Analysts bet on IndiGo, SpiceJet despite travel curbs amid Omicron spread

However, near-term concerns will continue to weigh on the stocks as Omicron spread puts a spanner on the growth trajectory, say analysts

Shares of aviation companies — InterGlobe Aviation (IndiGo) and SpiceJet — have plunged sharply on the bourses over the past one month as a fresh spurt in Covid cases due to the Omicron variant prompted travel restrictions worldwide.  Back home, India decided to defer the resumption of international passenger flights, at least, till January 31, 2022. 

Given this, the shares of IndiGo and SpiceJet tanked 8 per cent and 19 per cent, respectively, during the period, against the BSE Sensex’s nearly 2-per cent fall.    

However, Gagan Dixit and Reena Narang, research analysts at Elara Capital, recently upgraded ratings on both these stocks and revised upward their one-year target prices on the back of “managed turbulence”.

“The aviation sector seems set for a strong revival in the third quarter (Q3) of 2021-22 (FY22), fuel­led by demand revival to 85 per cent of pre-Covid levels in Decem­ber and airfare near two-year highs. We believe strong 2023-24 (FY24) gross domestic product (GDP) growth will continue to prop domestic passenger demand,” 

th­ey said in a report dated December 22.  The number of weekly average daily fliers stood at 360,000 in the week ended December 18, relative to 358,000 at the end of the previous week, reveals the data by ICICI Securities.  

On a monthly basis, nearly 10.5 million domestic passengers travelled by air in November, up 17.03 per cent, from 8.98 million who travelled in October, showed the data by aviation regulator Director­ate General of Civil Aviation. While IndiGo carried 5.71 million passengers, a 54.3 per cent share of the domestic market, SpiceJet flew 1.07 million passengers, accounting for a 10.3 per cent share of the market. 

Against this backdrop, Dixit and Narang have upgraded IndiGo to ‘Buy’ from ‘Reduce’ and SpiceJet to ‘Accumulate’ from ‘Reduce’. The target prices have been revised to Rs 2,252 and Rs 70, from Rs 1,728 and Rs 67, respectively.    

Moreover, the correlation between the sector’s growth and the country’s GDP further comforts analysts. According to Elara Capital, the pre-Covid data from the first quarter of 2016-17 through Q3 of 2019-20 (FY20) shows that real aviation demand grew 2.3-2.9x that of GDP.  

“Thus, if Covid is fully contained by 2022-23 (FY23), then FY23 and FY24 real demand may grow 19 per cent and 17 per cent, respectively, on Elara’s FY23 and FY24 GDP growth estimates of 8.1 per cent and 7.5 per cent, respectively,” they pointed out. 

The other comforting factor, says Harsh Patidar, research analyst at CapitalVia Global Research, is the valuation in the space. IndiGo remains his preferred bet since the stock has corrected 25 per cent from its all-time high of Rs 2,380. Patidar expects the stock to retain these levels in the next few months. 

“IndiGo is trading at a 30 per cent discount over FY24E enterprise value to earnings before int­erest, tax, depreciation, and amortisation (EV/Ebitda). This implies that the stock may be rerated when Covid-hit demand will see sustained recovery in FY23,” added Elara Capital’s report. 

For SpiceJet though, steep discounts indicate additional survival concerns, cautioned the brokerage. It is trading at a 62 per cent discount over the historical mean of 9.2x two-year forward EV/Ebitda and at a 47 per cent discount over the historical mean of 7.2x one-year forward EV/Ebitda.  

That said, near-term concerns will continue to weigh on stocks as Omicron puts a spanner in the growth trajectory, say analysts. 

“The current price bakes in most positives and, with near-term uncertainty due to a possible spread of the Omicron variant, we recommend awaiting better entry points,” says Paarth Gala, analyst tracking the sector at Prabhudas Lilladher. He maintains a ‘Hold’ rating on the stock, with a target price of Rs 1,950. 

Those at Edelweiss, too, have a ‘Hold’ rating on both stocks, with target prices of Rs 70 and Rs 1,986 at 8x FY23E EV/Ebitda ratio.  According to industry body CAPA — Centre for Aviation, domestic air traffic is estimated to recover by 70 per cent year-on-year in FY22, but still remains 30 per cent lower than FY20. It will recover to pre-Covid level not before the second half of calendar year 2022 due to the Omicron’s impact. 

“International travel plunged due to the travel ban and will remain 70 per cent lower (versus FY20) even in FY22, with likely normalcy by FY24,” the body said.  

On the cost front, CAPA India believes cost optimisation might not be possible since airlines have already taken measures to cut do­wn both fixed and variable costs. 

“Fare-cap regulation is expected to be removed from the fourth quarter of FY22, but removing cap/floor may be more challenging for airlines than it was to introduce them as it would decrease yields,” it added.  

Competitive pressure from Air India, Jet Airways, and Akasa Air may also be sentimentally negative for listed players.