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Profitability continues despite seasonality

* InterGlobe Aviation (IndiGo) posted a PAT of INR1.9b (v/s our estimated net loss of INR9.6b) in 2QFY24 driven by lower-than-expected fuel costs and supplementary rentals. Revenue passenger kilometers (RPK) were at 29.4b. Passenger load factor (PLF) was at 83.3% with available seat kilometers (ASK) of 35.3b (est. of 34.3b) and yield of INR4.4 (v/s est. of INR4.3) in 2QFY24.

* Supplemental rentals were down QoQ due to provisions of a reversal of ~INR1.5b taken by the company during 2QFY24. Rentals are likely to rebound to 1QFY24 levels from 3Q onwards. Currently, over 40 aircraft of IndiGo are grounded due to P&W engine issues. P&W has now identified a new issue with powder metal, and an incremental number of engines will be removed for inspections from Jan’24 onwards, thereby hurting operating fleet further.

* That being said, according to our airfare tracker, the 30-day domestic forward prices for IndiGo are up by 30% QoQ and the 15-day prices are up by 37% QoQ in 3QFY24 to date. Management highlighted that it has made adjustments to the base fare after introducing the fuel surcharge and would continue to have it to offset the increases in ATF prices in the past 3-4 months. Demand has remained stable, with IndiGo serving 26.3m passengers in 2Q and it is on track to raise this to 100m in FY24 from 85m in FY23.

* To harness the expected demand growth, the company plans to increase its fleet size to 350 in FY24 from 306 in FY23, while also adding 10-15 new destinations (both domestic and international). The long -term guidance of doubling the capacity stays intact, with the management highlighting that it would be difficult to give a number for FY25 because of the P&W-related issues. Management would prefer to wait and watch on this as of now.

* Due to the outperformance in 2QFY24, we raise our EBITDA/PAT estimates by 9%/13% for FY24, while keeping our FY25E broadly unchanged. While we remain positive on the industry as a whole, IndiGo would have to navigate through various challenges in the near to medium term. Reiterate Neutral with a TP of INR2,800 (premised on 7.5x FY25E EV/EBIDTAR)

Beat on steady demand for air travel, sequential decline in PLF and yield

* IndiGo’s yield stood at INR4.4 vs. our estimate of INR4.3 (and INR5.1 in 2QFY23). RPK was at 29.4b (our est. of 28.7b, +34% YoY), with PLF at 83.3%. ASK was at 35.3b (our est. of 34.3b, +27% YoY) during the quarter.

* Thus, revenue stood at INR149b (+7% est., +20% YoY). EBITDAR stood at INR23.9b (est. of INR11.3b) with EBITDA at INR22b (our est. of INR9.4b). The company has paid an IGST of INR927m in 2QFY24 on re-import of a repaired aircraft, which is under dispute right now.

* PAT was at INR1.9b vs. our est. loss of INR9.6b. Depreciation charge was higher by INR692m on reassessment of estimated useful life for 14 CEO aircraft from 20 years to 13-16 years, and consequent residual value.

* Free cash was at INR180b in 2QFY24 vs. INR82b in 2QFY23. Capitalized lease liability stood at INR455b with a total debt of INR494b in 2QFY24.

* For 1HFY24, revenue was at INR316b (+25% YoY), EBITDA was at INR71.6b (+10x YoY) and PAT stood at INR32.8b (loss of INR26.5b in 1HFY23). PLF improved to 85.9% (79.3% in 1HFY23) with average yield at INR4.8 (-7% YoY)

Valuation and View

* IndiGo is working to increase its international presence through strategic partnerships (codeshare agreement with Turkish Airlines) and loyalty programs. The company’s loyalty program subscriber base has increased 4.5 times from FY21 levels. The company also plans to add more routes and strengthen its own network of international routes it is operating.

* Management has been taking several preemptive measures to increase its global brand awareness, as it expects to capture a bigger share of growth from its international market in the coming years (due to the lower base right now). However, competition in the sector is expected to intensify with the resurgence of Air India and the entry of a new player (Akasa Air).

* While we remain positive on the industry as a whole, IndiGo would have to navigate through various challenges in the near to medium term. Reiterate Neutral with a TP of INR2,800 (premised on 7.5x FY25E EV/EBIDTAR).

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