Interglobe Aviation - 3QFY23 Result Update

 InterGlobe Aviation - Increasing Traffic and Better Yield to Boost Profitability🚁

Interglobe Aviation

INDIGO recorded a strong performance in 3QFY23 on all counts. Its Revenue increased by 61% YoY (up 20% QoQ) to Rs149.3bn, 3% higher than our estimate of Rs144.8bn, due to better yield. Yields came in at Rs5.38 (up 22% YoY and up 6% QoQ). Passenger revenue grew by 63% YoY (up 18% QoQ), while ancillary revenue grew by 25% YoY (up 10% QoQ). CASK for the quarter stood at Rs4.77 (up 18% YoY and down 7% QoQ), while RASK stood at Rs5.26 (up 29% YoY and up 15% QoQ). PLF increased by 5.4 percentage pts YoY to 85.1%. It reported an EBITDAR of Rs31.8n (up 67% YoY/up 4,2x QoQ), vs. our estimate of Rs28.1bn, while EBITDAR margin stood at 21.3% (up 82bps YoY and up 2,073bps QoQ), vs. our estimate of 19.4% due to lower ATF prices and better yield. INDIGO recorded a PAT of Rs14.2bn (including forex loss of Rs5.9bn) as against PAT of Rs1.3bn in 3QFY22 and net loss of Rs15.9bn in 2QFY23, vs. our estimated PAT of Rs9.2bn, due to better operating performance and higher non-operating income. We expect a strong revival in the air passenger traffic over the next 2 years and factor 31% CAGR in ASK over FY22-FY25E (vs. 12% CAGR over FY18-21), and an improvement in EBITDAR margin by 2,350bps over FY22-FY25E. We believe that INDIGO’s strong cash position would help in sustaining its market share along with pricing power, going forward, which would drive its overall profitability. Rising Yield, pricing discipline and falling crude prices would support turnaround despite other cost inflation. We expect fuel prices to normalize by FY23-end. It is the best play to capitalize in the fastest-growing Indian aviation sector. We reiterate our BUY rating on INDIGO with a revised Target Price of Rs2,750 (vs. earlier RS2,350).

Improving Load Factor and Higher Yield to Aid Profitability 

The aviation industry has witnessed a remarkable jump in load factor due to demising Covid impact completely and surge in corporate as well as non-corporate travel during seasonally best quarter. Moreover, all players witnessed an improvement in load factor and yield in 3QFY23. We believe that the recent trend of increasing cargo traffic for Indian players would cushion the overall profitability. We expect cargo movement to record a double-digit growth over the next 2-3 years. International passenger traffic would rise further with company’s increasing focus on overseas markets, which has already surpassed pre-Covid level in 3QFY23. Air fare has increased significantly in last one year and we expect it to remain firm on the back of strong pent-up demand, increasing leisure travel and corporate booking surpassing pre-Covid level. We believe that the improving affordability, pent-up demand of last 2 years and emerging trend of leisure travel would continue boosting travel demand for next 1-2 years. INDIGO, being the market leader, would enjoy this benefit, which in turn shall result in a turnaround in 2HFY23 itself. Moreover, lower crude prices would provide a major relief to the industry. Despite few aircrafts are grounded due to supply issue from OEMs, INDIGO witnessed remarkable performance, while likely improvement in situation by FY24-mid would further increase average block hours and operating efficiency significantly in 2HFY24 and FY25.

Outlook & Valuation

We expect a strong revival in air passenger traffic over the next 2 years and factor 31% CAGR in ASK over FY22-FY25E (vs. 12% CAGR over FY18-21). Management guided for ask growth of 45% YoY in 4QFY23 and 15%+ in FY24E. Considering company’s performance in 3QFY23, higher yield, capacity addition by 15% and lower fuel prices, we increase our revenue estimate by 5%/15% for FY23E/FY24E. We expect company’s Revenue/EBITDAR to clock CAGR of 41%/185% over FY22-FY25E and a PAT of Rs89.6bn in FY25E (vs. net loss of Rs61.7n in FY22). Stock is currently trading at an attractive P/E valuation of 12.9x/9x FY24E/FY25E and EV/EBITDAR of 6.8x/5.2x FY24E/FY25E. We reiterate our BUY rating on INDIGO with a revised Target Price of Rs2,750, rolling forward our valuation to FY25 and valuing the stock at a revised EV/EBITDAR multiple of 6x FY25E. >

Conference Call – Key Takeaways

Company Performance: PLF increased to 85.1% (up 5.4pts YoY/up 5.9pts QoQ) in 3QFY23. Fuel prices increased by 52% YoY (down 7% QoQ) leading to increase in fuel CASK by 41% YoY. CASK ex fuel reduced by 4.3% YoY due to lower forex losses. Forex loss stood at Rs5.9bn in 3QFY23. The company is operating at a peak of 1,685 flights/ day. The international capacity constituted 23% of the overall capacity in 3QFY23 (stood at 105% of the pre-covid level). 

Outlook: On the back of strong bookings and demand, the company expects ASK to increase by 45% YoY in 4QFY23. It maintains its capacity guidance of 13-17% growth vs. pre covid level (expects to achieve the higher range of the band) for FY23 and expects the capacity to grow upwards of mid-teens in FY24. It expects the international ASK to constitute ~30% from the current 23% of the overall ASK in FY24. The company recently added North Goa as its 76th destination and plans to add 2 domestic destinations in March’22.

Debt & Free Cash Flow: Free cash for the quarter stood at Rs106.1bn (up 36% QoQ). Total cash as of 31st Dec’22 stood at Rs219.2bn (up 27% QoQ). Capitalized operating capital lease liability for the quarter stood at Rs410.4bn, while the total debt for the quarter stood at Rs444.7bn. ROU asset at the quarter end stood at Rs254.8bn.

Key Risks

• Lower than expected decrease in ATF prices.
• Weak demand growth
• Adverse currency movement
• Prolonged geopolitical issue
• Sharp fall in yield on rising competition