Nitin Agrawal Moneycontrol Research
InterGlobe Aviation, the parent company of IndiGo airlines, posted a significant growth in its Q4 FY18 revenue from operations. However, operational profits were marred by lower passenger yields, higher fuel cost and foreign exchange losses. We continue to like the business on the back of operational efficiencies, its capacity addition plans and multiple growth drivers.
Quarterly snapshot Revenue from operations grew 19.6 percent year-on-year (YoY) led by a 24.6 percent YoY increase in volumes. This was partially offset by a 5.4 percent YoY fall in passenger load factor, which witnessed a 280bps growth over the same quarter last year.
Cost per available seat km (CASK) increased 7.1 percent YoY, leading to a 1,040bps YoY contraction in earnings before interest, tax, depreciation, amortisation and tax (EBITDAR) margin at 19.5 percent. This was primarily driven by rise in fuel cost, forex losses (booked a loss of Rs 925 million compared to a gain of Rs2.5 billion in the same quarter last year) and fall in passenger yields.
This impact profit after tax (PAT) as well, which fell by 73.3 percent YoY. On a full year basis, the company posted a significant 35.1 percent YoY growth in PAT, its highest ever profit.
Growth drivers going forward
Significant capacity addition to capture rising demand During the quarter gone by, the company added six aircraft to its fleet. It has also placed a huge order for aircraft, the delivery of which will help IndiGo retain its leadership position in the Indian market. Most of these additions would be of the fuel efficient A320neo aircraft. The management sees its capacity growing 18 percent YoY in the first quarter and 25 percent YoY in FY19.
Foray into the international market The management has envisaged interest in stepping up its presence in the long-haul international market and continues to expand its global reach organically. It has also stated that it has no intention of acquiring Air India. The company added one international destination during the quarter gone by. In terms of capacity mix, the company has allocated 15 percent capacity to its international operations from 11 percent last year.
UDAN scheme may power regional growth The government’s regional air connectivity scheme, UDAN, is another avenue for IndiGo to capture growth originating from non-trunk routes. The airline has started connecting non-trunk routes aggressively and chalked out plans for regional connectivity. The government has already cleared the airline for 20 routes under this scheme.
ATR operations As part of its regional connectivity programme, the management has sourced an ATR aircraft and started operations from December last year. The management said this operation would constitute five percent of total capacity in the years to come.
Well timed aircraft ownership The management plans to use its existence cash flow to finance purchase of aircraft. It believes this strategy would bring in additional operational cost savings. The company has enough resources on its book to acquire new aircraft. The primary reason for it owning aircraft is because new technology has just been introduced into the market and the company sees lesser chance of it going obsolete soon. This technology will usher in additional cost savings if the aircraft are flown for a longer duration.
IndiGo has all the right ingredients that is required to retain its leadership position in the Indian aviation sector. Post the recent weakness due to the departure of Aditya Ghosh, its President and Whole Time Director, the stock is quoting at 4.3 and 3.6 times FY19 and FY20 projected EBITDAR, respectively. This makes it a ripe candidate for accumulation in the long-term.
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