IndiGo, which holds a dominant position in the rapidly expanding aviation market, is likely to face challenges in the medium term as new and existing players add capacity in the LCC (low-cost carrier) segment, according to brokerage firm Jefferies.
Jefferies says this is likely to result in profit headwinds, even though lower fuel prices may provide some relief in the near term. The brokerage has now an 'underperform' rating on the stock and has cut its target price on the stock to Rs 1,615, down 13 percent from the current market price.
With significant aircraft orders within the industry, there is limited scope for missing out on traffic growth. Additionally, the overhang of a stake sale by a co-promoter is an added concern, Jefferies said.
IndiGo co-promoter Rakesh Gangwal, who holds a 37 percent stake in the company, including affiliates, had announced his intention to leave the board and gradually divest his holdings over a period of five years starting in 2022.
He has already sold around 7 percent of his holdings in the past six months, and the ongoing periodic sales are expected to weigh on the stock, analysts say.
IndiGo's current market share is around 56 percent, with the company consistently trying to increase its domestic market share by focusing on on-time performance, competitive pricing, and cost-cutting strategies.
Over the past decade, the competitive landscape has also worked in its favour, with full-service airlines pursuing strategies that were not in line with the expectations of price-sensitive customers.
In the past, airlines in India have focused on lower pricing to increase demand and gain market share. However, full-service airlines, such as Jet Airways and Kingfisher Airlines, lost market share and eventually failed. Meanwhile, no-frills airlines, such as Air Deccan, SpiceJet, and IndiGo, emerged as early players in the market.
Recently, after being taken over by the Tatas, Air India has announced plans for separate brands for no-frills and full-service operations. New entrant Akasa also follows a low-price strategy, while SpiceJet is eyeing a revamp, following a targeted fund raise.
Despite the seemingly large combined market share of IndiGo and Air India, increasing competition is imminent as most players, new and old, adopt similar low-price strategies to capture market share.
Following Air India's recent large aircraft order, the industry's total order book has expanded to 1,250-1,300 planes, almost double the current fleet of approximately 700 planes.
This suggests that the industry may witness low to mid-teen capacity addition over the next decade, although near-term supply-chain challenges may provide some protection, the Jefferies report added.
In an extreme downside scenario, Jefferies expect the Indigo stock to fall 35 percent amidst higher-than-expected increase in competition, which is likely to result in sharp decline in yields. Passenger volume growth is also likely to be under threat due to an urban slowdown.
"Resultant operating EBITDAR should see an EBITDAR CAGR at 41 percent over FY23eFY25e. We value IndiGo at 6x Mar-25E EBITDA to arrive at a profit target of Rs 1,200,” it said.
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