The Directorate General of Civil Aviation (DGCA) has extended the deadline for IndiGo to replace its A320neo aircraft fitted with unmodified Pratt and Whitney (PW) engines to May 31, 2020, from January 31 earlier. But IndiGo will have to replace at least one engine of an aircraft with a modified PW engine by March 31.

According to the plan submitted by the company to the regulator, IndiGo will replace ~135 unmodified engines by May 31.

We believe the extended deadline would allow IndiGo to achieve its revised ASK growth target of 22-23% for FY20. Accordingly, we revise our FY20 ASK growth estimate from 14% to 22%. The extension will also allow IndiGo to add new aircraft on new/fresh schedules. This will allow it to make net additions in ASK growth and facilitate flying of new pilots whose salaries were an overhang and not associated to ASKs.

IndiGo is expecting a lag in deliveries of new aircraft owing to various issues faced by Airbus with the family cabin layout of A321neo and a delay in engine deliveries from engine manufacturers.

In India, low fares are driving passenger growth and airlines are aggressively engaging in price competition. We expect IndiGo to continue enjoying the streak of highest domestic market share (~48% for 8MFY20) with its ASK growth plan back on track and concerns about delivery delay from Airbus subsiding in CY20.

Vulnerabilities to its profitability would be lower in the current benign crude price environment. The recent spate of conflicts between the promoters could continue posing corporate governance challenges.

Thus, we remain cautious on the stock — it trades at 23.1x FY21E EPS of Rs 61.7 and 6.3x FY21E adj EV/Ebitdar. We value IndiGo at 17x FY22E EPS to arrive at a target price of Rs 1,549. Maintain ‘neutral’.