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Strong performance…engine issues key monitorable

InterGlobe Aviation Ltd. (Indigo) is one of the most efficient low cost air carriers (LCCs) with a market share of 54% in the Indian aviation sector.

• Q2FY24 revenue grew by 20% YoY, inline with expectations, propelled by 34% YoY surge in passengers, defying historical Q2 softness.

• Healthy demand from leisure and corporate travel continues to aid revenue growth, Avg. aircraft utilization was healthy at ~83.3%.

• Reported a profit of Rs.188cr, a turnaround from Rs.1,586cr loss, driven by higher revenue and other income, but was tempered by a forex loss.

• Net aircraft addition to the fleet was 18, taking the total fleet count to 334. Going ahead, led by festive, with higher capacity utilization, cost rationalization and a stable ticket price, we expect earnings momentum to continue.

• From Q4FY24, the phased removal of P&W engines will impact operations throughout CY2024. Management aims to mitigate risks via strategic secondary market leasing.

• Given healthy cash position and strong earnings outlook, we value Indigo at a P/E of 20x (9.0x EV/EBITDA), on FY25E and maintain Buy rating with a target price of Rs. 3,008.

Revenue growth...despite a seasonally soft quarter

In Q2FY24, Indigo’s revenue demonstrated a robust 20% YoY growth, surpassing expectations despite a soft quarter due to seasonality. This achievement was underpinned by strong passenger growth of 34% YoY and an 83.3% load factor. Both leisure and corporate travel continued to play a pivotal role in driving this growth momentum. Indigo’s market share expanded significantly from 60.7% to 63.4%, facilitated by substantial capacity enhancements, as reflected in a 28% YoY rise in ASK. Indigo expanded its fleet by 12 aircraft in the quarter, bringing the total fleet count to 334 aircraft as of the end of Q2FY24. We anticipate sustained robust passenger traffic, driven by the continued resurgence in leisure and corporate travel. However, the Pratt & Whitney (P&W) metal powder issue will start to impact the overall AKS in the near future. Management has indicated that the company will access the secondary market for the mitigation of engine-related issues. Management has projected an 18.5% YoY increase in ASK for FY24E. We anticipate revenue to grow by 18.5% CAGR over FY23–25E.

Strong profitability…

In Q2FY24, Indigo achieved robust EBITDA growth driven by strong passenger demand and ticket pricing. But forex losses to the tune of Rs.617cr impacted overall profitability. While there was a sequential increase in and on a YoY basis, EBITDA margins expanded to 18.8% from 0.2%. This performance culminated in a reported PAT of Rs. 188cr. Looking forward, tailwinds like moderation in ATF prices, steady ticket pricing, and consistently high load factors instil confidence in sustaining earnings momentum.

Outlook and Valuation

Indigo’s market leadership position, ability to leverage its network, cost efficient fleet, and healthy cash position reflect our positive outlook for the stock. Healthy passenger volume, strong ticket prices, and an ease in fuel prices will support earnings momentum in FY24E. We value Indigo at a P/E of 20x on FY25E (9.0x EV/EBITDA) and maintain Buy with a target price of Rs.3,008.

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