The InterGlobe Aviation stock slumped close to 11 per cent on Thursday after a disappointing performance in the March 2018 quarter on Wednesday (post market hours).

After two consecutive quarters of year-on-year increase in yield, the 4 per cent decline in the fourth quarter came as a negative surprise and also impacted profitability. The firm has been hit by high fuel cost, too, as that has affected the pricing power environment.

Weak financial performance following news of its president Aditya Ghosh resigning hit the stock price by 20 per cent in the last one week. Though the stock has an upside potential of about 23 per cent from the current levels based on various analysts’ target price estimates, the upside journey could be turbulent and bumpy.

This is mainly because of the rise in crude oil prices. Analysts have raised their crude oil price estimates for FY19 and FY20. “While crude oil prices are hovering at $72 per barrel, we are modelling $65 for FY19 and $60 for FY20, resulting in 6 per cent cut in our earnings estimate for those years. Further increase or even sustenance of current high price levels would pose a downside risk to our earnings estimates,” said Motilal Oswal. Even Garima Mishra, analyst at Kotak Institutional Equities, has increased crude price estimate to $65 in FY19 from $60 earlier, resulting in a 14 per cent cut to FY19 earnings.

Pressure on margins

This, along with aggressive capacity addition by the company and competition, could continue to hurt the company’s margin, some analysts believe. The management has guided for ASK (available seat kilometres) growth of 25 per cent in FY19. “Indigo firmed up its capacity growth guidance from an earlier guidance of ‘sharply higher than 20 per cent’,” Mishra of Kotak pointed out. Pricing was limited in the March quarter, especially in the lucrative 0-15-day bracket, irrespective of metro or non-metro and the beginning of the new fiscal (read April) has also not been very encouraging, the company said.

However, the company and some analysts (Kotak, Edelweiss) expect the competitive scenario to soften and yields to improve gradually again. “We believe that volatility in pricing/margins would even out over the medium term; earnings growth would mirror topline growth over the long period,” said Joseph George, analyst at IIFL Institutional Equities.

Nevertheless, investors are advised to stay away from the stock. Even the risk-taking ones should increase exposure gradually only..

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