1. Buy rating on Indigo; Operational numbers were in line

Buy rating on Indigo; Operational numbers were in line

Carrier announced a final dividend of Rs 15/sh, taking full year dividend to ~R43/sh; this implies 93% payout

By: | Published: May 9, 2016 5:59 AM

IndiGo’s Q4FY16 Ebitdar (earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs) was in line at Rs 15 bn (+7.3% y-o-y, -9.7% q-o-q). Ebitda was largely in line at Rs 8.1 bn (6% y-o-y, -19% q-o-q).

Q4FY16 PAT at Rs 5.7 bn (est. Rs 5.1 bn, flat y-o-y, -12% q-o-q) was boosted by higher OI and lower interest costs. IndiGo announced a final dividend of R15/sh taking full year dividend to ~R43/sh; implying 93% payout (incl. tax). Management now expects to exit FY17 with a total fleet of 136 aircraft (vs. 131 earlier). The stock trades at FY18 P/E of 12.9x and has an implied dividend yield of 4-5%. Maintain Buy.
* Q4FY16 operationally in-line: Largely in-line Ebitdar/Ebitda; with ASK at 11.4 bn (+19% y-o-y), RPK at 9.7 bn , implying load factor of 85.1%. Benefit of lower fuel cost at R10.6 bn (-14% y-o-y, -12% q-o-q) was negated by (i) higher employee expenses at R4.9 bn (+44% y-o-y) led by higher bench strength, ESOPs and hikes and (ii) other expenses. However, on per ASK basis Ebitdar was down 10% y-o-y led by lower yields and higher employee costs. Ebitdar margin was flat y-o-y at 36.8%.
* PAT above estimates: Indigo’s reported Q4FY16 PAT at R5.8 bn (est R5.1 bn; flat y-o-y and -12% q-o-q) was above estimates boosted by higher OI at R1.6  bn (est R1.2 bn) and lower interest costs at R269 m
(est. of R334 m).
* Full year FY16 Ebitda stood at R56 bn (+47% y-o-y), PAT stood at R19.9 bn (+53% y-o-y), implying an EPS of Rs 55.2/sh.
* FY17 end fleet guidance increased: Indigo will now exit FY17 with 136 aircraft (earlier guidance of 131) versus 107 in FY16. It will induct 20 A320Neo and 9A320s during FY17. Management indicated that Pratt and Whitney is aggressively targeting resolution of engine issues and Airbus management had guided the same. FY17 ASK growth guidance stands at 34% driven by aircraft induction and higher aircraft utilisation at ~13 hours.
* Dividend payout >90% (highest among global peers): IndiGo’s FY16 dividend at ~R43/sh (excl. dividend tax) translates to ~93% payout (incl. dividend tax).
* Upgrade estimates: We increase our FY17 earnings by 4% to factor in revised fleet guidance. The stock trades at 12.9x our FY18 EPS of R83 and at 7.6x adj. FY18 EV/Ebitdar. Dividend yield is highly attractive at 4-5%. Buy with a target price of R1,410.

Key takeaways from results concall

Increased FY17 ending fleet guidance to 136 aircraft (vs 131 aircraft earlier):
* IndiGo exited FY16 with 107 aircraft. FY17 ending fleet guidance has been revised to 136 aircraft (131 aircraft guided earlier).
* Guides FY17 ASK growth of 34%/Q1FY17 ASK growth at 23%.
* The inducted A320Neos have proven to be 13% fuel efficient (vs. A320Ceos) without sharklets.
* Management has already locked in financing for 35 A320Neos and we believe that this implies that incentives for the aircraft have been locked.
* While management has already chosen Pratt & Whitney engines for 150 A320Neos, management is weighing alternatives with the rival CFM engine for remaining 280 aircraft.

Q4FY16 performance
* Added 7 aircraft in Q4 (including 3 A320NEos). End fleet size was 107, daily flights reached 730 by end-March
* On a y-o-y basis, while fuel costs were reduced by ~30%, fares declined by ~15%, implying all fuel price benefit was not passed on to the consumers.
* FY16 employee costs were up ~48% y-o-y, of which 20% is due to capacity, 8% due to ESOP and the rest led by salary hike and bench strength.
* During FY16, IndiGo has added Dehradun as the third destination in line with its stated strategy of adding 2-3 destinations per year.

Balance sheet and new accounting standards
* From Q1FY17, IndiGo will present results on basis of IND-AS and will provide like to like comparison with previous results. The impact on different financial items will likely be off-setting (increase in finance costs will be offset by decrease in supplementary rentals).
* Cash on the balance sheet stood at R60 bn (R22.6 bn free cash and R38 bn restricted cash) as on March 31, 2016.
* Debt reduced from R39 bn in FY15 to R32 bn in FY16 (debt continues to be related solely to
* Management expects domestic aviation market to grow at ~20%.


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