IndiGo shares gain 3% after posting surprise profit

"IndiGo’s sharp outperformance was driven by improving yields, utilisation and fleet composition. Third quarter performance boosts the prospects for IndiGo reporting its best spreads ever in the first year sans Covid-19 effects. The flywheel of cost leadership, great service offerings and enhanced coverage is yielding results. Any further sharp increase in the oil price is a key risk, though likely transient," said Kotak Institutional Equities in a note to its investors.

Kotak Institutional Equities has kept its rating 'neutral' on the stock and increased target price to Rs 3,000 a share.

IndiGo's yields grew 19.2 percent to Rs 4.41 per kilometre at the end of December. Passenger load factor rose to 79.7 percent from 72 percent a year ago.

"Its yields were higher because of pent-up demand and the management expects the yields to sustain at current levels. Factoring in the same, we raise our yields to 3.9 percent for FY23 from 3.8 percent, keeping FY24 estimates unchanged, given the entry of new player(s) in the market and consolidation of Air India might result in higher competition," said Motilal Oswal Securities in its report.

Kotak has increased IndiGo's yield estimates to Rs4.4/4.2 for FY2023/24 against $75/70 per barrel crude for these years. Current yield of Rs4.4 is back to FY2015 levels and modest 5 percent increase can counter a rise in crude estimates up to current $90 per barrel, the report added.

Aircraft fuel expenses surged 186 percent to Rs 3,269.30 crore, while aircraft and engine rentals advanced 98 percent to Rs 127.30 crore. Total expenses increased 62 percent to Rs 9346.40 crore. EBITDA margin improved to 21.5 percent from 20.1 percent a year ago.

Free cash for the company increased to Rs 7,810 crore in 3QFY22 from Rs 7,440 crore in 3QFY21, backed by additional liquidity measures and forward sales. As of December 2021, its total debt stood at Rs 35,153.40 crore, up 26.8 percent from the same quarter last year.

The company said its board has approved the appointment of its co-founder and promoter Rahul Bhatia, as the managing director with immediate effect.

"We believe that despite the near-term challenges, IndiGo will evolve out of the pandemic stronger than before with various pre-emptive steps already undertaken. The upward risk to our call could be a sharp turnaround in the domestic passenger market demand, and improvement of yields from current levels. We value the stock at 8x FY24 EV/EBITDAR to arrive at a TP of Rs 2,200. Maintain 'neutral' owing to the limited upside of 11 percent from the current level," a Motilal Oswal report said.