Interglobe Aviation, the parent company of Indigo saw its net loss widen by 10% to Rs 1,583 crore for the three months ended September. The loss was worse than Bloomberg estimates of Rs 1,210 crore but better than HSBC estimates Rs 2000 crore loss. While the yield was slightly better than expected, cost was in line. Passenger yield in the quarter was 3% down q-o-q but that was because of the seasonal impact. Management indicated that the yields held up mainly because the industry was more disciplined. However, costs also remain under pressure because of high fuel and weak Rs against $. Unit cost was up 14.1% y-o-y and up 1.3% q-o-q.
Strategic shift towards global
Indigo’s new CEO, Elbers spoke about pillars of his strategy one of which is about increasing focus on international flying. While it’s an interesting strategic shift since domestic markets are turning competitive and the demand is highly price sensitive, he didn’t explain the model Indigo will follow on its international operations which is crucial. Having said that, it is worth highlighting that there are not many examples of Low-cost carriers (LCCs) succeeding in long-haul international flying globally
We continue to believe that competition will increase as all the carriers are growing aggressively in the medium to long term. However, capacity may be squeezed in the short term due to supply-chain issues. Meanwhile Indigo had to ground 30 of its aircraft due to these issues.
We could also see some capacity shift towards international operations which could further tighten domestic capacity, helping domestic fares to remain strong. However, in the medium term, we continue to believe that the industry will be very competitive, especially as Tata group (not listed) comments suggest that it aspires to capture around 50% market share in the domestic market and a significant presence in the international market. We also see a risk of Indigo potentially losing corporate market share to the Tata group.
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We have adjusted our forecasts sharply, primarily driven by a lower fuel price and yield assumptions. We cut our FY23 estimates loss forecasts by 42% and raise our FY24 estimates profit forecasts by 22%, as presented late. We raise our target price from Rs 1,565 to Rs 1,756 and upgrade to Hold (from Reduce).
We upgrade Indigo to Hold from Reduce as the yields are holding up well and the company expects yield to remain strong during Q3 which is seasonally one of the strongest quarters for the industry. Hence we expect the company to shift some capacity towards its international operations which could be higher than pre-COVID-19 levels.