- Significant improvement in passenger growth and yield
- Lower fuel cost helped the company return to the black
- Oil prices need to be carefully watched
- Accumulate as valuations are reasonable
Falling oil prices helped InterGlobe Aviation, the operator of IndiGo airlines, to deliver a net profit in Q3 FY19, compared to the huge loss it posted in Q2. Improvement in passenger yields too helped. On a year-on-year (YoY) basis, net revenue rose significantly led by passenger growth. Operating profitability, however, continued to be under pressure due to higher fuel prices and adverse currency movement. We have very high comfort on the business, but oil prices could play spoilsport and needs to be carefully monitored. We advise investors to accumulate the stock for the long term. Also read: IndiGo appoints Ronojoy Dutta as CEO with immediate effectQuarterly snapshot
Net revenue from operations grew 28 percent both year-to-year (YoY) as well as on a sequential basis, driven by a 27.9 percent growth in revenue passenger kilometres (RPK). What came as a positive surprise was the improvement in yield, which grew 3.5 percent.
Despite the recent fall in oil prices, it is still 31 percent higher as compared to same quarter last year. This, coupled with adverse rupee movement, continues to weigh on profitability. Both fuel prices and adverse currency movement led to a 14.2 percent YoY growth in cost per available seat km (CASK). Higher CASK led to 1,116 bps contraction in earnings before interest, tax, depreciation, amortisation and rent (EBITDAR). This impacted the bottomline as well, with the company reporting a 75 percent YoY decline in its net profit.
Load factor fell 270 basis points (100 bps = 1 percentage point) YoY to 85.3 percent in Q3. In fact, the improvement is not significant on a QoQ basis too.
OutlookYields not at optimal levels
Fever pitch competition continues to put significant pressure on domestic pricing. The management mentioned that these pricing levels are not optimal, given the significant rise in fuel prices and rupee depreciation versus the dollar. It believes that the industry needs to pass on higher fuel prices to customers.Oil prices – need to be monitored closely
Trade war, weather anomalies in the US, internal problems within major oil exporting countries and their inability to pump-up production and approaching winters resulted in a strong uptick in oil prices. Things, however, have normalised now, leading to a 20 percent fall in airline turbine fuel (ATF) prices, giving a breather to the carrier. Prices are still much higher compared to year ago levels. We need to carefully monitor oil prices as the sensitivity of IndiGo’s profitability is still very high.
Aggressive capacity addition
In Q3 FY19, the company added 19 aircraft to its fleet, taking its fleet count to 208. Capacity grew 38.6 percent in Q3 and the management sees the same rising 34 percent in Q4.
In light of the significant growth expected in the Indian aviation industry, the management has also placed huge orders, the delivery of which will help IndiGo retain its leadership position in the Indian market. Most of these additions would be of fuel-efficient A320neo aircrafts.Foray into the international market
The management continues to focus on expanding its footprint in the long-haul international market. It recently entered into a codeshare agreement with Turkish Airline. It has also added 22 new international destinations during Q3 and plans to launch a direct flight to Istanbul. The management has guided to a 30 percent growth in the international market in Q4 FY19.Valuation at reasonable levels
IndiGo has all the right ingredients that are required to retain its leadership position in the Indian aviation sector. However, not-so-benign operating environment continues to put it under a lot of pressure. Investors need to carefully monitor oil prices and passenger growth. We advise investors to accumulate the stock in a staggered manner.
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