Analysts see up to 34% upside in IndiGo stock despite Covid-19 headwind

Analysts believe IndiGo is well-placed to survive this tough phase

InterGlobe Aviation, the parent firm of IndiGo airlines, crash landed on the bourses on Wednesday, a day after the airline posted its highest ever quarterly loss of Rs 3,147.17 crore for April-June quarter of FY22 (Q1FY22).

The company's shares dropped 4.6 per cent to Rs 1,627 on the BSE in the intra-day deals as the airline's operations faced a severe blow due to the second wave of Covid-19. Yet, analysts remain largely bullish on the stock and see up to 34 per cent upside over the next one year even though near-term headwinds may continue to weigh.

"A combination of volatile demand trends over February to May and a sustained demand-supply mismatch at an industry level took out most part of the contribution margin that IndiGo and its peers were earning. This is potentially a transient phase that may continue into Q2FY22," notes Aditya Mongia and Teena Virmani, research analysts at Kotak Institutional Equities. 

They, however, believe IndiGo is well-placed to survive this tough phase with Rs 5,500 crore of free cash, potential QIP of Rs 3,000 crore and other liquidity-boosting measures.

The airline's condition was worsened by crude oil prices which have inched up sharply in the recent past. For perspective: average aviation turbine fuel (ATF) prices in Q1FY22 increased by around 97 per cent year-on-year and 12 per cent against the March quarter. Given this, the airline's fuel cost jumped 854 per cent year-on-year to Rs 1,216 crore in the quarter. READ ABOUT IT HERE

The management, however, expects fuel cost will fall further with the addition of fuel efficient NEO aircrafts (NEO aircraft share increased to 59 per cent in 1QFY22 from 56 per cent in FY21 and 43.5 per cent in FY20 in its total fleet).

Furthermore, while the airline generated Rs 1,540 crore of cash in April, it depleted more than half to Rs 670 crore in May and increased slightly again to Rs 970 crore in June. "We are expecting that in July it will be similar to that in April," IndiGo CEO Ronojoy Dutta said in a post earnings call. Given the steep cash burn rate during the quarter, analysts at Goldman Sachs expect the company to launch its QIP sooner than expected.

IndiGo's all-out focus on emerging stronger, analysts say, covers several elements that would have a positive impact on the cost structure and market share gains as the demand situation normalizes. First, its equity among customers has meaningfully increased during Covid times with 0.1 complaints per 1,000 journeys versus 1.09 for peers; second, its fleet has become a key asset as it scores high on fuel efficiency and availability; and third, it has strengthened relationships with lessors and would benefit from better rentals over time. 

Credit Suisse bets on consolidation in the industry, given the "scale of damage to peers and ensuing lessor disputes", and believes the airline is set to benefit from the same.

That said, Aditya Makharia and Mansi Lall, research analysts at HDFC Securities, believe weak demand with corporate travel down to 7 per cent of sales (vs 20 per cent earlier), and rising fuel prices (which were higher by 12 per cent QoQ) dents the airline's near term outlook. "We await clarity on the timing of IndiGo's proposed QIP, which will strengthen its balance sheet as cash burn levels have risen," they noted.

Ashutosh Somani and Sanket Kabra, analysts at JM Financial, meanwhile, see limited upside in IndiGo's share price as it not only factors in the improving (expected) momentum in passenger demand but also factors in a favourable change in competitive landscape, "ignoring the sharp rise in brent and adverse impact on cash flows". 

Source: Brokerage reports
Note: Upside from Tuesday's closing price of Rs 1,707