IndiGo Q1 Review: Stock Likely To Be Under Pressure As Competition Intensifies, Say Analysts

Shares of InterGlobe Aviation Ltd., the parent of India’s largest airline, swung as analysts expect competition to intensify with the entry of two new carriers, hurting IndiGo’s yield and market share.

That, along with margin pressure as jet fuel prices surge and the rupee’s depreciation, is likely to keep stock under pressure, they said.

The Gurugram-based airline operator reported a net loss of Rs 1,064 crore against a net loss of Rs 1,680 crore in the preceding three months, according to its exchange filing. A consensus estimate of analysts tracked by Bloomberg had forecasted a net profit of Rs 1,694 crore for the first quarter.

Key Highlights (QoQ):

• Revenue rose 60% to Rs 12,855 crore.

• Ebitdar stood at Rs 717 crore versus Rs 172 crore.

• Ebitdar margin stood at 5.6% compared with 2.1%.

“Cost pressures on fuel and foreign exchange prevented us from translating this strong revenue performance into net profitability. While our financial performance in the second quarter will be challenged by weak seasonality, the long-term revenue trend remains strong,” the airline’s Chief Executive Officer Ronojoy Dutta said in a statement.

Shares of the company opened 2.4% higher but fell 1.6% in early trade. It ended 0.5% lower on Thursday. Of the 25 analysts tracking the company, 15 maintain a ‘buy’, four suggest a ‘hold’, while six recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 10%.

Here's what brokerages made of IndiGo's Q1 FY23 results:

• Maintains 'neutral', raises target price to Rs 2,006, implying an upside of 2%.

• Corporate travel and tourism are back to pre-Covid levels and are likely to gradually improve in coming months. The cargo business remains strong, and the management expects it to remain stable.

• Management expects yields to contract from current levels, given the entry of new and established players (Akasa Air and Jet Airways), which may result in heightened competition.

• Despite the current state of precariousness in the industry, the stock trades above pre-Covid levels.

• Expects the international market to grow faster than the domestic market for IndiGo. The same will touch 40% of its total share over the next five years.

• Despite the near-term challenges, IndiGo will take additional pre-emptive measures. However, the resurgence of airlines (Air India and SpiceJet), the upcoming Akasa Air, and the established Jet Airways will reduce IndiGo's market share. Maintains 'neutral' owing to the limited upside of 2% from current levels.

• Maintains 'buy', raises target price to Rs 2,710, implying an upside of 37%.

• Reported a positive revenue per available seat-kilometer less cost per available seat-kilometer excluding forex.

• IndiGo’s spread will go up in a stable to declining crude environment. The fact the demand beyond metro-to-metro (domestic, international) is buoyant will only enhance Indigo’s scope to leverage coverage, pick routes and accelerate improvement in spread.

• Positive operational spread happened in spite of the low sub-80% load factors and heightened crack spreads between crude and ATF.

• The key cost levers are higher load factors and lower crack spreads for ATF. The key add-on profitability drivers are IndiGo’s ability to pick and choose routes that are the most profitable and Indigo’s ability to go international more.

• On the prospects of IndiGo choosing routes, IndiGo has a lot of options. Its versatile fleet and coverage make it uniquely placed to operate several routes in domestic (beyond metro-to-metro) and in international (China, Africa, Saudi Arabia, Asia). It is seeing good demand in these sweet spots for itself. It is also highlighting good off-take of low sub-400 km lead distance profile like Kolkata-Deogarh.

• IndiGo highlighted absence of any irrational pricing moves by competition. It is relying on the fact of seasoned professional captaining the peer companies and expects the pricing for the sector to remain rational. All airlines have had this realisation that reducing pricing does not grow revenue for anyone the hard way.

• Maintains 'sell' at a target price to Rs 1,635, implying an downside of 17%.

• Rising fuel cost and depreciating rupee to impact profitability.

• Increased competitive intensity from Air India and entry of two new carriers, Akasa and Jet Airways 2.0 is likely to impact yield. IndiGo’s share price at current market price factors in the improving (expected) momentum in passenger demand.

• Stock is likely to remain under pressure given increasing competitive intensity in the airlines industry, margin pressure given surge in ATF prices/rupee depreciation, decision of Rakesh Gangwal to reduce his 36.6% stake in the company over the next five years, which is likely to cap stock performance.

• Maintains 'hold’, raises target price to Rs 1,900 from Rs 1,800 earlier, implying a potential downside of 3.9%.

• IndiGo reported impressive performance on revenue front. However, soaring fuel costs (fuel CASK at Rs 2.18 vs Rs 1.58 QoQ) and higher forex losses continue to remain spoilsports.

• Load factor at 79.6% remain considerably below pre-COVID levels of 89%, impacted by price hikes against rising fuel costs. Anticipate Q2 to be a weak quarter impacted by seasonality and weak macros.

• IndiGo is better placed than its peers with about 55% 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, better than industry cost structure and strong management.

• However, inflationary cost environment and rupee depreciation will continue to drag its profitability.