Indigo is slowly moving toward owning planes via internal accruals. Dividends take a hit but NPV of owning is higher than renting, thus we don’t view this move as a negative. Stay EW as valuations seem fair to us. Owning vs. leasing — on NPV basis, owning wins: While dividends going down is a short term hit, in looking at NPV (net present value) of both methods, we believe that for established airlines with good credit ratings, owning can make more sense than leasing. Indigo is looking to own planes but via internal accruals: The company is looking to buy planes mainly via internal accruals and not raise debt. The pace of fleet owned will gradually rise, assuming that company buys 6, 6 and 8 planes in FY18, FY19 and FY20, respectively, (referred to as Scenario A); then operating leases as a percentage will go down from 87% in FY17 to 84% in FY20. Indigo’s lease rentals are 17% of FY17 actual sales while depreciation was lower at around 2-3% of sales as cost of six year leases that the company takes are high. Overall while dividend yield drops, but assuming scenario A, we see 2% to 4% jump in FY18/19 earnings.
Reflects maturing business model: As business is growing in scale so it makes sense for Indigo to have a more balanced fleet strategy that gives more flexibility and lowers FX risk to some extent. We see this as an evolution of the business model and not a deviation from its low cost strategy. Key risks: Key downside risks are that Q1 yield strength is one-off and the pricing environment gets tougher going ahead or jet fuel prices rise sharply.