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Sky is the limit

* The Indian aviation market is highly underpenetrated currently, which provides huge room for growth for domestic players. This growth trajectory will be aided by increasing airport infrastructure and capacity additions in terms of aircraft orders, which could make India the third-largest aviation market in the world by CY35.

* INDIGO highlighted its three-pillar strategy for growth: affordable fares, lower cancellations and on-time performance. It also seeks to enhance customer experience and invest in talent. INDIGO aims to significantly expand its international network.

* The management has also been making efforts to increase its global brand awareness. The stock is trading at ~14x FY26E EPS of INR238and 7x FY26E EV/ EBITDAR. We maintain our Neutral rating on the stock with a TP of INR3,510 as we believe that INDIGO would have to navigate through various challenges in the near to medium term.

Indian aviation aiming for the sky

* The Indian aviation market is highly underpenetrated, with one of the lowest domestic and international seats per capita in the world. This provides huge headroom for growth with only 6.5% Indians holding a valid passport. CAPA, an aviation research consultancy, estimates that Indian aviation passengers will increase from 225m in FY24 (70m international) to 510m by FY30 (160m).

* This growth would be enabled by accelerated infrastructure expansion, with the number of airports likely to reach 220 from 140 in CY19. Various greenfield and brownfield airport expansions are underway, with Jewar (Noida) and Navi Mumbai airports expected to be operational in CY24-end and CY25, respectively.

* Indian players have robust capacity addition plans, with domestic players accounting for ~32% of total global aircraft orders in CY23 (only for Boeing and Airbus). INDIGO alone placed an order for 500 aircraft in CY23 (~44% of the 1,124 aircraft ordered by domestic airlines). India is expected to be the third-largest country in terms of fleet size by CY35.

INDIGO has a 3-fold strategy for growth

* The management reassures of affordable rates, led by lower costs and relentless commitment to reliability through OTP and lower cancellation rates (vs. global peers). It has an unparalleled network in 88 domestic cities with plans to add more destinations. The management believes that network advantage would only increase over time.

* INDIGO seeks to develop and enhance customer experience through its AI Chabot 6Eskai that enables users to effortlessly manage their travel. It boasts 1,000+ graduates from its Cadet Pilot Program with an eye to expand its ifly training academy across India.

* The company aims to expand its international network to drive its next phase of growth. INDIGO wants to cater to the expanded market through A321XLR, targeting mid-long haul markets (expected within two years). New initiatives, such as freighter business, venture capital arm and its loyalty program, are supporting the company’s existing business model.

Valuation and view

* INDIGO is working to increase its international presence through strategic partnerships and loyalty programs. The company has added seven new destinations and 19 routes in FY24. The company has eight strategic partners with 27% international share in terms of ASKs in FY24.

* The management is also making efforts to increase its global brand awareness, as it expects to capture a bigger share of growth from its international market in the coming years. However, competition in the sector is expected to intensify with the resurgence of Air India and the entry of a new player.

* While we remain positive about the aviation sector, we believe INDIGO would have to navigate through various challenges in the near to medium term. We reiterate our Neutral rating on the stock with a TP of INR3,510, valuing it at 7.5x FY26E EV/EBIDTAR.

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