InterGlobe Aviation, which owns the country’s largest airline IndiGo, reported an impressive set of numbers for the quarter ended June 30 on Monday. Ace investor Rakesh Jhunjhunwala who is an investor quizzed top management on the rationale for growth guidance.
InterGlobe said it expected capacity to grow at a compound annual growth rate of about 20 percent for 2018 to 2020. The billionaire investor asked if InterGlobe grows at 20 percent and the market also grows about the same percentage then there are no fresh capacity additions. I don’t think other airlines such as Air India tends to grow at 20 percent. Don’t you think it will lead to better pricing for the entire industry?
To this management replied on the concall that on the capacity front we see a huge opportunity in terms of continued growth and demand in the Indian market.
We are focussed on that long term growth. Yes, we can optimise profitability in the short term by squeezing capacity and raising fares, but that game doesn’t last very long. It does not create any long term value, they say.
Jhunjhunwala further added that we don’t want you to squeeze the capacity because we want the price to go up, but it will become a national consequence if it were to grow at 25 percent and you have almost 40 percent of market share – means 2 percent fresh capacity will come to the market. I don’t think you are doing in order to squeeze prices but would that not be an actual consequence, asks Jhunjhunwala.
The management replied that this market behaves in strange ways depending on what competitors do. We know what we are doing and I think any more speculation on that would be gazing into a crystal ball for us.
The billionaire investor, Jhunjhunwala had reportedly placed a sizeable bid in the initial public offer of InterGlobe Aviation back in 2015, but June quarter shareholding data does not show him among shareholders holding more than 1 per cent stake in the aviation firm.
InterGlobe Aviation reported its highest quarterly profit with a 37.1 percent increase in bottom line at Rs 811 crore for the three months to June.
The airline attributed the good set of numbers to an overall improvement in all key operational metrics, including overhead cost, which declined by 2.5 percent.
The New Delhi-based carrier, that enjoys over 40 percent market share, said its revenue clipped past 25.6 percent to Rs 5,955 crore, driven by higher passenger revenue that grew 5.5 percent and the higher load factor that grew 4.7 percent pushing up the overall yields by 200 basis points.
To meet promoter holding norms, InterGlobe is planning a follow-on public offer, which is likely to be a mix of a fresh issue and an offer for sale. Promoters currently hold 85.8 percent stake in the company.
Edelweiss has a hold rating on Indigo with a target price of Rs1330 while Motilal Oswal has a neutral rating on the stock with a target price of Rs1312.
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