InterGlobe Aviation - Lower yields point to developing supply overhang - ICICI Securities

InterGlobe Aviation (IndiGo) will remain one of the biggest beneficiaries of the expected recovery from Covid with healthy signs of return of air traffic, steady PLFs complemented by strong balance sheet. Cash erosion has been stalled as of now with the liquidity measures taken by the company along with the advance sales/SLB profits, which has added to the business strength. Q3FY21 revenues came in lower than expected on account of lower yields. Expected delay in return of corporate traffic could lead to lower fares, which will put pressure on earnings in FY21. Q3/9MFY21 adjusted loss stood at Rs8.2bn/Rs53bn. Post the 22% rally in stock price over the past three months, we downgrade the stock from Add to HOLD.

- Air traffic has seen a steady recovery... average daily fliers have increased from 60k in May to ~244k in Jan'21. IndiGo also has managed to increase traffic from 1.2mn passengers in Q1FY21 to 5.2mn passengers in Q2FY21 to 10.5mn in Q3FY21 with improvement in PLF from 61% to 65% to 72% during the same period, respectively. Compared to Q3FY20, 59% of the capacity was deployed in Q3FY21. IndiGo aims to operate Q4FY21 at 75-80% of the capacity of Q4FY20.

- ... but fares will remain under pressure as evident from Q3 (seasonally strong quarter) with yield lower than Q2 (seasonally weak) in FY21: Current traffic is in the VFR (visiting friend and relatives) category, which is price sensitive. Hence, yields are unlikely to increase. The price-inelastic demand is usually with business travel, which is absent currently. The trends too have not been great with flash sales beginning to appear from most players. There was estimated 3.5% sequential decline in fares for IndiGo, which led to higher-than-expected losses despite in line costs.

- 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 to Rs150mn in Q3FY21. The company has also received Rs6bn working capital from a bank. Of the total Rs66bn, additional liquidity (including the newly available credit line), Rs54bn has been availed of by the company in 9MFY21. As such, QIP has been annulled.

- We factor complete traffic recovery in FY22 to FY20 levels and growth of 8% in FY23 over FY22. This can manifest from market share gain or organic demand recovery. Based on 20x core EPS of Rs57 and free cash balance of Rs147bn, we downgrade the stock from Add to HOLD with a revised target price of Rs1,515 based on FY23 estimates (earlier Rs1400 based on FY22E). We factor in RASK/CASK (including depreciation/interest) to move from Rs3.72/3.74 in FY20 to Rs3.80/3.52 in FY23E. CASK savings will be driven by fleet efficiency/cost savings. CASK ex-fuel is expected to move from Rs2.45 in FY20 to Rs2.41/2.51 in FY22/FY23E, respectively.

Shares of InterGlobe Aviation Ltd was last trading in BSE at Rs.1545.3 as compared to the previous close of Rs. 1588.35. The total number of shares traded during the day was 214279 in over 7708 trades.

The stock hit an intraday high of Rs. 1643.75 and intraday low of 1534.55. The net turnover during the day was Rs. 341412517.

Source : Equity Bulls

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