IndiGo to keep flying high: Analysts see up to 34% upside; UBS says 'Buy'

Zurich based, global investment banking firm, UBS raised its target price for Indigo to Rs 5,400 from Rs 4,000, while maintaining a 'Buy' rating on long-term macro prospects along with various demand and supply tailwinds. 

UBS in a note on the company said that it expects Indigo's market share gains in international travel to continue, further aided by A321 XLRs and A350s in the medium to long term.

“We remain constructive on Indigo's medium-term profitability driven by a highly favourable industry structure. We expect Indigo to generate a 13 per cent Ebitda CAGR over FY24-27E with upside risks. However, a short-term profit impact on sudden significant rise in supply, seasonality or sharp fuel price increases cannot be ruled out; any associated dip remains an ideal buying opportunity, in our view,” Pramod Kumar, Nikunj Mandowara and Aditya Chandrasekar of UBS wrote in a recent report.

However, the investment banking company expects the domestic aviation giant's Q1FY25 profitability to be impacted considering the sharp rise in Air India/Vistara's near-term capacity, and expects a weaker Q2 on seasonality. 

Indigo, the only moneymaker

According to analysts, apart from rising GDP per capita the Indian aviation sector is also seeing multiple structural tailwinds with strong growth in airport infrastructure, growing demand beyond tier-1 cities, govt's focus in making India an export travel hub; and significant time savings supporting the shift from railways. 

That said, in the Indian flying pack, Indigo is the only airline making money, said analysts at dometic brokerage firm, Kotak Institutional Equities. Other Indian airlines have been struggling to make profits due to higher capital expenditure and less return on investment. 

Most airlines beyond Indigo have large capital employed, on which they need to earn a return and are not making money at current fares. In our assessment, airlines have no option but to raise fares over time. Airlines will have to address concerns about the brunt of the price inflation being borne by fliers flying closer to the travel date, analysts said. KIE gave Indigo a 'Buy' rating with a target price of Rs 5,700 per share. 

Further, UBS stated Indigo's cost structure is best in class; it was the only airline to post positive Ebitda in FY23 with 1,700-2,800 basis points higher margins than peers. 

In FY24, Indigo posted a record profit after tax of Rs 9,000 crore, while Air Indiaposted losses of Rs7,000 crore. UBS therefore sees strong pricing power for Indigo. Despite near-term cost inflation, it sees multiple margin tailwinds over the medium term including fall in crude prices, shift to more fuel-efficient airplanes and fall in aircraft on ground.

The share price of the company zoomed 1.32 per cent at Rs 4,283 per share intraday. At 11:28 AM; the stock of the company was trading 0.18 per cent higher at Rs 4,235.35 per share on the BSE. In comparison, the BSE Sensex was up by 0.35 per cent at 79,312