Interglobe Aviation Ltd
Clear skies ahead: IndiGo sets the course for strong growth altitudes
Apr 01,2024
The stock of InterGlobe Aviation (IndiGo) has reached its all-time high on
expectations of double-digit growth in 2024-25 (FY25), robust medium-term
prospects, and lower costs, which could
translate into improving yields and profits. The stock is up
24 per cent since the start of February and is currently trading at around
~3,544 per share.
For FY25, the country's largest airline expects to post low double-digit
passenger (pax) growth and plans to increase capacity by 11-13 per cent
year-on-year. It also plans to add 10 new destinations in FY25.
The company aims to add more than one aircraft per week. The current order
book stands at 960, and steady deliveries are expected from the recent
order of 500 aircraft placed in 2023.
While the number of grounded aircraft is currently over 70, with capacity
additions and mitigation measures
such as damp leases, lease
extensions, and re-induction of old aircraft, IndiGo does not expect much
impact from the grounding of aircraft.
According to analysts
Jinesh Joshi and Stuti Beria
of Prabhudas Lilladher Research, 'Despite the escalation in
engine issues at Pratt & Whitney, growth guidance of early double digits is
an indication IndiGo
is well placed to mitigate
supply-chain challenges.'
The brokerage has retained its accumulate' rating with a target price of
around ~3,961 and increased its enterprise value-to-operating profit
multiple to
8.5x from 7.5x earlier.
What justifies its aggressive fleet addition are projections
of pax traffic, which is expected to double by 2030. While the sector is
expected to hit the
225 million mark in passengers for 2023-24 (FY24), the same
is expected to increase to
510 million by 2029-30, a
2.3x jump over this period.
The traffic increase is a
combination of a shift in traffic from railways to airlines,
accelerated airport expansion (Navi Mumbai and Delhi airports), an increase
in passengers holding passports (only 6.5 per cent of Indians hold
passports), and an increase in connectivity to neighbouring countries.
While it has a dominant share in the domestic market, the company is also
working to increase its international presence through strategic
partnerships and loyalty programmes. It has added seven new destinations
and 19 routes in FY24.
While it has eight strategic partners with a 27 per cent
share in international routes
in terms of capacity in FY24,
it plans to increase this to
30 per cent in FY25.
It is in the process of adding wide-body aircraft for mid-
to long-haul markets. New
initiatives, such as the freighter business, venture capital arm, and its
loyalty programme,
are supporting the company's existing business model.
While Motilal Oswal Research remains positive about the
aviation sector, the brokerage believes IndiGo would have to navigate
through various
challenges in the near to medium term. The brokerage has a
neutral' rating with a target price of around ~3,510.
In addition to pax growth, its cost rationalisation process is expected to
bring down its
non-fuel bill. The company's cost per unit, excluding fuel and
foreign exchange, at $3.13 is one of the lowest among the top nine low-cost
carriers in the world. This enables the company to offer affordable and
competitive fares in the domestic market and maintain its market share of
over 60 per cent.
In addition to strong prospects and lower costs, analysts of Nuvama
Research, led by
Jal Irani, say that a likely duopolistic industry structure dominated by
IndiGo and Air India bodes well. This shall spur pricing discipline,
thereby driving yields up over the long term.
Aggressive capacity addition and robust demand shall drive pax growth, they
add. The
brokerage has raised its profit estimates and increased its target price to
around ~3,953 per share.