Interglobe Aviation Ltd
With oil on the boil, Vistara's loss may not be IndiGo's gain
Apr 11,2024
Shares of low-cost airline IndiGo hit record high on the bourses soon after
reports of pilot crisis at Vistara emerged. The development also saw
airfares surge by around 25 per cent on select routes. Shares of IndiGo hit
a lifetime high of ~3,68.5 on April 2, 2024, and has gained 2.4 per cent on
the bourses in April. While the benchmark S&P BSE Sensex has risen 1.4 per
cent during the period.
While Vistara has decided to curtail flight operations, reports suggest
that the airline is working towards returning to normalcy. Going ahead,
analysts believe the near-term outlook for IndiGo which is owned and
operated by InterGlobe Aviation remains slightly cautious as the situation
is developing. Air fares have already jumped this month, likely benefitting
IndiGo. Any further increase in ticket price may see capping action from
the regulatory watchdog,
cautioned Gaurang Shah, senior vice-president, Geojit Financial Services. G
Chokkalingam, head of research at Equinomics Research, however, points out
that incremental benefits from the crisis at Tata-owned airline, if any,
may be outweighed by risks from surging oil prices.
Besides, IndiGo commands a dominant market share in the industry and the
incremental benefits from the Vistara crisis may not be significant for the
low-cost carrier, he said. Data by Directorate General of Civil Aviation
(DGCA) showed that IndiGo commanded a market share of 60.1 per cent as of
February 2024, while Vistara had a share of 9.9 per cent and Air India 12.8
per cent.
Brent crude oil, meanwhile, is testing the $91 per barrel-mark at present,
having risen 10.4 per cent in a month. So far in calendar year 2024 (CY24),
oil prices have jumped nearly 18 per cent.
Industry analysis suggests nearly half of Indian airlines operating
expenses are attributed to jet fuel, thereby making them significantly
sensitive to such fluctuations. For IndiGo, aircraft fuel expenses
accounted for 41 per cent of total expenses at the end of the December 2023
quarter (Q3FY24). This was higher than 38 per cent at the end of the
September quarter. Surging oil prices, according to Shah of Geojit, could
hit the airline if the government decides to hike the prices of aviation
turbine fuel (ATF). The last time ATF price was hiked was on March 1, 2024
when the Centre jacked up jet fuel prices in the national capital to
~1,01,396.54 per kilolitre (kl) from ~1,00,772.17 lakh.
Against this backdrop, analysts suggest investors partially book profit in
IndiGo, while new investors may wait for a decent correction to add the
stock from a long-term perspective. Analysts at Kotak Institutional
Equities believe IndiGo is big enough to chart its own growth trajectory
over long-term, unperturbed by externalities.
IndiGo has guided for an improved pricing outlook for Q4FY24, up on a
yearly basis versus the earlier flat year-on-year (Y-o-Y) guidance. Its low
double-digit available seat kilometer (ASK) growth guidance for FY25 is
comforting, the brokerage said in a recent report. It has a buy rating on
the counter and a target price of ~4,300. Meanwhile, the airline plans to
add at least one new aircraft a week in FY25; add 10 new destinations and
raise employee count by 5,500-6,000. It also aims to shift the capacity mix
towards international travel. Despite factoring in higher crude prices and
pilot salaries, our estimates are flat to higher, driven by better ASK
growth and yields. We continue to see upside risks to our yields in
near-term and capacity/demand growth and profitability over the
medium-term, said analysts at UBS. They maintain a buy rating on the stock
with a target price of ~4,000.