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InterGlobe Aviation Brokerage Report: Will The Stock Fly or Be Grounded?

Updated: Jun 25, 2023



InterGlobe Aviation Brokerage Report has been prepared by Emkay Global


Management exudes confidence on growth; Indigo well-placed on capacity:

Indigo hosted its first-ever Analyst Day in Gurugram, wherein its top management laid out the broad FY24 guidance – of 16-17% ASK growth YoY, 100mn total pax and fleet expansion to 350 aircraft. Management highlighted the potential of the rapidly-growing aviation market and India’s need for 1,100 planes by CY27 vs ~700 currently. Indigo remains well placed in the space, with its ongoing order book of ~500 aircraft, and aims to double in terms of both, size and scale, by CY30. Despite supply-side issues likely continuing in CY23, capacity should be supported by steady gross adds, lease extensions, wet-leasing and future engines being CFM. International would be a key growth area for Indigo, with aim of ASK share touching 30% in 2 years vs 23% now. Also, fuel costs have started coming off. While Q4 is seasonally weaker, decline in airfares from the Q3 highs have boosted demand. Yields would fall more than the seasonal trend, albeit remaining strong vs pre-pandemic. While capacity and pax guidance is in line with our assumptions, guidance of net-fleet addition of 46 in FY24 is better than our 30-35 p.a. assumption and points to Indigo’s robust position, even amid delivery & engine concerns. We reiterate BUY, with TP of Rs2,600/share.


Key Takeaways from the Analyst Meet:

FY24 ASK (capacity) growth target is north of mid-teens YoY (as against 18% growth in FY23 vs FY20), while fleet would expand from 306 (as of FY23-end) to 350 (by FY24- end). Pax would touch 100mn next fiscal vs 85mn in FY23 (~15% above FY20’s). No. of destinations should increase, from 104 to 115, while employee base would grow by 5,000 (32,000 now).

Indigo targets a twofold increase in size and scale by CY30. Growth level is on a high base and the last 16-year achievement could now be attained in half the time (i.e. within only 7- 8 years). India remains a high-potential market, as it has ~700 commercial passenger aircraft vs 4,000 in China currently. India’s requirement is of 1,100 passenger planes by CY27.

Indigo’s international MS has improved to 16% in 9MFY23, with ASK share of 23% (19.2bn) of Indigo’s total ASK. It aims to increase its Intl ASK share to 30% in 2 years. International is a natural extension for Indigo, as many destinations are similar to domestic, wrt flight duration. Indigo awaits Airbus’ confirmation wrt XLR deliveries which should happen by CY25.

While supply-side disruptions continue, things are more stable vs 6mths ago; issues would persist in CY23. Indigo’s Block Hours ex AOG stand at 12.5 (10.7, incl. AOG), while FY24 should clock >13hrs (ex-AOG/on property flights), buoyed by Intl. Indigo has exhausted its P&W order; all new aircraft now have CFM engines, per a deal made a few years ago.

A Covid-scare at end Dec-22 subsided by Jan-23, leading to robust pax in Feb-Mar ’23. Seasonally-lower ticket prices/yields have also supported demand in Q4. Yield drop is slightly more enhanced this time around, as Q3 yield was quite high; yield would remain strong vs pre-pandemic. Lower costs may lead to yield adjustment; Q1FY24 should be strong, though.



Other Takeaways:

Indigo’s ~500 aircraft order-book places it much ahead of peers, in terms of delivery schedule. New players are seeking more planes. Indigo is extending some leases, to 8 years from 6, while going for wet-lease, etc. Global interest rates have gone up, but airline leases are more reflective of 5-10-year yields, which are relatively more stable.

Indigo currently has 78 domestic destinations (Dharamshala to launch on 26-Mar-2023 as the 78th) and 26 international destinations, with 410 and 75 city pairs, respectively. It has 7 strategic partners. Turkish codeshare is two way, while Qantas would improve brand awareness. Indigo targets improving international brand equity.


Indigo’s fleet will mostly comprise of NEOs (79% NEOs with 23 CEOs, as at end-Q3FY23), with some ATRs and XLRs. Company has further scaled up – pre-Covid, Indigo undertook 1,600 daily flights, which have now increased to 1,800. Indigo saw post-Covid demand boost from Sep-Oct 2022.

Indigo has 2 freighters as of now, with a third expected by Q3FY24. These have payload of 27-ton each. The loyalty program is an important area and its Kai Ching card users have grown by 4.5x, from FY21 to FY23. Indigo plans to tap its total ~80mn customer-base with the loyalty program.

Fuel costs are coming down now, and FY24 should see more moderation. The MOPAG formula for ATF has made pricing more transparent and rationalized the structure, with no excessive volatility.

Company expects the competitive scenario to be healthy, as this drives airlines to improve services. If steady yields are met with healthy PLFs, there is a fairly low chance of any other player pulling them down (through lower ticket prices etc). Indigo intends to increase PLFs to maximize its profits.

Management did not comment on market share (MS) guidance; even before Covid, Indigo’s market share grew to 47-48% in India. International market share would grow on a low base. In India, domestic air-seat per capita is 0.13 vs 0.49 for China and 0.06 for International. The air traffic multiplier is generally 2x GDP, which is strong in India.

Pieter Elbers accepted the CEO role at Indigo, as the company has a strong track record and ambitious plans. The Indian market has a big youth dividend and zeal to travel and connect. Indigo has always had a defined path, which it has effectively executed. Company remains among the top LCC players globally, in terms of affordability, OTP and courteous & hassle-free services, especially considering its large size.

Indigo is not facing any pilot shortage as of now, as the order book is ongoing and everything is planned. It has a well-established pilot program, with steady flow of talent. It is also prepared for challenges. While employee cost would normally grow, it should be inline at the unit level. Employee morale is strong and the company does not see rivals luring away its human resources. A plane generally requires 12 pilots in total and 27-28 crew members.

The normal annual cost escalation for Indigo wrt OEMs is 3-4%. There is natural inflation in the aviation business. Indigo keeps evaluating currency hedging, but has not seen any benefit from this so far, based on the past trend (6-8-year leases). Company targets having natural hedges, one of its steps being international growth.

Digitization (app development, CRM tools, crew planning, network optimization, etc.) is a focus area and would lead to lower cost, better customer experience and fast turnaround at airports (which, in a way, improves airport capacity).

Indigo does have sizeable corporate travelers, though the exact data is awaited, as it includes other categories. Due to strong OTP, corporates prefer Indigo. Further, Indigo is looking at premiumization. It continues to improve services and quality is paramount.

There are different fare-buckets and booking classes. There are routes with a high ticket price (like Mumbai-Bagdogra), but this cannot be stated as a ‘high fare’, given the dynamics; also, the company does not indulge in high pricing to avoid flying any route. Q1 is generally strong in terms of both, pricing perception (and resultant yields) and pax demand (holiday season, etc).


The GoI is supporting the aviation sector by giving a thrust to airport expansions and rationalizing ATF VAT. Airport plans are encouraging (140 currently, to increase to 220 by CY25) and should, more or less, meet the pax traffic demand, though there could be deviations on an annual basis.

Indigo’s gCO2/ASK (emissions) has reduced by 18% from FY16, to 60.6 (lowest in AsiaPac) in FY23. Fuel usage has seen 15% reduction versus Dec 2017. Indigo is active in CSR, while boasting of having the highest number of woman pilots (>600) in the world. It has an efficient risk-management committee.

Management did not comment on the ex co-promoter stake sale, on which it has taken feedback though, and would communicate the relevant matter to those concerned.

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DISCLOSURES:

All Investment, including one made in equities are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from expectations as expressed or implied under this document. Past performance is used to show actual performance for that period of time and in no ways assures similar performance for investments in the future. Wiremesh does not assure any financial goals to be attained, any profits to be made, or losses to be avoided, whether directly, indirectly. Investors must therefore exercise due caution and consult their financial planner and stock broker before making any decisions. This article only incorporates recent stock-related information about the companies from the brokerage report of Emkay Global. Wiremesh, and the author are not liable for any losses caused as a result of decisions based on the article.

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