ASK was also down, by 14%. Indigo’s fleet size puffed up by 18 net additions QoQ to 334, as of end Sep-23. Core debt rose 21% QoQ to Rs38.7bn. Total cash balance improved 12% QoQ to Rs306.7bn, with a 15% jump in free cash to Rs180.8bn, while lease liability was up 6% QoQ to Rs455.2bn.

Management KTAs

Indigo could see incremental AOGs due to the P&W powder metal issue, from CY23-end till mostly early-CY24. It has taken mitigation measures like retaining 14 A320CEOs, adding 11 wet leases from Nov-23, and 12 more CEOs from the secondary market from Jan-24. It plans to undergo a digital transformation, invest in hangars at Delhi-Bangalore, and purchase ATRs and engines, aiming to utilize cash. It expects to end FY24 with a fleet size of 350 and plans adding one aircraft a week in FY25E. Indigo is negotiating with suppliers for spares and compensation. Oct-23 yields have been weaker YoY, due to festival timing adjustments, but Company expects a catch-up in Nov-Dec ’23. Fuel charge takes care of the ATF hike and covers other costs, though last year did not see any hike due to fare caps. Current lease rentals are higher owing to demand-supply mismatch. Airport fees & supplementary rentals were lower in Q2 due to provision reversal of Rs1.5bn on account of RCS, along with claims received from OEMs. From Q3, airport fees could increase due to hike in RCS fees. Supplementary rentals are expected to be similar to the Q1 trend. PLFs were affected by new routes (>80% internationally, though).

Valuation

We value Indigo on DCF, with TP of Rs3,100/sh (15.7x Sep-25E target P/E, nil taxes). Key risks: Adverse currency/fuel prices, recession, stake sale and operational issues.

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