InterGlobe Aviation - Play on Covid recovery - ICICI Securities

InterGlobe Aviation (IndiGo) will remain one of the biggest beneficiaries of expected recovery from Covid with healthy signs of return of air traffic, steady PLFs complemented by strong balance sheet. The pace of cash erosion has slowed down with the liquidity measures taken by the company has added to the business strength. However, expected delay in return of corporate traffic could lead to lower fares, which will put pressure on earnings in FY21. Post the 40% rally in stock price over the past three months, we downgrade the stock from Buy to ADD.

- Air traffic has seen steady recovery.... Daily fliers have increased from 60k in May to ~180k in October. IndiGo also has managed to increase traffic from 1.2mn passengers in Q1FY21 to 5.2mn passengers in Q2FY21 with improvement in PLF from 61% to 65% in the same period. However, recovery hereon will depend on return of corporate travel, which might take time. Compared to Q2FY20, 37% of the capacity was deployed in Q2FY21 with an exit rate of 47%. Company aims to operate at 60% of Q3FY20 capacity in Q3FY21. Management believes the government will soon increase this permissible capacity beyond 60%.

- ....but fares will remain under pressure: The available traffic now is in the VFR (visiting friend and relatives) category, which is price sensitive. Hence, yields are unlikely to increase. The price-inelastic demand usually is with the business travel, which is not there now. Hence, the yields are likely to dampen going ahead, will be definitely lower YoY. The trends too have not been great in the festive season till date. Additionally, with increasing traffic (government is likely to allow 75% of the capacity to fly from start of CY21), hence the yields will come under further pressure.

- Fare print was weak in Q2FY21. There was estimated 15% sequential decline in fares for IndiGo, which led to higher than expected losses. While expenses were broadly in line, there was an increase in finance cost in line with lease liability (Rs180bn as of H1FY21 compared to Rs156bn in FY20) and depreciation in with Rights of Use (Rs159bn as of H1FY21 vs Rs142bn in FY20) while other income declined on account of lower investment yields (Rs6.6bn as of H1FY21 vs Rs8.1bn in H1FY20).

- Balance sheet concerns largely over with improving earnings and measures taken by the company. Cash burn reduced from Rs300mn per day in Q1FY21 to Rs250mn in Q2FY21. Company has also got Rs6bn working capital line from a bank. Of the total Rs66bn additional liquidity (including the newly available credit line), 50% has been availed of by the company in H1FY21. As such, QIP decision has been postponed to Dec'20.

- Our Rs90 EPS estimate factors-in complete traffic recovery in FY22 to FY20 levels. This can manifest from market share gain (if there are capacity curtailments by other airlines, which too will support fares) or organic demand recovery (several consumer discretionary sectors have already seen recovery to pre-Covid levels). Based on 20x core EPS of Rs57 and free cash balance of Rs102bn, we downgrade the stock from BUY to ADD with a target price of Rs1,400. We factor-in RASK/CASK(including depreciation and interest) to move from Rs3.72/3.74 in FY20 to Rs3.76/3.46 in FY22E. CASK savings will be driven by fleet efficiency and cost savings

Shares of InterGlobe Aviation Ltd was last trading in BSE at Rs.1308.65 as compared to the previous close of Rs. 1331.2. The total number of shares traded during the day was 114728 in over 5976 trades.

The stock hit an intraday high of Rs. 1346 and intraday low of 1296.75. The net turnover during the day was Rs. 151709030.

Source : Equity Bulls

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