FY17 was a high growth year for IndiGo when it increased its capacity as measured by available seat kilometre (ASK) by 27%, passenger by 32% and aircraft from 107 in FY16 to 131 at the end of the year, 19 of those being next generation neos.
FY17 was a high growth year for IndiGo when it increased its capacity as measured by available seat kilometre (ASK) by 27%, passenger by 32% and aircraft from 107 in FY16 to 131 at the end of the year, 19 of those being next generation neos. However, the benefits of scale and technology are yet to achieve the targeted cost optimization. As the engine problems of the neos mitigate, could be a year, short term leases unwind, would take 3-4 years, and the new capacity gets absorbed in the market, the company will benefit from a declining cost curve. An improving cost profile along with a lower capacity growth in FY18 on top of a weaker base of a demonetisation affected FY17 set up for a likely margin improvement over FY18-19E.
We discuss some of these margin levers in details below. We expect EBITDAR margins to improve from 28% in FY17 to 32% in FY19. Maintain ‘buy’ with a target price of Rs 1,446 based on 8x FY19E EV/ EBITDAR unchanged. As measured by number of flights per aircraft per day, the utilisations have improved from 5.74 hours in FY12 to 6.92 hours in FY17. This underlines a superior network management despite aggressive aircraft addition.
Employee strength increased by CAGR 29% between FY10 and FY17. Going by our estimate of aircraft addition in FY18 and required employees per aircraft, the employee growth should be below 20% for FY18-19. Maintenance cost per ASK, as measured in $, increased 18% in FY17 compared to past average of 11%. This would improve as short term leases are replaced over next 3-4 years with neos. Selling & distribution costs have come down with scale from Rs 0.21 to Rs 0.17 per ASK, helped by the partnership with Travelport. As IndiGo enters new markets, this partnership will lend key support without the traditional cost of a global distribution platform.
As a share of total revenue, ancillary revenue increased from 10.4% in FY14 to 11.3% in FY15 to 12.4% in FY16. However, the same was 12.2% in FY17. Partially explained by lower excess baggage/cancellation fees, it was also due to demonetisation during H2FY17. We factor ancillary revenue to grow to ~13% of the total operating revenue in FY18/19E. As IndiGo plans to start operations in tier 2/3 cities with the turboprop aircraft, it will also need a wide body for its international aspirations like A330.