IndiGo Airlines issued its inaugural set of results following the Nov 2015 IPO. During FY3Q16 (December), operating Revenue improved 11% y-o-y (and remains up 19% through FY9M16), reflecting 25% traffic growth in the quarter, offset by a 14% decline in average fare price. However with fuel expense off 20% y-o-y (representing 34% of total costs vs 47% in FY15), Ebit grew 23% y-o-y (although below the 100% improvement observed YTD). Meanwhile, EBITDAR (ex Finance Income) improved 31% on a 37.8% adjusted EBITDAR (earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs) margin (+540bps y-o-y). Net Profit rose 24% in FY3Q16 (vs 93% growth YTD). In short, IndiGo continues to benefit from the favourable oil price environment, but the pressure on passenger yields and 5% depreciation in the INR offset part of this benefit. We believe, higher D&A (related to a recent accounting change), increased tax associated with the expiry of aircraft tax credits and higher wage costs capped performance as well. The company ended the period with a net cash position of ~R18 bn (prior to the adjustment for off-balance sheet operating leases).
Implications: As the company did not report its Sept results previously due to the timing of the IPO, this set of results was highly anticipated. Due to delays in the A320neo (citing industrial reasons, likely involving the new next generation engines), mgm noted that the prospectus guidance for 111 aircraft at March 31 will be difficult to achieve (vs 101 today), but the company would take delivery of five used aircraft in the near-term to help bridge the capacity shortfall.
Our target price of Rs 1,300 is based on a target FY17e EV/EBITDAR (enterprise value/earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs) of 8x (and implied FY16E P/E of ~17x, similar to the Indian market). While the 8x target EV/EVITDA multiple is notably above 12-month forward multiple of 6.5-7.0x the sector in Asia has traded at historically (particularly as we are applying this to our FY17e estimate, for the period ending March 2017), we believe the rapidly declining oil price has yet to be reflected in consensus estimates, and the company looks well positioned to grow earnings above that of the index (our target price implied a target FY16 P/E of ~17x, similar to that of the NIFTY index) and with better returns.
While our quantitative rating system suggests a High Risk rating for stocks with short trading histories such as IndiGo, we think a High Risk is not appropriate given the company’s scale and operating history.
We believe the largest risk facing IndiGo is the timing of aircraft deliveries in and out of market cycles. Thus far, relative mismanagement by the competition has led to easy market share gains and well-timed capacity additions. However, the addition of new foreign-backed rivals could force IndiGo to up their game or face challenges to their leading market share. Other key risk factors include: large swings in the price of fuel which can have outsized impact on results, despite the ability to hedge and implement fuel surcharges; the impact on US dollar-denominated fuel prices as local currencies fluctuate, i.e. a weaker local currency will result in higher fuel expense; airports may be unable to expand capacity or obtain regulatory approvals/licenses to operate in existing markets and gain access to new markets/airport slot constraints; rising interest rates given highly capital-intensive long-lived assets (and which could also weigh on DCF-implied valuations); should the 5/20 rule be relaxed, foreign competition may try and enter the market more aggressively; increased competition; aircraft operational risks; airport capacity constraints; changes in government regulations, including environmental regulations; general India economic conditions; exposure to currency exchange rate movements; events such as terrorist attacks, natural disasters, epidemics, social/political unrest which affect tourism and travel volumes; and potential future share issuance to satisfy minimum public float requirements. Upside or downside impact of any of these risk factors could cause the shares to deviate from our target price.