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  • Company update: InterGlobe Aviation — Buy — TP Rs.1,430

    InterGlobe Aviation — the company that primarily operates IndiGo — has suffered in the exchanges recently due to sharp increase in ATF (aviation turbine fuel) prices, a weak rupee and a churn in the top management.

    But we believe the turbulence is temporary.

    The stocks will shrug off the current slump once the impact of strong passenger volume is felt after five to six quarters and rival airline stop providing high ticket discounts. We also feel that the recent inclusion of expats in the top brass may be the company’s strategy to aggressively expand its international market.

    Although the medium-term forecasts have been revised, the company’s robust market share and a higher yield are expected to reap dividends in the longer run.

    Key Highlights

    • A 14% increase in ATF prices and a weak rupee has resulted in IndiGo’s stocks sliding by 16% in the last three months. The current share price revision provides a window of opportunity for investors to buy with a long-term outlook.
    • The slump in the aviation sector can also be attributed to rival airlines’ policy of higher discounts. But this trend is set to change as other airlines have now matched IndiGo’s fuel surcharge per ticket of Rs.200-400. The other airlines have also increased the baggage charges, signifying a rise in the average yield once Q3 kicks in.
    • New faces have entered the top brass, with Greg Taylor and William Boulter taking over from Aditya Ghosh (former president) and Sanjay Kumar (ex-chief commercial officer) respectively. These appointments suggest the company is planning a broader presence in the international market.
    • The FY2019-21 earnings per share (EPS) forecast has been cut by 5-10%, but the long-term prospects remain undiminished as crude prices are likely to hover between US$67.5 and US$72.5 in the next two financial years.

    Valuation & outlook

    The bottomline is that the rebound will take a few quarters as the yields (the fare of passenger per mile) usually take that much time to catch up with the rising crude prices. The full report (see below) shows how yields took five-six quarters to catch up with the high ATFs between 4QFY15 and 4QFY16.

    All in all, we believe that the expected expansion of Indigo’s fleet size, the increase in passenger volume (revenue per available seat-kilometer and cost per available seat-kilometer) and growth in ASK (available seat-kilometer) in the next two financial years are indicators for a structural long-term growth.

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