Flaring crude oil price, entry of new players to hit IndiGo: Analysts

InterGlobe Aviation (IndiGo) shares dropped nearly 4 per cent in Monday’s intra-day trade after flaring Brent crude oil prices and over-supply situation in the aviation industry worried Street.

In the last one week alone, Brent crude oil prices have surged over 6 per cent to around $79 per barrel mark. That apart, the stock's outperformance over the past few weeks also dented sentiment.

Over the past six months, IndiGo has surged over 31 per cent on the BSE as against a 20 per cent rise in the S&P BSE Sensex. From the March 2020 low of Rs 800, the stock has appreciated nearly 170 per cent relative to the Sensex’s 134 per cent rally. SpiceJet, on the other hand, has soared 138 per cent during this period.

According to Ansuman Deb and Ravin Kurwa, research analysts at ICICI Securities, rising Brent crude prices and no major structural capacity cuts may limit the spreads (between revenue and cost per available seat kilometer) of InterGlobe Aviation to Rs 0.34 in financial year 2022-23 (FY23).

“Besides, entry of new players (return of Jet Airways and launch of Akasa - the aviation venture of ace investor Rakesh Jhunjhunwala), delay in recovery of international travel, longer absence of high yielding corporate travel and low cash balance do not provide any rationale for increase in multiples,” they said in a report dated September 27.

The brokerage has downgraded the stock to “Sell” from “Add” with a target price of Rs 1,650, which translates into 23 per cent downside from the current levels.

As per Deb and Kurwa’s estimates, IndiGo’s RASK (revenue per available seat kilometer) is unlikely to go beyond Rs 4.3 in FY23 considering there is no structural capacity cut and there are new players entering the market. RASK shows how much revenue each seat kilometre has generated for the airline.

On cost side, Fuel/ASK is unlikely to go below Rs 1.25 in FY23 for IndiGo if Brent crude is at $65/barrel, and there is enhanced fuel efficiency due to neo fleet and possible gain from using A321s. Cost ex-fuel/ASK, they say, is likely to achieve efficiency and hence, estimated to grow only at 5 per cent CAGR between FY19-23E. Hence, the best case spread for IndiGo remains at Rs 0.34 bps per ASK in FY23E.

RASK at the end of the June quarter was Rs 2.73 while CASK (cost per available seat kilometer) was Rs 5.55.

A steep run-up in the stock price also calls for profit-booking, cautions G Chokkalingam, founder and chief investment officer (CIO) at Equinomics Research.

“The stock’s current market price is higher than pre-Covid level while its financials are weak. Such exuberance in the price isn’t justified given the road to recovery is long,” he says.

On Monday, shares of IndiGo hit a low of Rs 2,059 apiece on the BSE in the intra-day as against a flat BSE Sensex index.

That said, IndiGo is still a relatively better bet than other players such as SpiceJet as it has consistently earned profits over the past decade, ignoring Covid period, has flight connectivity to tier-II/III cities, and has a better international flights’ network than other private airlines, analysts say.

SpiceJet, on the other hand, is already saddled with its own internal issues besides the rising fuel prices that can keep the stock price under check going ahead, analysts say. According to reports, the Ajay Singh-controlled carrier's plans to hive off its logistics and cargo business into a separate entity is facing legal hurdles with lenders and aircraft lessors challenging the move.

The aviation sector, according to A K Prabhakar, head of research at IDBI Capital, is not a good way to play the travel theme amid economic recovery.

“Aviation is a cost-heavy sector, hence it’s a risky bet. A small increase in the cost structure of a company makes it unsustainable. Therefore, investors should be very careful while investing in the space,” he says.