IndiGo turbulence: Street cautions investors against checking in

The InterGlobe Aviation (IndiGo) stock extended its losses for the second consecutive session, losing 13 per cent on a cumulative basis. The spat between promoters could see the stock drop further before it stabilises, said analysts.

While near-term triggers are the June quarter numbers, brokerages have advised against taking fresh exposure to the stock despite the sharp correction.

An analyst at a domestic brokerage said: “Unless there is visibility on the outcome of the feud between the promoters, investors should refrain from taking exposure. Given the fight for control, this will take time to play out. The stock is unlikely to see a sharp rebound anytime soon.” Brokerage downgrades mean the price-to-earnings ratio has corrected from 19.3 times a week ago to 16 times now — a fall of 17 per cent.

Jal Irani and Vijayant Gupta of Edelweiss Securities say that at 7.2 times its enterprise value to operating profits prior to rentals for FY20, the stock is at a 100 per cent premium to its Asian peers. The brokerage has cut its target price by 26 per cent to Rs 1,390, and reduced its FY21 valuation multiple by 16 per cent to 7.5 times. The stock is trading at Rs 1,354.85.

Analysts added that IndiGo was getting premium valuations for the flawless execution that helped it garner about half the domestic aviation market, with the top management and promoters offering coherent leadership.

The accusations by the Rakesh Gangwal group have led to fissures among promoters and could puncture the growth engine. Edelweiss believes the need for management focus is even higher now, given that IndiGo is moving from a purely domestic low-cost carrier market to a fiercely competitive global arena.

The bear case scenario is —corporate governance issues take a turn for the worse and ‘irregularity’ is detected, though the chances of the same are low, say analysts. However, there could be near-term overhang if a promoter were to sell out his stake.

While the void left by Jet Airways is aiding yields and the bottom line of IndiGo and SpiceJet, the Street is betting on SpiceJet to offer more upside in the near term.