IndiGo soars 9% in 2 days, hits record high on Jefferies' 'Buy' upgrade

IndiGo share price today: Jefferies bull case pegs IndiGo's share price target price at Rs 5,800, suggesting a likely upside of 29.4 per cent from current levels

Jefferies upgrades IndiGo to Buy: Global brokerage Jefferies has upgraded IndiGo share to 'Buy' with a base price target of Rs 5,225, as the airline has consistently gained market share over the years led by a dense network of flights and supportive pricing power.

While the brokerage's base share price target for IndiGo implies an upside of 16.5 per cent from Thursday's closing price, its upside scenario pegs the stock's target price at Rs 5,800, suggesting a likely rally of another 29.4 per cent from current levels.

"IndiGo's operating performance has consistently surprised in the past 12-18 months as it maneuvered through cost/capacity headwinds. The precarious industry capacity situation has kept yields/spreads healthy. Supply adds seem to have picked up recently, but challenges with global OEMs suggest aircraft demand-supply staying balanced. IndiGo remains in the driver's seat, with new avenues of growth," Jefferies said in its report dated August 21.

 

Jefferies estimates RASK-CASK spread at 47-49p in FY25-27 as against 58p in FY24 (FY11-FY18 avg of 42p). It has raised FY25-27 EPS by 6-7 per cent.

RASK is Revenue per Available Seat Kilometre while CASK is Cost per Available Seat Kilometre.

Since the release of the report, IndiGo share price has surged 9.4 per cent in two days. At 12:08 PM, IndiGo share price was ruling 4.6 per cent higher at Rs 4,690 per share as against 65-point (0.08 per cent) rally in Sensex.

IndiGo hit a record high of Rs 4,705 in the intraday trade today.

What Jefferies said about IndiGo?

According to Jefferies, the InterGlobe Aviation-owned IndiGo airline has mitigated the impact of faulty-engine related grounding of the airline's capacity 'surprisingly' well.

It received better compensation from original equipment manufacturers (OEM) to ensure minimum economic/operational impact; managed cost headwinds related to grounding, expensive secondary leasing, increasing airport charges, and wage-hike inflation; and has reported stronger yields over the past few years, driving consistent beat on spreads.

"IndiGo has gained market share in 17 out of 18 years of operations. Its capacity ASK has grown at a CAGR of 11 per cent/17 per cent over the past 5/10 years. As India remains an underpenetrated aviation market, IndiGo has a strong growth outlook," analysts at Jefferies said.

Notably, IndiGo plans to add more A321 XLR aircraft by 2025, followed by addition of wide-bodied A350s from 2027, which will likely augment its global presence.

Besides, the company has announced a calibrated entry into the 'Business Class' segment which will aid IndiGo to capture a bigger market share amid growing travel aspirations of Indian consumers, and the company's superior execution.

IndiGo's pricing power

The aviation industry has faced  various disruptions over the past couple of months, ranging from bankruptcy of GoFirst, contracting schedule of SpiceJet operations, and P&W engine issue at IndiGo to pilot/operational/staff-related challenges at Air India.

Besides, the recent scrutiny around Boeing's production remains a key overhang on the industry-wide supply.

This, Jefferies said, could help the industry with pricing and IndiGo, specifically, at attaining strong spreads.

"With the industry supply adds not looking too disruptive, we believe the industry pricing may sustain at elevated levels as seen in the past 1-2 years, helping offset the broad-based inflationary pressures. Inferior cost curve for peers remains a winner for IndiGo," Jefferies said.

What other experts said on IndiGo

Rating agency Icra expects a healthy growth in passenger traffic ahead which, along with  better pricing discipline and relatively stable aviation turbine fuel (ATF) prices, will result in a healthy RASK-CASK spread, and help IndiGo gradually improve its credit metrics, it said.

Given IndiGo's large orderbook, the company will be well positioned to maintain its strong market position in the long run, the rating agency added.

With planned addition of more than an aircraft per week in FY2025, the management expects early double-digit growth in the capacity (in terms of available seat kilometers (ASKM)) and passenger traffic for the fiscal. Icra noted that a proportionate growth in passenger traffic, number of routes, and airport infrastructure, etc., remain critical for healthy load factors.

Meanwhile, analysts at Kotak Institutional Equities believe IndiGo stock may rerate in months ahead on the back of better-than-estimated load factor ahead and improving yields.

The brokerage said gains for its spreads may get amplified if crude remains within a range.