Analyst Corner: Downgrade IndiGo to ‘sell’ with revised TP of Rs 1,650

By: |
September 28, 2021 1:45 AM

Our spreads include depreciation and interest cost. Entry of new players, delay in recovery of international travel, longer absence of high yielding corporate travel and low cash balance do not provide any rationale for increase in multiples.

Short-term capacity cuts remain tactical measures.Short-term capacity cuts remain tactical measures.

Rising Brent crude prices and no major structural capacity cuts may limit the spreads of InterGlobe Aviation (IndiGo) to `0.34 in FY23, as per our estimates.

Our spreads include depreciation and interest cost. Entry of new players, delay in recovery of international travel, longer absence of high yielding corporate travel and low cash balance do not provide any rationale for increase in multiples.

Downgrade to SELL from ADD with revised target price of Rs 1,650 (earlier: Rs 1,800) based on 20x FY23E EPS of Rs 82.4 (earlier: Rs 90). Our earnings cut is driven by higher Brent crude prices of $65/bbl in FY23 compared to $60/bbl earlier and current Brent crude prices of $78/bbl.

There are incremental positives on traffic recovery with daily passenger count improving from 62k in May’21 to 231k in late Sep’21. Additionally, the government has also increased the allowable flying capacity to 85% in Sep’21 from 50% in June’21. These have been well backed up by improving PLFs of 70%/72% in Aug/Sep’21 as festive season firms up. Improving vaccination count, controlled Covid cases and pent up travel demand remain macro positives. IndiGo has been able to reach new highs of domestic market share at 56% in FY22-TD compared to 48/55% in FY20/FY21.

However, there are multiple headwinds including (1) high Brent crude prices (currently at $78/bbl), (2) no sight of international travel recovery. This segment was supposed to be ~25% of total capacity of most Indian airlines by FY23 and hence, create an oversupply in the domestic market and (3) most airlines are being able to work with lessors on lease payment restructuring and hence, no structural supply cuts are in the offing. Short-term capacity cuts remain tactical measures.

IndiGo’s RASK is unlikely to charter beyond Rs 4.3 in FY23 considering there is no structural capacity cut and there are new players entering the market. This is also seen empirically as IndiGo’s RASK has never crossed `4 historically. Sharp increase in RASK is also difficult considering the delay in recovery of corporate travel where there is relatively higher price inelasticity. Leisure travel can be dampened by higher prices and beyond a certain price, alternate modes like rail and road become more attractive.

Fuel/ASK is unlikely to go below Rs 1.25 in FY23 if we factor Brent crude at $65/bbl (currently prices are $78/bbl). This is post factoring 15% efficiency from a complete neo fleet and possible gain from using A321s. Cost ex-fuel/ASK is likely to achieve efficiency and hence, estimated to grow only at 5% CAGR between FY19-23E. Hence, the best case spread (also our estimate) for IndiGo remains at Rs 0.34bps per ASK in FY23E.

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