Broker’s Call: InterGlobe Aviation (Hold)

BL Chennai Bureau | Updated on: Aug 04, 2022

Prabhudas Lilladher

Target: ₹1,900

CMP: ₹1980.00 

InterGlobe Aviation (IndiGo) reported impressive performance on revenue front with 60 per cent quarter-on-quarter growth at ₹12,500 crore, led by improved yield of ₹5.24 (+19 per cent quarter-on-quarter). However, soaring fuel costs (fuel CASK at ₹2.18 vs ₹1.58 quarter-on-quarter) and higher forex losses (₹1,400 crore vs ₹600 crore quarter-on-quarter) continue to remain spoilsports. Load factor at 79.6 per cent remain considerably below pre-Covid levels of 89 per cent, impacted by price hikes against rising fuel costs. We anticipate Q2 FY23 to be a weak quarter impacted by seasonality and weak macros.

Going ahead, we believe IndiGo is better placed than its peers with about 55 per cent market share. The company will benefit in medium to long term from: demand recovery along with capacity deployment; network expansions in domestic as well as international; commodity softening; superior balance sheet (₹8,300 crore free cash); better-than-industry cost structure; and strong management. However, inflationary cost environment and INR depreciation will continue to drag its profitability.

Despite strong tourist demand, corporate travel, network expansions and yield improvement, IndiGo’s performance remains impacted as higher fuel costs and forex losses drag down margins. IndiGo reported record yield at ₹5.24 due to its focus on maximising revenues at the cost of load factor (at 79.4 per cent vs 89 per cent in Q1 FY20). Load factors are expected to improve over the next few quarters, as price hikes are absorbed by passengers. Q2, which is usually a weaker quarter compared to Q1, is likely to impact revenue and profitability. And, higher crude and INR depreciation will further hit margins. However, Q3 should again see revenue improvement supported by festive season. As international travel has begun again, IndiGo has added back all destinations except China, Myanmar and Hong Kong. In June 2022, the traffic was at pre-Covid levels. The company plans to expand its international operations quickly as more NEOs/ATRs are added in the fleet.

Published on August 04, 2022
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