Shares of InterGlobe Aviation, which runs IndiGo, the country’s largest airline by market share, are up over 30 percent from March lows, and analysts believe they can gain even more altitude. According to Bloomberg, the stock has 21 buy, 3 hold and 2 sell calls on it with target prices pegged as high as Rs 2,700 while its current market price is Rs 2,415.
The optimism comes against the backdrop of periodic selling of shares held by promoter Rakesh Gangwal and his family, with another 5-8 percent offloading likely on July 15. The Gangwal family has been steadily reducing stake ever since rift erupted between the co-founders - Rakesh Gangwal and Rahul Bhatia.
A better outlook on jet fuel prices, healthy traffic and robust prospects for international air travel are some factors that have analysts upbeat. Mutual funds have also been raising stake - from holding 6.23 percent stake in December 2022 to 8.58 percent by May 2023.
As per data from the Directorate General of Civil Aviation (DGCA), IndiGo's market share grew from 56.8 percent in March to 57.5 percent in April, while those of SpiceJet and Go First declined from 6.4 percent and 6.9 percent in March to 5.8 percent and 6.4 percent, respectively, in April.
Go First's loss is IndiGo's gains
On May 2, Go First filed for voluntary bankruptcy with the National Company Law Tribunal (NCLT) and blamed the situation on Pratt & Whitney for supplying faulty engines. Since then, IndiGo shares have rallied 10 percent.
A likely duopolistic industry structure dominated by IndiGo and Air India bodes well for the stock, according to Nuvama Institutional Equities. The market disruption caused by Go Air's shutdown could benefit airfares, especially amid the recent strong traffic trends, said analysts.
Also Read: Moneycontrol Pro Panorama | Will GoAir’s manoeuvre end in a safe landing?
In FY23, domestic passenger traffic was around 13.60 crore, over 60 percent higher year-on-year (on a low base), and only short by around 4 percent compared to pre-Covid levels of 14.15 crore in FY20.
In the capacity-constrained but demand-overshoot environment, analysts at CLSA believe IndiGo will have stronger yields as well as increasing leverage with global original equipment manufacturers (OEMs) of engines and planes.
Higher yields
IndiGo's yields, a metric for profitability, rose 10.2 percent year-on-year to Rs 4.85 per kilometre in the March quarter.
Yields are expected to be even higher in Q1FY24 driven by increase in capacities and gradual replacement of ceos (current engine option) with the neo or new engine option family which is about 20 percent more fuel efficient, according to Nuvama Institutional Equities.
A fleet size of 350 in FY24 will help yields further, it added. The brokerage has pegged yields at Rs 5.30 per kilometre in FY24.
International expansion
IndiGo recently announced it is adding six international destinations starting July, which is another key trigger, as per analysts. The airline will launch flights to Nairobi and Jakarta from Mumbai in late July or early August.
It will also connect Delhi to Tbilisi and Almaty with thrice-a-week flights and Tashkent and Baku with four times-a-week flights from August.
"With Central Asia and former Soviet countries, this takes the airline towards a blue ocean strategy. IndiGo is known to stimulate the market after its entry, by a mix of low cost, disciplined operations and network effect," according to aviation analyst Ameya Joshi.
Near-term uncertainties
ATF (aviation turbine fuel) prices fell 7 percent sequentially in Q4FY23 as crude oil prices declined. This helped IndiGo post a quarterly profit of Rs 919 crore against a net loss of Rs 1,680 crore in the year-ago period.
But last week, Saudi Arabia decided to cut crude production by 1 million barrels per day from July, which has kept crude prices firm. High fuel costs and foreign exchange volatility dragged the company to losses in two of the last four quarters. Hence, analysts are keenly monitoring the crude price trajectory.
Also Read: IndiGo CEO Pieter Elbers elected as next chief of IATA's board of governors
On technical levels, too, the stock does not show a lot of promise. "If the stock can maintain its position above Rs 2,280-2,260, it is expected to advance to the Rs 2,450-2,500 range," according to Viraj Vyas, technical and derivatives analyst at financial service company Ashika Group.
According to Milan Vaishnav of Gemstone Equity Research, "The levels of Rs 2,485 is the intermediate top; the stock is expected to consolidate and retrace with further rallies coming in only above Rs 2,485-2,500 levels."
"Investors can book partial profits at current levels and trail their stop-loss to Rs 2,300, below which they must exit all positions. Re-entry can be done only above Rs 2,500," he added.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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