Stock Recommendation | InterGlobe Aviation - BUY - Target price : 980

An analysis of top-10 city pairs indicates that Indigo has the highest share of flights in 8 of these routes. We note that while Vistara accounts for only 6% of domestic ASKs, it accounts for a reasonably high 7-16% flight share on 6 of the top-10 city pairs. Acquisition of Jet can give it a much larger share in the key Mumbai-Delhi, Bangalore-Delhi, Bangalore-Mumbai routes, which is important in the context of capacity constraints at Mumbai airport. However, it may also need to consolidate overlapping flights along these routes, which may ultimately provide much-needed impetus to ticket prices on metro routes.

Vistara has the backing of strong entities such as the Tata Group as well as Singapore Airlines, and has not been deterred by losses of ₹ 10 bn it posted over FY2017-18. Acquisition of Jet could catapult it straightaway to the No 2 position – a size at which Vistara would want to run a profitable business. Lowering intensity of forward selling of tickets at cheap fares as well as rationalization of flights on key routes should be positive for the airline industry as a whole. Indigo has a strong head-start as far as operating metrics are concerned, though it will need to look beyond the metro sectors to maintain its growth momentum.

Vistara-Jet could end up with 30%+ share in several key routes, though they may need to rationalize their flight count. Current flight schedules show several Vistara flights at close intervals to those of Jet, which may have to be reworked or reduced.

Jet’s international business – may also appeal to Vistara

India’s international passenger traffic has increased at a CAGR of 8% over FY2012-18. Jet accounts for the second largest share of the Indian passenger market, and may appeal to Vistara particularly as (1) Singapore Airlines may use India as a base to connect to the large Middle East market and (2) via code-share or otherwise, it can potentially increase its share in south-east Asian traffic emerging from India.

Vistara has publicly stated that it aspires to fly internationally, and wants to develop India as a large hub. It currently has a fleet of 19 aircraft, and was anyway targeting to commence its international operations in 2HFY19. Acquisition of Jet thus ties in with its stated strategy.

Vistara incurred losses of ₹9.5 bn over FY2017-18 when crude prices were relatively benign. Post Jet acquisition, we believe it is likely that Vistara would want to drive profitability of the combined entity upwards, and will probably not want to compete aggressively on pricing.

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