Sectoral growth, carrier's superior positioning and attractive valuations behind initiation with ‘Outperform’ and TP of Rs 1,650
We initiate on Indigo with an Outperform and TP of Rs 1,650 (8X EV/Ebitdar on Dec-2019E), based on strong sectoral growth, Indigo’s superior positioning and relatively attractive valuations (11X FY20E P/E, and 6.3X FY20E EV/Ebitdar). Airline traffic growth is structural on penetration and affordability. Growth can have added cyclical upside with stronger economy. Resulting strong yields and seat factors can continue as industry capacity and demand growth likely remains in line. Indigo has a strong balance sheet and cost structure, and has also taken a lead in market share (~40%) and offering. Competition remains modest, limited by strategic dissonance and financial resources.
We expect Indigo’s revenue, Ebitdar and earnings to have CAGR of 22/28/39% during FY17-FY20E. While we are (by 15%) ahead of consensus, we build reasonable unit yield (RASK of Rs 3.7 vs FY13-16 avg. of Rs 3.8) and costs (CASK-ex fuel flat at Rs 1.85) and both variables can drive more upside.
Key risks: Profitability has high sensitivity to fuel (build $65/bbl), yields (fares) and load factor (build 86%).
Best in class; competition modest but reviving: Strong traffic growth and moderate capacity addition have ensured stronger yields and seat factors. This broad trend can continue as industry capacity growth likely remains in line with demand growth. Indigo has taken a strong lead in terms of market share (~40%), frequency of flights, on-time performance and consistent offering. Indigo has strongest balance sheet and lowest cost structure (cost focus, scale and advantages from bulk aircraft orders), even though more airlines seem ready for competition after some profitable years.
Unit yield, cost can drive up spreads; ahead of consensus: We expect Indigo’s revenue, Ebitdar and earnings to have CAGR of 23/27/36% during FY17-FY20E. While we are significantly (by 15%) ahead of consensus, we build reasonable unit yield (RASK of Rs 3.77 versus five-year average of Rs 3.7; 10% higher than FY17) and costs (CASK-ex fuel flat at Rs 1.85) and both variables can drive more upside. Usage of unrestricted cash for buying airplanes can further optimise cost structure and returns. Profitability has high sensitivity to fuel (build long-term crude price of $65/bbl), yields (fares) and load factor (build 86% as in H1 FY18 trend).