After a solid Q1, IndiGo's troubles may mount in Q2FY24, warn analysts

IndiGo's profitability may be affected in the July to September quarter (Q2) of FY24 owing to lower fares in a seasonally weak quarter and higher fuel prices, analysts said

Despite the best-ever quarterly net profit of Rs 3,091 crore in the June quarter of financial year 2023-24 (Q1FY24), challenges are mounting for InterGlobe Aviation-run IndiGo in the near-term, analysts said on Thursday.

Given this, most brokerages have retained their rating, spanning across Buy to Underperform, and target price on the stock.

Motilal Oswal Financial Services, for instance, has retained its 'Neutral' rating on the scrip as it believes the low-cost airline is facing teething issues at present.

"Despite the positive outlook and strong current demand in India's aviation industry, we see several challenges to be addressed, making it not yet a perfect picture for IndiGo," the brokerage said.

At the bourses, shares of the airline settled 4.5 per cent lower at Rs 2,450 apiece. By comparison, the benchmark S&P BSE Sensex index ended 0.82 per cent down at 65,241 levels.

Turbulence ahead?

According to analysts, IndiGo’s profitability may be affected in the July to September quarter (Q2) of FY24 owing to lower fares in a seasonally weak quarter and higher fuel prices. This, the management said, would affect yields by 10-15 per cent in Q2FY24.

As per industry estimates, the average 30-day domestic forward prices are down 15 per cent sequentially so far in Q2FY24, while 15-day prices are down 15 per cent QoQ.

For IndiGo, the prices are down 10 per cent for 30-day domestic forward booking and 11 per cent for 15-day domestic forward booking.

In Q1FY24, InterGlobe Aviation reported a record quarter with all time high revenue and PAT aided by strong load factor of 88.7 per cent and yield of Rs 5.1, coupled with 26.6 per cent YoY decline in fuel cost per available seat kilometer (CASK) to Rs 1.6 amid fall in crude prices. Ebitdar (earnings before interest, tax, depreciation, amortisation, and rent) jumped over 7-fold to Rs 5,210.9 crore

Aviation turbine fuel (ATF) prices, however, have risen by 10.7 per cent to Rs 100.1 per litre so far in Q2FY24. This rise, analysts said, might put pressure on IndiGo’s spreads in the September quarter.

"We cut our Ebitdar estimates by 7 per cent each for FY24/FY25 as yields are witnessing higher pressure on sequential basis (as compared to past) while ATF prices have increased by 11 per cent in the last two months. We expect revenue CAGR of 15 per cent over next two years with Ebitdar margin of 25.4 per cent and 28.1 per cent, respectively, in FY24 and FY25," said analysts at Prabhudas Lilladher.

The brokerage has retained ‘Buy’ call with a target price of Rs 2,855.

That apart, analysts warn of competitive intensity increasing in the coming months with SpiceJet receiving funds through promoter infusion (Rs 500 crore), likely resumption of Go First post DGCA conditionally allowing the grounded airline to resume its operations, and Jet airways receiving Indian air operators' permit (by DGCA) taking it a step closer towards its revival.

Amidst this, IndiGo is seeing higher fleet grounding due to the inspection of Pratt and Whitney engines. Detailed investigations are being carried out on these aircrafts, which could potentially impact 9 aircraft along with 35 aircraft already on ground.

P&W will inspect 1,200 engines with 200 engines expected by mid-September and the rest over the next year.

Analysts at JM Financial, who have maintained a ‘Hold’ rating (target of Rs 2,270), believe the concerns will weigh on the stock in the near-term.

Long-term view

That said, analysts believe a likely duopolistic industry structure dominated by IndiGo and Air India bodes well for IndiGo as robust demand and growing international business will drive passenger growth, addition of extra-long-range fleet-adds, and improved cargo business shall raise competitiveness in the long term.

“We raise FY24/25 net profit by 31 per cent/38 per cent, factoring-in the tax-loss benefit, and higher other income. IndiGo’s 1,000-plane order-book positions it well in the long run,” said Emkay Global with a ‘Buy’ call and Rs 3,000-target price.