InterGlobe Aviation (IndiGo) posted strong operational performance with Q2FY18 Ebitdar jumping 61% y-o-y, driven by 9% surge in yields. Key highlights: (i) passenger yield revived strongly to Rs 3.57/km, broadly in-line, led by robust revenue management in addition to favourable base; (ii) RPKM growth moderated to 15% y-o-y following 26% CAGR over the past 5 years due to delivery issues with NEOs; and (iii) PLF improved 180 bps y-o-y to 84%. IndiGo received compensation from Airbus for delivery issues and grounding of NEOs, which should ease with expected resolution over the next 12-18 months. Management expects benefits from new ATR operations to be launched from December 2017 and the aircraft will be funded via internal accruals. We have raised FY19E Ebitdar by 4% on 2% higher yields. Hence, we revise target price to Rs 1,378 (9.2x FY19E EV/Ebitdar). Maintain Hold.
Yields recovered; NEO engine related issues to be resolved
Passenger revenue grew a robust 26% y-o-y to Rs 45 bn driven by 9% y-o-y revival in yields and slower-than-usual 15% RPKM growth. Due to delay in delivery of NEOs and grounding of aircraft amidst shortfall of spare engines, ASKM grew only 13% y-o-y (Q1FY18: 19%). The company has lowered FY18 capacity guidance to 19% y-o-y from 20% earlier, but expects resolution of engine issues by Pratt & Whitney to normalise operations (20% capacity guidance over 3 years).
ATRs to commence operations soon; NEO upgauge from CY18
Indigo will launch ATR operations by December 2017 and is planning to ramp-up fleet to 21 ATRs by January 2019. The company aims to own bulk of these aircraft, financed via internal accruals, and expects regional operations to be fairly viable. Indigo will switch part of A320 NEOs (185-seater) to larger A321 NEOs (230-seater) from CY18, which will further drive 10% fuel savings per seat over A320 NEOs, while optimising capacity at constrained Metro airports during prime slots.
Outlook and valuations: Growing profitably; maintain ‘HOLD’
We have raised FY19E Ebitdar by 4% on 2% higher yields. We estimate robust 21% volume growth and flat yields in FY19 driving 30% Ebitda CAGR over FY17-19. We maintain ‘HOLD’ with a revised TP of Rs 1,378.
Q2FY18 conference call:
Operational reliability with Neos: On-ground situation has improved. As many as 9 aircraft were grounded at one time. However, it has received a sufficient number of spare engines. Currently, none of the aircraft are grounded. Expects it to take another 12-15 months before design changes are implemented by Pratt & Whitney.
ATRs: 21 ATRs to be added between December 2017 and January 2019, majority of which will be owned. Indigo expects ATR fleet to make up 5% of capacity in couple of years. Regional operations to commence by year-end, for which ticket sales have started. The company will look at Phase 2 of UDAAN, but ATR operations will also happen separately.
AI International operations: Indigo awaits further clarity from government on AI’s divestment. Management believes there is significant opportunity for long-haul travel in India. If the AI deal fails to go through, entry in international operations will be slower.
ASKs: Capacity ramp-up to significantly accelerate in Q4FY18 led by NEO aircraft, ATRs and aircraft lease from secondary market. Management highlighted that it has the flexibility to up-gauge aircraft (use higher capacity aircraft) in slot-constrained airports . However, Indigo highlighted that despite such constraints, there are opportunities by way of non-peak hour flights, services at non-metros as well as UDAAN airports.
RASK: RASK (revenue per available seat kilometre) and yield improved 13/9% y-o-y on back of higher load factors and better yield management. Indigo has upgraded its revenue systems by way of better automation systems, experienced personnel and better market analysis. These measures were initiated in Q4FY17; hence, the company expects benefits to flow in subsequent quarters.
Ownership versus sales and leaseback model: Planning to reduce SLB and move to owning aircraft based on cash reserves. Indigo will utilise proceeds from the recent Institutional Placement Programme (IPP) to acquire new aircraft. Bulk of the upcoming ATRs will be on ownership model. With greater competition in the lease market, Indigo also expects some benefits on lease rentals.
Capacity guidance: ASK will increase 14% in Q3FY18 and 19% for FY18 (including ATRs). Lower guidance due to issues with NEOs and delay in deliveries. Over 3 years, Indigo expects capacity CAGR of 20%. GST impact on operations: 5% under GST for all leases, which are eligible for input credit. There is 5% GST on outright purchase of aircraft; the industry expects further clarity on the issue.