IndiGo soars 10% post Q3 nos; analysts upgrade stock, see up to 38% upside

Shares of InterGlobe Aviation – parent company of low-cost airline IndiGo – zoomed 10.58 per cent to Rs 2,183 per share on the BSE in intra-day trade on Monday, after the airline posted its first-ever net profit in nearly two years in Q3FY22. They ended 9.9 per cent higher at Rs 2,170 per share as against 1.7 per cent fall in the S&P BSE Sensex.

India's largest airline IndiGo swung back into profit, posting a PAT of Rs 129.79 crore in the December quarter, after registering seven consecutive quarters of loss. This was primarily driven by higher revenue and yields. Net revenue increased 89 per cent to Rs 9,294.77 crore from Rs 4,909.98 crore a year ago.

The airline also registered higher yields as a government cap on price beyond 15 days and weaker rivals who were not able to deploy capacity allowed it to aggressively price its tickets higher. The company’s yield went up by 19.2 per cent as compared to the corresponding period a year ago, while the revenue per available seat kilometer went up by 25 per cent.

Now, as the airline has joined global peers in financial recovery in the third quarter of FY22, analysts see the stock hitting Rs 3,000-mark in a year, which is 38.24 per cent higher than current level.

"IndiGo's sharp outperformance was driven by improving yields, utilization and fleet composition. Q3 performance boosts prospects for IndiGo reporting its best spreads ever in the first-year sans Covid-19 effects. The flywheel of cost leadership, great service offerings and enhanced coverage is yielding results. We increase estimates by 9-15 per cent and fair value to Rs 3,000," said Aditya Mongia and Teena Virmani, research analysts at Kotak Institutional Equities.

IndiGo's nil spread reported in Q3FY22 is largely a result of 20 per cent sequential decline in CASK-ex fuel to Rs 2.64 per ASK. The CASK-ex fuel can further decline to a similar extent as utilization levels further increase and thus can drive close-to-historical peak spreads of less than Rs 0.5 per ASK, they pointed out.

Edelweiss Securities, too, has upgraded the stock to "Buy" with a target price of Rs 2,380 due to its improved outlook.

"Domestic passenger traffic growth is likely to normalise from FY23 as demand rises. Further, 15 per cent fuel-and lease-efficient NEOs will replace CEOs in FY23 versus 75 per cent now, which shall enhance overall yields. Fleet addition is also likely to shoot up by 2027, and economies would rise as the long-range XLRR fleet is inducted. Moreover, cargo revenue could stay strong with deployment of dedicated 20 per cent wide-body freighters in CY22," said Jal Irani, analyst at the brokerage in a co-authored report with Shubham Mittal and Iqbal Khan.

They view IndiGo as a proxy play for a re-opening trade led by better yields and pent-up PAX demand in the near-term. They expect an uptick in FY23/ FY24 EBITDAR by 14 per cent/ 19 per cent.

Those at ICICI Securities, too, have upgraded the stock to "Hold" with a revised target price of Rs 1,871 as the combination of continued availability of advance sales and Airbus neo inductions has put the balance sheet in a stronger position.

"We remain positive given IndiGo's strong balance sheet, efficient fleet and cost structure, which should help it leverage on the structural shifts in aviation. We marginally upgrade our FY24 revenue/EPS estimates by 1-5 per cent led by better recovery and operational efficiencies," said a report by Ambit Capital.

That said, the changing competitive landscape, uncertainty of repeat Covid waves, and high Brent crude prices, will make it tough for the airline to maintain high yields, caution analysts.

"Currently, IndiGo’s share price 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. The stock trades at an expensive 9.9x FY23E EV/EBITDAR, hence we re-iterate SELL," JM Financial said.

KIE has increased its yield estimates to Rs4.4/4.2 for FY23/24 against $75/70 per barrel crude for these years. Current yield of Rs 4.4 is back to FY15 levels and modest 5 per cent increase can counter a rise in crude estimates up to current $90 per barrel.

Besides, Air India, with 9.9 per cent domestic market share, continues to run operations smoothly - not aving lost material market share during the pandemic – and is likely to be much more competitive internationally and domestically going forward post its acquisition.

Spicejet has shown no signs of weakness in operations despite challenges, and has recently received shareholders’ nod to raise up to Rs 2,500 crore through QIP. GoAir, too, has received Rs 2,000 crore infusion from its promoter, and has recently rebranded itself 'Go-First' as the airline will now focus on ultra low cost business model.

Source: Brokerage Reports