Strong near-term outlook to aid revenues, margins for IndiGo after Q2 show

India's leading airline did well in a seasonally weak quarter for the industry and after paying fees and charges

InterGlobe Aviation, the operator of India's leading airline IndiGo, delivered a better than expected performance across most parameters in Q2FY24. The company posted its fourth consecutive quarter of net profit of Rs 188 crore. It had reported a loss of Rs 1,583 crore in the same quarter a year ago. Adjusted for foreign exchange losses, net profit in Q2FY24 stood at Rs 806 crore.

Q2FY24 is the first time since FY18 that IndiGo achieved profitability in the seasonally weak quarter for the aviation sector, said ICICI Securities. IndiGo announced profit after adjusting one-off cost benefits, which included Rs 150 crore as airport fees and charges, and Rs 300 crore as supplementary rentals, said Ansuman Deb and Sanil Desai of the brokerage.

The company’s net sales, at Rs 14,943 crore, beat estimates by 3-7 per cent on the back of higher revenue-paying passengers, an expanded fleet, and higher claims. Operating profit of Rs 2,663 crore was up 117 per cent year-on-year (Y-o-Y) on the back of robust revenue and lower operating expenditure.

Emkay Research said adjusted standalone operating profit was 61 per cent above its estimate due to a 9 per cent fall in employee costs, 11 per cent less airport fee, and 17 per cent dip in supplementary rentals. Operating profit margin of 17.8 per cent was more than 450 basis points higher than consensus estimates. Operating profit margin of 20.2 per cent before rentals was better than estimates on the back of reversal in provision related to airport fees and compensation from original equipment manufacturers related to grounded aircraft. IndiGo has said that demand is stable and it recorded passenger traffic of 26.3 million in the September quarter. It expected traffic to rise to 100 million in FY24. The company ended FY23 at 85 million passengers. While the management is optimistic, the street will keep an eye on the 40 aircraft grounded due to faulty Pratt and Whitney (P&W) engines. Some flying aircraft will be inspected and that could impact operations in the last quarter (Q4FY24). Prabhudas Lilladher Rese­arch said that IndiGo is well placed to benefit from capacity deployment, network expansion in domestic and international markets, and a balance sheet that has Rs 18,000 crore of free cash. The airline’s decision to levy fuel surcharge of Rs 300 to Rs 1,000 depending upon distance is expected to provide cushion to gross spreads in an environment of rising aviation turbine fuel (ATF) prices, said Jinesh Joshi and Stuti Beria of the brokerage.

Motilal Oswal Research increased its operating and net profit estimates for IndiGo by 9-13 per cent for FY24. The brokerage has a ‘neutral’ rating on the stock, saying it is positive abo­ut the aviation industry as a who­le, but IndiGo would have to navigate through various challenges in the near to medium term. IndiGo’s Q3 is expected to be strong due to seasonal dem­and, but higher passenger fares, the impact of ATF prices, and the ability to maintain profitability could be a challenge later.

JM Financial Research said busier operations in Q3 is likely to be somewhat offset by higher ATF prices and grounded aircraft. 

The brokerage, which maintains a hold rating, believes that the IndiGo stock is fairly priced at 8.3 times enterprise value to operating profit of its FY25 estimates.