5 reasons why IndiGo shares went down 20%

Given the jump in Q3 profit by 24%, the reaction seems out of place, but a closer look at the numbers justify the fall

IndiGo results have sprung a negative surprise on the market because of which a massive sell-off was seen today in its shares. Indigo shares fell as much as 20% to Rs 958.30 apiece intraday and was briefly locked in a lower circuit.

In its maiden earnings, the company posted a net profit of Rs 657.3 crore in December 2015 as compared to Rs 531.6 crore during the same quarter last year, a gain of nearly 24%. Given the jump in profit the reaction seems out of place, but a closer look at the numbers justify the fall.

We look at five reasons why the market reacted negatively to the numbers

 

1. IndiGo’s revenue jumped by 11.3% from Rs 3,857.35 crore to Rs 4,297.76 crore while its operating profit moved at a higher pace from Rs 702.07 crore to Rs 857.15 crore. A large chunk of the jump in operating profit is on account of a sharp fall in fuel prices which now contribute 27% of the cost as compared to 38% earlier. But the gains in lower fuel cost were eaten away by a higher employee cost.

2. Higher employee cost was due to the company adding pilots and cabin crew in anticipation of deliveries of its A320 Neo, says a Motilal Oswal report. A Kotak Securities report says that the management expects deliveries of A320 Neos to be delayed beyond FY16 which means that the present quarter will also have these added costs. This would result in analysts lowering their number for the current year as well as the next. Though management did not give any guidance, it expected its fleet size for FY16 to be 104 as compared to 111 earlier.

3. Apart from the delay in the delivery of the aircraft, which impacted deferred incentives, the company was impacted by the depreciation in rupee against the dollar resulting in higher aircraft rental costs which rose by 37%.

4. A factor that came as a surprise to analysts was the September 2015 quarter numbers. As the company was in the midst of launching its initial public offer (IPO), the numbers for September quarter were not known. As far as the market is concerned, the company announced two quarter numbers together. September quarter numbers were sharply lower which impacted the nine month estimates of almost all analysts. For September 2015, the company posted a profit of only Rs 112.69 crore bringing the nine month figure to Rs 1,410 crore as compared to Rs 1,304.17 crore in the nine month of the previous year.

5. The relatively poor performance in the nine month numbers and delay in aircraft delivery has resulted in analysts lowering their estimates and price target. Motilal Oswal has lowered its profit target for FY16 by 25% to factor in actual nine months numbers and FY17 by 18% to account for the delay in A320 Neos. Despite the numbers what is also playing on the mind of investors is that the company’s promoter gave themselves a hefty dividend at a time when the quarterly numbers were going to be bad.