What investors should do with IndiGo stock as promoters’ feud turns uglier

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Updated: July 15, 2019 7:07:10 PM

IndiGo’s parent company InterGlobe Aviation’s stock has tumbled over 13% in the last two days after a spat between the airline’s two promoters Rahul Bhatia and Rakesh Gangwal spilled out in public on Tuesday.

IndiGo commanded 49% market share of the domestic market at may end and has been expanding its overseas capacities by 25% year-on-year. (PTI File photo)IndiGo’s parent company InterGlobe Aviation’s stock has tumbled over 13% in the last two days after the promoter feud became public on Tuesday.

IndiGo’s parent company InterGlobe Aviation’s stock has tumbled over 13% in the last two days after a spat between the airline’s two promoters Rahul Bhatia and Rakesh Gangwal spilled out in public on Tuesday. InterGlobe Aviation shares traded low continuously for two trading sessions, falling from Rs 1,565.75 on Tuesday’s close to Rs 1,354.85 on Thursday’s close. Today, IndiGo shares opened flat at Rs 1,355 on BSE and inched up later. Several analysts that Financial Express Online spoke to are divided on whether to buy or sell IndiGo shares, amid the controversy shadowing the strong fundamentals of the airline. InterGlobe Aviation is IndiGo’s operating company, jointly promoted by Rahul Bhatia and Rakesh Gangwal.

SEBI has sought clarification from the company. IndiGo co-founder Rakesh Gangwal on Tuesday asked SEBI to intervene in the matter. He alleged several corporate governance violations by co-founder Rahul Bhatia including matters about related-party transactions, the appointment of senior management personnel. “I have vigorously attempted for almost a year to persuade the company to shore up its governance standards, and all my attempts have been thwarted by the IGE Group,” Gangwal said in a letter to SEBI.

“Beyond just questionable RPTs, various fundamental governance norms and laws are not being adhered to and this is inevitably going to lead to unfortunate outcomes unless effective measures are taken today,” he added while detailing the gamut of events at the company violating corporate governance norms. Both the co-founders Gangwal and Bhatia each own less than 40% in Interglobe Aviation, giving both co-founders a major say in its strategy and plans.

ICICI Securities has maintained a BUY rating on the stock in view of its strong business fundamentals. It said the core issue remains of overriding power of IGE in the board, as per Rakesh Gangwal group, is leading to the decadence of governance standards of IndiGo related to issues of related party transactions (RPTs) between IndiGo and IGE.

However, Target Investing has a SELL rating on IndiGo stock as it believes the premium valuation of the company will come down due to promoter dispute. “ We believe due to promoter dispute there will be a reduction in premium valuation the company trades at. In short and medium term there will be volatility and we do not see resolution anytime soon as concerns of Gangwal would be investigated by SEBI and government. We have SELL on the company,” Sameer Kalra, Founder and Research Head, Target Investing told Financial Express Online. 

If there are stock-specific issues then the sectoral tailwinds generally do not support the stock, Neelkanth Mishra, Managing Director of Credit Suisse said in an interaction with CNBC TV18 while declining to comment on the specific stock.

“Considering the strong fundamentals of the company, it’s not risky but the investors should be cautious until the company clarifies about the corporate governance issues in the company. In the near-term and medium-term, the day to day operations of the company is not going to get impacted by this as the promoters are not involved in the day to day function. It is only when it comes to the larger strategic issues in future are not resolved, it will be a negative,” according to a Mumbai-based analyst who didn’t wish to be quoted.

For existing investors, the analysts have a cautious note as there is no clarity with regard to alleged related party transactions. Those who are holding should wait before jumping on to any conclusion. New investors should not jump in and the existing investors can either hold or reduce, another analyst told requesting anonymity.

“Although we do not see any serious repercussions as yet, management distractions could impact Interglobe Aviation’s (Indigo) currently strong franchise. Moreover, current valuations reflect high growth expectations in an industry characterised by low barriers and innumerable past failures. We believe scenarios range from “not good” to “ugly”. While we do not perceive an immediate risk to earnings, we believe the market is sensitive to governance issues. Hence, we revise down target FY21E EV/EBIDTAR from 9.0x to 7.5x and TP 26% to INR1,390 and downgrade to ‘HOLD’, especially as the stock is close to an all-time high,” Edelweiss Research told Financial Express Online.

InterGlobe Aviation is likely to register a net profit at Rs. 608.4 crores in Apr-Jun, up 3.2% quarter-on-quarter, according to Prabhudas Lilladher. Its net sales are expected to rise by 17.3 per cent on a quarterly basis to Rs. 9,250.6 crore. The earnings before interest, tax, depreciation and amortisation (EBITDA) are likely to grow by 19.3 per cent to Rs 2,453.7 crore on a quarterly basis. 

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