IndiGo's overseas push, new aircraft orders, UDAN ambitions to keep it flying high

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Nitin Agrawal
Moneycontrol Research

Interglobe Aviation (IndiGo), the market leader in domestic skies, retained its mojo as was evident from a strong set of Q2 numbers. IndiGo posted a very strong all-round performance with significant growth in revenue from operations and reported strong profit after tax. We continue to like the business on the back of operational efficiencies, capacity addition plans, and multiple growth drivers.

Quarter in a Snapshot
Revenue from operations clocked a growth of 27 percent (YoY) led by an increase in volumes (15.4 percent) supported by a rise in yield (8.9 percent). Additionally, the load factor witnessed growth of 180bps over the same quarter last year.

On the cost front, CASK (cost per available seat kilometres) ex-fuel increased by 5 percent (YoY) on the back of costs incurred on grounded nine A320neo aircraft and currency depreciation during the quarter. The management indicated that, as of now, there is no aircraft grounded as the company started getting spare engines from Pratt & Whitney.

IndiGo was able to post EBITDAR margin of 29.9 percent, up 643 bps over the same quarter last year. This was primarily driven by reduction of 612 bps in fuel costs as the percentage of revenues from operations. The management indicated that the profitability improved in the quarter on a year-on-year basis as result of better revenue management and the credit the company received from Pratt and Whitney for the engine issue.

Growth Drivers

Foray into international market
IndiGo's management has indicated its interest in stepping up presence in the long-haul international market. With that objective, the management has expressed interest in acquiring debt-laden Air India's international operations, which would give IndiGo immediate access to the various restricted and closed foreign markets. It would strengthen its reach and give it access to highly coveted slots at foreign airports. The management is confident of tackling challenges that come with ailing Air India.

Even if the deal does not fructify, the management intends to start a low-cost airline for the long-haul market.

Significant capacity addition to capture increasing demand
The company has placed a huge order for aircraft and delivery of these aircraft will help IndiGo retain its leadership position in the Indian market. In fact, the management indicated that IndiGo's capacity is expected to register a CAGR (compounded annual growth) of about 20 percent over FY18-20.

UDAN - regional growth
The government’s regional air connectivity scheme, UDAN, is another avenue for IndiGo to capture growth coming from non-trunk routes. IndiGo has started connecting non-trunk routes aggressively and has chalked out plans for regional connectivity. As part of the regional operations, the company has sourced ATR aircraft and is expected to start from December. The management indicates that the operation would be 5 percent of the total capacity in the years to come.

Owning aircraft – well timedIndiGo now plans to use the cash flow to own aircraft and believes that this would bring in additional operational cost savings. Recently, the company has successfully completed a fundraising and has enough dry powder to buy new aircraft. The management indicated that the primary reason for owning aircraft is because the new technology has just come into the market and there is lesser chance of its obsolescence soon. This new technology will bring in additional cost savings if the aircraft are kept for a longer duration.  However, they are yet to evaluate this option thoroughly.

We believe IndiGo has all the right ingredients that is required to retain its leadership position in the Indian aviation sector. At the current price, it is quoting at 6.0 and 5.4 times FY18 and FY19 projected EBITDAR, which we believe is attractive for the long-term investors.

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