IndiGo share takes off 3% as Elara Capital upgrades to 'Buy', lifts target

IndiGo share price: Shares of IndiGo, operated by InterGlobe Aviation, soared on Monday, December 23, 2024, climbing as much as 3.13 per cent to hit an intraday high of Rs 4,486.95 per share.

 

At 11:15 AM, IndiGo share was trading 2.97 per cent higher at Rs 4,480 per share. In comparison, BSE Sensex was trading 1.01 per cent higher at 78,828.40 levels.

 

The rally in IndiGo's share price followed a rating upgrade from domestic brokerage Elara Capital. The brokerage upgraded the stock to ‘Buy’ from ‘Sell’ and raised the target price to Rs 5,309 from Rs 3,847, indicating an upside of 21 per cent.

 

 

“We raise FY25E/26E/27E earnings per share (EPS) estimates by 2 per cent/27 per cent/15 per cent and upgrade FY27E enterprise value/earnings before interest, tax, depreciation and amortisation (EV/Ebitda)-based target price (TP) to Rs 5,309 (from Rs 3,847), on one-year forward EV/Ebitda of 10.0x (from 8.0x),” said Gagan Dixit of Elara Capital.

 

According to Elara Capital, the upgrade was led by strong demand compound annual growth rate (CAGR) through to FY28E, given capacity expansion at major airports and the return of Pratt & Whitney (P&W) fleet, even as competitors face constraints to aggressively add capacity. 

 

On the flipside, key risks to the rating are jump in crude oil prices to above $90/bbl and delay in return in operations of the Aircraft on Ground (AOG) fleet.

 

What other factors led Elara Capital to upgrade IndiGo share:

 

Expansion at major airports to drive growth

 

The weighted average utilisation for top-seven airports peaked at 90 per cent in H1FY25, as per Airport Authority of India (AAI) data. With new airports and terminal upgrades, airport capacity is expected to support a 12 per cent demand CAGR in FY25E-28E. Historical trends suggest that following the opening of a new airport in Goa and the addition of a second runway in Bengaluru, respective demand grew 23 per cent and 9 per cent in a year, outperforming pan-India growth by 1,445 basis points (bps) and 838 bps, respectively.

 

Constraints at major airports (excluding Delhi, Mumbai, Ahmedabad) may re-emerge beyond FY28, preventing over-supply. To sustain a +10 per cent demand CAGR over the next decade, analyst at Elara Capital said, India will require at least 12 additional airports with a +10 million passenger capacity. 

 

By comparison, China not only has about 300 per cent more airports handling +10 million passengers than India but also a higher share of such airports to the total (15 per cent in China versus about 7.5 per cent in India).

 

Large orders to drive fleet addition

 

According to Elara Capital, since FY21, large carriers have demonstrated their ability to manage fleet retirements to balance supply while leveraging robust +1,600 orders to meet strong demand growth. 

 

Per IndiGo’s Q2FY25 call, aircraft on ground (AOG) is expected to decrease from the current high-60s to the mid-40s by Q1FY26. Furthermore, a strike at Boeing’s 737 Max production facility has delayed ramp-up, limiting monthly aircraft deliveries to Air India to ~four in H1CY25E (compared to four in H1FY25 and >six in H2FY24), creating an opportunity for IndiGo to gain market share, Elara Capital highlighted in a note.

 

Indian carriers gaining share in international traffic

 

International traffic, which accounts for 20 per cent of Calendar Year 2024 (CY24) traffic, is expected to grow at a 12 per cent CAGR in FY25E-28E. Indian carriers are likely to post a higher CAGR of ~14 per cent, driven by underutilised international slots (~25 per cent) and increasing short/mid-haul flights. Wide-body aircraft deliveries will further boost slot utilisation for Indian carriers. 

 

Additionally, railway AC traffic for journeys >12 hours stood at 162 million in FY24, comparable to domestic aviation traffic at 150 million. A gradual shift from long-haul railway travel to aviation could double aviation demand in the long-term, provided the industry continues to expand capacity, Elara Capital said.