Interglobe Aviation: Buy on a dip for the long haul, say analysts

The weakness in the stock, analysts say, is a knee-jerk reaction to the news of its president, Aditya Ghosh, unexpectedly quitting on Friday. Going ahead, oil prices, Q4FY18 results will dictate trend

Interglobe Aviation, the parent company of IndiGo, ended 0.6 per cent lower at Rs 1,400 levels on the NSE, reacting to the news of its president, Aditya Ghosh, unexpectedly quitting the company in post market hours on Friday. By comparison, the Nifty50 index gained 0.4 per cent to 10,739 levels. 

Analysts say the fall as a knee-jerk reaction to the news. Surprisingly the stock, as if anticipating the move, had lost over 6 per cent in trade ahead of the announcement on Friday.

“The change in management will have a limited impact on the stock. Naming of a successor will lend some stability to the counter,” says A K Prabhakar, head of research at IDBI Capital.

Over the past year, Interglobe Aviation has outperformed its peers and rallied nearly 27 per cent as compared to 20 per cent rise in Jet Airways and a 15 per cent up move in the Nifty50. Thus far in calendar year 2018 (CY18), it has outrun its peers by rallying around 17 per cent, as compared to 25 per cent fall in Jet Airways. Nifty50, during this period, rose around 1.5 per cent.

IndiGo, analysts say, has been benefiting from a steady increase its market share despite operating in a competitive industry amid a rise in domestic air passenger traffic.

According to a recent report by Motilal Oswal Research, the passenger growth for the aviation sector has been in double digits since the last 44 months. Domestic air passengers in India grew 28.2 per cent year-on-year (y-o-y) to 11.5 million in March 2018 and 24 per cent year-on-year in the January – March 2018 quarter (4QFY18), it says. 

During March 2018, IndiGo’s passengers grew 26.7 per cent (y-o-y) in March 2018 and 24 per cent (y-o-y) in 4QFY18. The airline’s passenger market share stood at 39.6 per cent in March 2018 and 39.8 per cent in 4QFY18 (versus 39.6 per cent in Q3FY18), the Motilal Oswal report suggests.

The sharp run in Interglobe Aviation since the past year and the surge in crude oil prices (up 42 per cent since April 30, 2017) are now making analysts cautious on this space.

“The road ahead for aviation stocks depends on how crude oil prices play out. If they remain above $75 a barrel (average for one quarter), the financial performance of all airlines will come under pressure going ahead. Investors can buy if the stock corrects around 10 per cent from the current levels,” Prabhakar adds.

Gaurang Shah, head investment strategist at Geojit Financial Services, too, believes that one individual exiting will not have any material impact on the company. “We remain positive on the stock and suggest investors buy on a decline from a long-term perspective,” he says.

For Q4FY18, analysts expect Interglobe Aviation to report a subdued performance, as a part of its fleet was grounded during the quarter due to safety concerns. 

Analysts at Edelweiss, for instance, peg the revenues for the recently concluded quarter at Rs 59,653 million (up 23 per cent y-o-y), core profit after tax at Rs 3,771 million (down 14.4 per cent y-o-y) and earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs (EBITDAR) of Rs 14,927 million (up 12 per cent y-o-y).