Clear skies ahead: IndiGo sets the course for strong growth altitudes

Airline maps out its FY25 route, powered by double-digit pax growth, 11-13% year-on-year capacity boost, and expansion into 10 new destinations

The stock of InterGlobe Aviation (IndiGo) has reached its all-time high on expectations of double-digit growth in 2024-25 (FY25), robust medium-term prospects, and lower costs, which could translate into improving yields and profits. The stock is up 24 per cent since the start of February and is currently trading at around Rs 3,544 per share.

For FY25, the country’s largest airline expects to post low double-digit passenger (pax) growth and plans to increase capacity by 11-13 per cent year-on-year. It also plans to add 10 new destinations in FY25.

The company aims to add more than one aircraft per week. The current order book stands at 960, and steady deliveries are expected from the recent order of 500 aircraft placed in 2023.

While the number of grounded aircraft is currently over 70, with capacity additions and mitigation measures such as damp leases, lease extensions, and re-induction of old aircraft, IndiGo does not expect much impact from the grounding of aircraft.

According to analysts Jinesh Joshi and Stuti Beria of Prabhudas Lilladher Research, “Despite the escalation in engine issues at Pratt & Whitney, growth guidance of early double digits is an indication IndiGo is well placed to mitigate supply-chain challenges.”

The brokerage has retained its ‘accumulate’ rating with a target price of around Rs 3,961 and increased its enterprise value-to-operating profit multiple to 8.5x from 7.5x earlier.

What justifies its aggressive fleet addition are projections of pax traffic, which is expected to double by 2030. While the sector is expected to hit the 225 million mark in passengers for 2023-24 (FY24), the same is expected to increase to 510 million by 2029-30, a 2.3x jump over this period.

The traffic increase is a combination of a shift in traffic from railways to airlines, accelerated airport expansion (Navi Mumbai and Delhi airports), an increase in passengers holding passports (only 6.5 per cent of Indians hold passports), and an increase in connectivity to neighbouring countries.

While it has a dominant share in the domestic market, the company is also working to increase its international presence through strategic partnerships and loyalty programmes. It has added seven new destinations and 19 routes in FY24.

While it has eight strategic partners with a 27 per cent share in international routes in terms of capacity in FY24, it plans to increase this to 30 per cent in FY25.

It is in the process of adding wide-body aircraft for mid- to long-haul markets. New initiatives, such as the freighter business, venture capital arm, and its loyalty programme, are supporting the company’s existing business model.

While Motilal Oswal Research remains positive about the aviation sector, the brokerage believes IndiGo would have to navigate through various challenges in the near to medium term. The brokerage has a ‘neutral’ rating with a target price of around Rs 3,510.

In addition to pax growth, its cost rationalisation process is expected to bring down its non-fuel bill. The company’s cost per unit, excluding fuel and foreign exchange, at $3.13 is one of the lowest among the top nine low-cost carriers in the world. This enables the company to offer affordable and competitive fares in the domestic market and maintain its market share of over 60 per cent.

In addition to strong prospects and lower costs, analysts of Nuvama Research, led by Jal Irani, say that a likely duopolistic industry structure dominated by IndiGo and Air India bodes well. This shall spur pricing discipline, thereby driving yields up over the long term.

Aggressive capacity addition and robust demand shall drive pax growth, they add. The brokerage has raised its profit estimates and increased its target price to around Rs 3,953 per share.