Brokerages cut IndiGo's earnings estimates on Q2 loss and weak guidance

Brokerages have cut earnings estimates of InterGlobe Aviation, which runs the country’s largest airline IndiGo, on July-September quarter (Q2) loss and weak guidance.

InterGlobe Aviation posted Rs 1,301 crore pre-tax loss in Q2FY20 due to mark-to-market foreign exchange loss and provisioning for aircraft maintenance. The stock fell nearly 12 per cent and closed at Rs 1,467.90 on Friday after the management guided for slower capacity expansion and cost increase in the coming months.

“We cut IndiGo’s FY20 and FY21 earnings before interest, taxes, depreciation, amortisation, and restructuring or rentals (Ebidtar) by 30.3 per cent and 22 per cent, respectively, and downgrade our rating from ‘buy’ to ‘hold’, given the increase in maintenance cost, cut in FY20 capacity addition guidance from 30 per cent to 25 per cent, weak domestic yield environment, and overhang of promoter feud,” said Prabhudas Lilladher analyst Paarth Gala in his investor note. 

SBI Securities, too, has revised its rating to ‘hold’, as the airline will continue to face cost pressure in the coming quarters. “Although the deterioration in cost structure is not structural, it could remain elevated till Airbus is able to expedite deliveries to replace IndiGo’s older fleet. Given the weak performance, we reclalibrate earnings resulting in 41 per cent and 91 per cent cut in our FY20/21 earnings per share,” said Santosh Hiredesai of SBICAP Securities.

In the first quarter, the airline had posted Rs 1,203 crore profit on the back of 44 per cent growth in revenue.  The stock has gained 26 per cent and 80 per cent on year-to-date and year-on-year basis.

While the airline posted an increase in revenue and yield in the second quarter, the management guided for flat unit revenue growth in the third quarter. “October is typically a very strong month with two big Indian holidays — Dussera and Diwali. We generally do not see any one coming out with sales during this period because demand is strong. This October was unusual,” said Chief Executive Officer Ronojoy Dutta, pointing to discounting by rivals. 

Competitive pressure has forced to estimate weak revenue growth, and aircraft delivery delays have promoted it to revise the capacity growth target. The airline has 245 planes with the addition of 10 in the preceding quarter.

Morgan Stanley, which changed its rating from ‘over weight’ to ‘equal weight’, said weak yields were the key reason for the revision. “With peers adding capacity in Q4FY20, we believe yields could be flat for the next two quarters. With cash of $2.6 billion and H1FY20 operating cash per share of Rs 85, IndiGo can weather any potential price wars but FY20 earnings per share visibility will go down,” said Binay Singh and Satyam Thakur in investor note.