IndiGo promoters see huge opportunity in India’s international air-travel market and believe the acquisition of Air India’s international operations can provide them a significant headstart in creating a major presence in the space. The acquisition will be completed only if the due diligence process gives them the confidence that IndiGo can turn around Air India’s operations and make the transaction EPS accretive. Maintain positive stance, increase TP to Rs 1,300 or rollover. IndiGo’s founding promoters Rahul Bhatia and Rakesh Gangwal outlined their bullish outlook on the growth potential in India’s international air-travel market, in a call with investors on Thursday. They believe that a low-cost long haul airline model can be significantly disruptive to India’s international air-travel market, and can unlock massive growth potential.
IndiGo, with its (1) large captive base of domestic passengers and (2) mastery over low-cost carrier model, can create big wins in the international market, at the cost of full-service long haul operators, through offering (1) much cheaper fares, (2) lower travel time by avoiding connecting flights and (3) hassle-free experience. IndiGo is interested in (1) the international landing rights held by Air India and (2) significant experience of its staff in operating international routes, and believe that it can turn its operations around by converting it into a low-cost long-haul carrier.
However, it will go for the acquisition only if (1) it can avoid debt and liabilities not associated with the international operations and (2) the due diligence process gives enough confidence to the management to make it an EPS accretive acquisition.
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India’s international air-travel market is nearly double the size of its domestic market, as per our estimates, where passenger volumes have grown at a CAGR of 9% in FY2007-17 period. Air India holds 17% market share in the international market and thus, can provide a large presence to IndiGo in the space.
However, we note the significant gap in the profitability of Air India’s operations versus IndiGo, which largely stem from Air India’s (1) complex operations, (2) expensive leasing arrangements, and (3) low productivity. IndiGo runs the risk of getting distracted in managing this cumbersome acquisition, though its promoters strongly believe this to be unlikely; they expect the due diligence process to give them enough insights to avoid this possibility. We believe it is too early to be conclusive over the impact of the proposed acquisition on IndiGo’s fundamentals, as the process is likely to take over a year.