InterGlobe pricing weaker than warranted, UBS quotes management

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Published: March 22, 2017 5:43:58 AM

Operating leases will remain the mainstay for now, although a company continuously evaluate benefit of owned (financial lease) vs operating lease.

InterGlobe pricing weaker than warranted, UBS quotes management. (Reuters)

Management agreed that the pricing is weaker than what should be warranted by the demand outlook but believes this is more of a temporary business factor. Neo fleet should help Indigo maintain its competitive edge over other players (ex: GoAir) as they will not be able to rapidly shift to more fuel-efficient Neos.

Lower cost of acquisition and maintenance due to large orders remains the other structural competitive advantage. Management expects to pay out a major portion of its profits as dividends (although no percentage fixed). Operating leases will remain the mainstay for now, although a company continuously evaluate benefit of owned (financial lease) vs operating lease.

Share of international business is likely to go up, the increase will not be very large. We continue to value Indigo at 7x 1-yr forward EV/EBITDAR, a 30% discount to Ryanair in its high growth phase. We believe the discount is well deserved given Indigo’s much higher leverage and higher earnings volatility. We value InterGlobe Aviation on a one-year forward EV/EBITDAR multiple. Airline earnings and therefore stocks are highly volatile.

Indigo earnings are exposed to and significantly negatively impacted by increase in oil price, dollar appreciation versus the rupee. Industry demand, capacity addition and utilisation levels are other significant factors. Price competition in the industry is frequent.

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