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

Interglobe Aviation

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

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.