After IndiGo profit washout, more woes may prevent stock from flying; should you still buy shares?

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Published: August 2, 2018 3:32:55 PM

After India’s largest airline by market share IndiGo reported a 97% plunge in net profit sending the shares tumbling to 52-week lows, experts say that the stock has not yet bottomed out, and the company’s woes are not yet over.

“We have been short on Indigo since 1,250 levels,” Rajat Sharma of Sana Securities said. 

After India’s largest airline by market share IndiGo reported a 97% plunge in profit, sending the shares tumbling to 52-week lows, experts say that the stock has not yet bottomed out, and the company’s woes are not yet over. Since January-18, shares of Interglobe Aviation, which runs the IndiGo airline, have plunged by more than 22%. Interglobe Aviation shares closed at Rs 960.5 on NSE this afternoon, up by more than 3.5%. IndiGo’s quarterly results were its worst in the last three years, where the firm posted a 96.6% decline in net profit to Rs 27.8 crore for April-June 18, mainly impacted by adverse foreign exchange, high fuel costs and a competitive fare environment.

Taking stock of the company’s woes so far, including Aditya Ghosh’s exit as well as problems related to the Airbus engines, investment advisor Sandip Sabharwal said that the industry is now consolidating and there could be more pressure on the stock. “Indigo has been facing its own issues related to management changes as well as problems with the new Airbus engines. This combined with a sharp increase in fuel prices has let to this performance. We could see near term pressures continue however if the stock falls another 10-15% then we could be entering into value zone as the industry is now consolidated. Passing on fuel price hikes is tough for airlines and right now we are in the lean season. Airline Stocks could bottom around the September/October period,” Sandip Sabharwal told FE Online.

Given the recent plunge in the airline stocks, Kotak AMCs Nilesh Shah recently quipped, “Warren Buffett once said –If someone had shot down Wright Brothers, so many fund managers wouldn’t have lost money in aviation stocks.” Given the pricing pressure in the industry at large, Rajat Sharma of Sana Securities says that customers seem to be the final beneficiaries in this price war. “We have been short on IndiGo since 1250 levels. I see no reason to cover my positions and I do not think there is any merit in investing in this stock, as a matter of fact the entire aviation pack. The sector has reached obsolescence and the only people it will help is the customer at the cost of hurting the owners/ shareholders. And hurting big in the coming quarters,” Rajat Sharma, Founder, Sana Securities told FE Online.

According to Jatin Khemani of Stalwart Advisors, the industry is slated to see growth in air travel for the next decade, and IndiGo remains the most efficiently run airline. “However, the industry is such that the marginal cost of having an additional passenger is negligible and hence the weakest player decides the pricing, leaving little pricing power with even the market leader. Add to the fact that there is hardly any customer loyalty given commoditized nature of service,”  observes Jatin Khemani, founder of Stalwart Advisors.

According to Khemani, Indigo’s track record of on-time performance, lowest cost operations and a large 40% market share, leads investors to believe that IndiGo has customer loyalty resulting in pricing power. “However in a commoditized industry, that seldom happens. Today Indigo is operating at 90%+ load factor, crude is at $70+ putting a lot of pressure on costs and yet Indigo is a price-taker having to reduce prices in line with competitor’s pricing, even though industry utilization itself is almost 87-88%,” Jatin Khemani told FE Online.

The irrational pricing is set to continue in the industry, and we may see some consolidation in the industry, he said. “If a player like Indigo with cost leadership and 40% market share is posting such results, I wonder what would happen to weaker players. This irrational pricing shall continue till the time some of the incumbents with stretched balance sheets go bust leading to consolidation and better pricing discipline,” Khemani noted.

So what is his view on the stock? “Given Indigo has a net cash balance sheet; cash amounts to almost 28% of its market cap, it will always be the last man standing. Valuation has turned attractive but we don’t know for how long will this continue so it is better to stay on sidelines until this situation corrects,” Khemani said.

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