Stability in operations may be delayed until Q3FY21; earnings estimates changed and TP cut to Rs 1,300 from Rs 1,617; ‘Neutral’ retained.
As the nationwide lockdown end date approaches near (15th Apr’20), many airlines along with InterGlobe Aviation (INDIGO) have started accepting advance bookings. However, the Directorate General of Civil Aviation (DGCA) has not yet issued a clear directive on resumption of operations. Based on our interactions with industry experts, we highlight various issues/challenges that INDIGO might face on its flight back to normal operations.
Domestic operations start, but speeding off may get difficult
As India moves out of the lockdown, domestic operations are expected to start in a phased manner; however, international operations should still remain closed due to various travel ban advisories. According to our airfare tracker, post the lockdown, domestic operations (mainly on key/metro routes) should see a staggered start. Indian carriers are using a hawk-eyed approach in resuming domestic operations; however, the rate of PLFs will be a key concern. The tracker also suggests that YTD average yield across metro routes has declined by ~30% for both 30-day/15-day ticketing window. Note that the steep decline is on the already under-pressure metro routes, which would lead to higher break-even PLFs for the respective carriers.
For Indian carriers, typically Q1 is the strongest period while Q2 is a weak quarter. In this fiscal, as the lockdowns/shutdowns are playing out in the first quarter, we expect gradual improvement in the dynamics of the Indian aviation industry only from Q3FY21.
International takeoffs grappling with travel bans
All countries where INDIGO operates have shut their borders for foreign travelers until further notice. Even if travel bans are discontinued, we believe progress for the airlines would occur in a staggered manner. For instance, only transit passengers allowed (within airports) or self-quarantine if they want to enter any country, which is a big dampener for international travel. International operations constitute ~22% (ASK-9MFY20) for INDIGO, which is likely to see extended impact of the shutdown in operations. The lack of visibility on foreign travel could also challenge INDIGO’s ASK growth plan (at 20% for FY21 with ~50% deployment on international routes).
Enough cash, but erosion could be quick
Cash on INDIGO’s books at end-Q3FY20 stood at ~Rs 201 bn (~Rs 94 bn of free cash and ~Rs 107 bn of restricted cash). The cash is sufficient for the company to run operations for another 5 quarters (~2 quarters on free cash and ~3 quarters on restricted cash), assuming ~10% average salary cut for all its employees. Even in such tough times, we expect INDIGO to continue enjoying the highest domestic market share (~48% in Feb’20) in India as other carriers face the challenge of operational existence. However, flying with lower PLFs would turn on the tap of variable cost and will lead to more cash erosion than in the above stated environment.
Valuation and view
Apart from the above stated challenges, vulnerabilities to the company’s profitability could be higher led by high sensitivity to (a) ticket yield, (b) PLF, and (c) crude price assumption; note that material change to any of these will impact our estimates. The stock has already corrected ~35% in the last 45 days; however, we believe that stability in operations would be lagged until 3QFY21.
Globally, various airline companies have withdrawn their earnings guidance indicating uncertainty in the aviation industry. Likewise, even we remain keen on hearing management guidance and commentary before taking a leap of faith in the industry/stock. Owing to assumption changes, we value INDIGO at 16x FY22E EPS of Rs 81.2 to arrive at TP of Rs 1,300 (from earlier Rs 1,617). We maintain Neutral on the stock.