Analysts downgrade IndiGo as second Covid-19 wave weakens outlook

The QIP should shore up its cash reserves currently at over Rs 7,000 crore

The InterGlobe Aviation (IndiGo) stock ended flat in trade after the company announced plans to raise Rs 3,000 crore by issuing equity shares through the qualified institutional placement (QIP) route. The company is looking to improve its cash position after the second wave of infection has dented demand and led to dip in volumes.

In August last year, the company’s Board had approved a QIP of Rs 4,000 crore with the timing of the same linked to the sales trajectory. The company, however shelved the equity raise plan in January this year given the gradual recovery in passenger traffic; the second wave is leading to a rethink of the same.

The street is not immediately worried about the liquidity situation as IndiGo has a free cash balance of Rs 7,444 crore (including restricted cash at over Rs 18,000 crore) and the QIP proceeds will only add to the cash pile. This should be enough for it to overcome near-term cash burn pegged at about Rs 450 crore a month. The company has a debt of Rs 27,726 crore with over 88 per cent being capitalised operating lease liability.

Analysts at Centrum Research have downgraded IndiGo due to valuations. While they indicate that IndiGo is better placed than peers, valuations at 10 times operating profit before rentals, means that the risk reward is unfavourable.

After peaking in February, the average daily passenger volumes are down 55 per cent till the first week of May. Analysts at ICICI Securities say that rising Covid cases and increasing lockdown restrictions from various states will remain an overhang on air traffic. With India being on the ban list of major countries, regulatory cap on capacity and fares and rising fuel costs add to the negative headwinds for airlines. Aviation turbine fuel prices are up 27 per cent since the start of the year.

While IndiGo’s market share is expected to be steady at around 53-54 per cent, falling traffic volume estimates for the current financial year and rising costs will be a double whammy for the airline. History may be repeating itself in FY22 after a washout in the first half of FY21. Investors should avoid the stock for now.