Fuel, forex and fares wiped out PAX growth; FY19/20e Ebitdar cut 25/10% owing to pricing pressure; TP lowered to Rs 1,073.
Fuel, forex and fares (FFF) pressure led to InterGlobe Aviation (IndiGo) clocking a dismal Q2FY19 performance—net loss of Rs 6.5 bn (consensus: Rs 3.6 bn loss). Key highlights: (i) yield contracted much higher than expected at -9.9% y-o-y; (ii) while forex loss widened to Rs 3.3 bn (Rs 2.4 bn in Q1), fuel CASK remained elevated (up 41% y-o-y); and (iii) RPKM growth came in higher than expected at 29.7% led by aggressive capacity expansion.
With resolution of A320Neo delivery issues, management has increased FY19 ASKM growth guidance to 30% from 25%. However, pricing pressure continues to persist, especially in the highly-profitable business segment (less than 15 days). Hence, we are revising down FY19/20e Ebitdar by 25/10% and thus lowering TP to Rs 1,073 (Rs 1,153 earlier). We believe, an industry-leading cost structure (CASK ex-fuel 20% lower than SJ) and a strong balance sheet (Rs 2 bn net cash) will help IndiGo weather near-term stress induced by adverse competitive environment. Maintain Buy.
Yield disappoints; forex and fuel impact compounds pressure
PAT turned negative at Rs 6,521 mn due to depressed yields (-9.9% y-o-y) and adverse forex impact—loss of Rs 3.5 bn versus Rs 2.4 bn loss in Q1FY19 (INR down 5% q-o-q). Overall, CASK at Rs 3.9/km rose 23% y-o-y as fuel CASK grew 41% y-o-y. Yields are expected to remain under pressure during FY19, although the festive season will lead to higher yields q-o-q.
Robust passenger growth leading to market share gains
With over 20 planes added in Q2 (A320Neo back on schedule), IndiGo grew faster than the industry with market share increasing from 40.8% to over 43.0% q-o-q. Management expects robust ASKM growth of 35% in Q3FY19 with 30% growth for FY19. Due to the aggressive capacity expansion, PLF fell to 84.5% versus 89.3% q-o-q. IndiGo’s cash position has broadly remained the same as FY18 at over Rs 2 bn.
Outlook & valuations: Best positioned; maintain ‘BUY’
We estimate a robust volume CAGR of 24% over FY18–20. Pricing pressure remains the key concern, which may abate as high cost players exit the market. Oil prices may have peaked at current level, which should keep the INR depreciation in check. We maintain Buy with revised TP of Rs 1,073 at 9x FY20e EV/Ebitdar with a 33% upside.
Q2FY19 conference call: Key highlights
ASKM growth: Largely from traditional routes with contribution from RCS (Regional Connectivity Scheme) routes immaterial.
International foray: With delivery of A321Neos (wider bodied planes than A320Neo) starting from December, IndiGo is planning to add more international routes. Currently, IndiGo services 57 cities, including nine international cities.
Capacity expansion: IndiGo is planning to continue to expand capacity at a robust pace leveraging its balance sheet to gain market share from financially stressed competitors.
ASKM guidance: Management has increased ASKM growth guidance for Q2FY19 to 35% from 30% earlier and FY19 guidance to 30% from 25% earlier.
NEO engine resolution: This has been resolved with IndiGo taking delivery of 14 A320 Neo’s during the quarter. Management expects delivery of 20 plus planes every quarter for the rest of the year.
Buy versus sale and leaseback: Three ATRs were purchased with cash payments. Management continues to lease A320 Neos and it has indicated that leasing will remain the norm going forward as well.
Yield pressure to sustain: The current pressure on yield is broad based. Management believes current yields are unsustainable in the present high fuel price environment. However, it anticipates that pricing power will return only after the exit of loss leaders.
Dollarisation to increase: Management has indicated that it will continue to convert INR deposits to USD denominated deposits in order to better hedge against USD denominated costs.
Stable cash position: Cash reserves are broadly at the same level as FY18.