HDFC Securities has maintained a neutral outlook on Interglobe Aviation Ltd. with a target price of Rs 1,310. The stock was trading with a current market price of Rs 1,299 on NSE. Indigo’s Q1 results beat expectations owing to savings on fuel, observed the report. The increase in revenue of more than 25% came on the back of growth in Revenue Passenger Kilometers (RPKM). The low cost carrier had posted record quarterly profits to the tune of Rs 811 crores. This amounts to an increase of 37% when compared to the corresponding period in the previous fiscal. As per the report, Indigo has revised the it’s capacity expansion, as measured by Available Seat Kilometres (ASK) to 20% from the earlier 25%, owing to the ongoing issue regarding engines with a few A320 Neos aircraft.
Owing to lower capacity addition guidance, HDFC Securities has cut earnings estimates by 2-3%, after taking cost efficiencies into consideration. The research report observed that Indigo has changed it’s preference to the owned aircraft model from the erstwhile operating lease model. According to HDFC Securities, this shift is driven by perceived long-term savings on costs. Further, Indigo plans to use A320 Neos for more than 10 years as against the typical lease tenure of 6-7 years. Given that it has only 18 owned aircraft in the current fleet of 136, the management intends to balance the aircraft mix. This may be seen as RoE dilutive by investors, pointed out the report. However, HDFC Securities remained constructive on Indigo given the huge penetration opportunity and Indigo’s capabilities. As the Indigo stock is up by more than 43% in the last six months, HDFC Securities changed it’s stance to neutral, by maintaining a target price of Rs 1,310 based on 16 times FY 19 Earnings Per Share (EPS). The report said that in the near term, there ought to be sustainable improvement in yield owing to lower capacity addition by Indigo.