Highlights - Highest-ever quarterly profit due to significant improvement in passenger growth and yield - Significant capacity addition and allocation to new slots are the growth drivers - Focus on international route is another key growth driver - Accumulate as valuations are reasonable --------------------------------------------------
Fading competitive intensity due to the departure of Jet Airways has led to meaningful improvement in yield within the industry and Interglobe Aviation (IndiGo), the leader in the space, has taken advantage of the same and reported the highest ever quarterly profit in Q1 FY20. Strong revenue growth coupled with higher operating profit helped company post strong profits.
We continue to have positive outlook on the business and believe that the changing industry dynamics would help the company grow and cope up with the volatility in oil prices as yields are higher. We advise investors to accumulate the stock for the long term.
Quarterly snapshot
Key positive Net revenue from operations witnessed a significant growth of 44.7 percent on year-on-year (YoY) basis. The growth was driven by 30.2 percent YoY growth in revenue passenger kilometres (RPK) and improvement in yield, which grew 12.7 percent. Yield witnessed improvement due to the Jet Airways fiasco that reduced competition from the industry. The management highlighted that the fares are higher in 0-15 days window as well.
With significant improvement in yield and increase in RPK, the company posted a YoY growth of 145.9 percent in earnings before interest, tax, depreciation, amortisation and rental (EBITDAR) and EBITDAR margin witnessed a YoY expansion of 1,214 bps in Q1 FY19.
Load factor remained largely same at 88.9 percent in Q1 FY20 and the company witnessed significant capacity addition of 30.9 percent YoY.
Outlook
Yields have improved significantly Departure of Jet Airways has led to significant improvement in yields as is evident from IndiGo’s result. The management, however, cautioned that the fares have started coming down now as the industry is witnessing lot of supply addition. However, expectations are that yields will not fall to previous low levels.
Capacity addition/ new slots In Q1 FY20, the company added 18 aircraft to its fleet, taking its fleet count to 235. Capacity grew 30.9 percent (YoY) in Q1 FY19. The management sees its capacity growing by 30 percent (YoY) in FY20 and 28 percent (YoY) in Q2 FY20.
In light of significant growth expected in the Indian aviation industry, the company 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 the fuel-efficient A320neo aircraft.
Additionally, IndiGo is getting new slots in heavily constrained airports which have been left behind by Jet Airways (40-50 percent slots in Mumbai and 20-25 percent in Delhi), which is expected to be an important trigger for growth.
Foray into the international market The company continues to focus on expanding its footprint in the long-haul international market. It has got into code share agreement with Turkish Airline. It has also added one new international destination during the quarter. In fact, it plans to allocate half of new capacity towards international markets.
Concern regarding the promoter’s rift There have been differences between the two largest shareholders, Rahul Bhatia (38.26 percent stake, including family) and Rakesh Gangwal (36.69 percent stake, including family). The allegations have become formal with one of the co-promoters writing to SEBI pressing charges with regard to related-party transactions, appointment of senior management, chairman and directors.
We believe that differences between promoters won’t last long and the same would be sorted as it is in the best interest of everyone. However, the overhang is expected to be there on the company as the battle has been going on for a year and the solution doesn’t seem to be in sight yet.
The management, during the call, highlighted that there are no differences between the promoters regarding the business strategy and planning and that won’t affect the business.
Valuation – at reasonable levels We believe, IndiGo has the right business model that is required to retain its leadership position in the Indian aviation sector. Investors need to carefully monitor the oil prices and passenger growth. We advise investors to accumulate it in staggered manner.
Risks The biggest risks for the business are the significant rise in oil prices, slowdown in the passenger growth, increase in competitive intensity and depreciation of the rupee against the dollar. One or all of these factors impact the financials of the company.
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