IndiGo growth story robust despite tepid Q2 numbers: CAPA's Kaul

IndiGo's second quarter numbers were expected to be tepid because of seasonal factors, but the growth story is robust, Kapil Kaul, CEO, India Subcontinent, Centre for Asia-Pacific Aviation tells CNBC-TV18.Kaul says the quarterly performance was hit by a couple of one-off factors, but there is no threat to profitability as long as crude prices stay low.Below is the verbatim transcript of Kapil Kaul's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: IndiGo is under quite a bit of pressure and there is some disappointment with regards to the Q2 performance because of the way the profits have been hit on account of the higher employee expenses etc but how did you read into both Q2 and Q3 and where does the disappointment lie?A: The results have been in line with expectations because we had to revise our forecast for the industry profitability twice.We had a different number in June as the oil prices kept falling, our forecast for the industry and the IndiGo as well had to change. More importantly, when we factor a full year guidance, we look at Q2 and Q4 very differently from Q1 and Q3 because Q2 is the worst quarter in terms of travel and thereby yields are down and the margins are down and the entire industry is under stress. So our expectations on Q2 were largely in line, Q3 has been a very robust in line with what they have delivered, we haven’t seen any surprises as far as IndiGo is concerned.As far as employee expenses are concerned, they have a robust expansion plan. So they are holding pilots and very strong technical crew, which perhaps they may require over a period of time. They have about 18-20 planes coming every year from now on depending upon the new schedule.So I think the employee cost has risen primarily because of the fact that they have a holding pool of pilots much larger than what they require largely keeping the growth pipeline in mind. Secondly, I think they have incentivised the staff during the initial public offer (IPO) process.If you see compared to last year most of the employee costs have gone up largely because of incentivisation and perhaps strong incentivisation across the board maybe some cash incentives across the organisation. So we should look at Q2 differently.The employee cost, if you take pilots off, should be one-of but broadly by the industry trade, we are looking at fuel as a game-changer. If you take fuel off, the non-fuel costs have not been significantly down. In fact, in certain cases, it has gone up. Fuel has played a critical role. As long as fuel stays in this line, it will create stimulus, even though there is going to be stress on the yields but it will be compensated by the higher growth numbers. So overall you will see, as long as the fuel prices sustain where they are, you would see IndiGo's profitability continuing to be robust.Latha: Further falls in crude prices are not to be expected, so do you think it will be more in maintenance of margin story and not improvement of margin story?A: From going forward, there are two-three things critical for IndiGo. One would be that this fuel price hedging will become important, they have the cash roughly about USD 800 million. So I think they would be placing hedging the fuel at this level, which will perhaps to some extent mitigate any upside that they may see in oil.Second is that the Neos as and when they come in, could be an important sort of an element in their margins primarily because of the fact that you get almost 15-18 percent fuel cost advantage. They are also importing fuel from Chennai. So if that continues and more important, if the Neos come in, it is going to be pretty significant for them in the near-term, a combination of that factor.Sonia: On that they have written in the conference call or they spoke in the conference call that there has been a delay by airbus in delivering the Neo something that we know but now they have not been able to meet that March 2016 target, would that be a concern and my second question is you have been talking about all the positives but the stock is still down 10 percent. Why do you think that is?A: As far as Neo is concerned, Lufthansa has taken one Neo delivery few days back and the process of Neo delivery will being soon.  It depends on airline to airline what stance they take on some of the issues that are being risen as a part of the certification. So my sense would be that if there is a significant delay of Neo -- which I don’t think so -- if it is not significant, it will not play out so negatively but for any reason if there is any certification issue with respect to for example hardware then it will be a very different ballgame. If it is a certification issue regarding to software, it will be a very different issue. So it depends on how it plays up, that can have an impact.However, for example in next few months, if they take a deliver my sense would be that will not impact them as much.As for the stock is down, my sense would be that you don’t look at a particular airline largely on one-two days, there is a robust story there. My sense is that as long as they continue to be driven the way they are, results would be much better than what they have at present. So I would not take the fact that today the stock has gone down by 8 percent. I would not give too much of importance.Sonia: So at this point there is no worry about a lack of disclosure or any such issue, right because they hadn’t disclosed Q2 numbers for a long time and that was a bit of a concern that the street had as well? You wouldn’t be perturbed about any lack of clarity or lack of disclosures from the management? They listed on November 10, and the result season is officially open till November 15?A: My understanding is that at the time during the IPO discussions they had indicated that the first result will come out in Q3. My sense would be that they had already indicated that the first results would be Q3 so they will go by that.I think that disclosure was there during the press conferences prior to the IPO. However, yes, I would agree when you are having such a spectacular debut on the listing and post that it has been excellent, so you would want to release your first set of numbers -- Q3 numbers rather than Q2. So I don’t think there is a disclosure issue.Only thing which I will be looking forward to, one is a Neo play, how that plays up. Secondly, what will be their dividend policy and that to some extent will have a significant bearing on how the stock would move.So these are the two things that I will wait and watch out for. Otherwise, I think they will continue to have a solid earning cycle in the near-term.