Will Go Air's IPO initiate sector re-rating? Here's what analysts think

The IPO may not garner expected response as the financial position of the entire sector remains precarious given the unabated rise in Covid-19, and relatively higher oil prices

GoAir IPO: The Wadia-controlled ultra-low-cost airline GoAir is likely to join its peers InterGlobe Aviation (IndiGo) and SpiceJet at the bourses soon, as the airline prepares itself for the Rs 3,600-crore initial public offer (IPO). The firm’s debut on the exchanges, however, may not trigger a re-rating for incumbent players, believe analysts, who expect turbulent times for the sector in the foreseeable future coupled with high valuations.

The uncertainty is such that analysts aren’t sure about how well the GoAir IPO may be received by investors. Independent market analyst Ambareesh Baliga, for instance, believes that the IPO may not garner expected response as the financial position of the entire sector remains precarious given the unabated rise in Covid-19, fear of an impending third wave, and relatively higher oil prices.

GoAir incurred losses totalling Rs 31 crore in fiscal 2017-18 (FY18), Rs 387 crore in FY19, Rs 1,271 crore in FY20, and Rs 471 crore in the nine months ended FY21 (9M-FY21). It currently has a total debt of Rs 1,838.9 crore on its books, which it plans to part-pay using the IPO proceeds, the airline's offer document says. Earlier in February 2021, Go Air got Rs 800 crore credit line from banks in a move to help the airline cushion the Covid impact on its fortunes.

IndiGo, meanwhile, reported profit of Rs 2,242.37 crore for FY18, PAT of Rs 156.1 crore in FY19, and loss of Rs 233.7 crore in FY20. Likewise, SpiceJet incurred losses worth Rs 936.5 crore in FY20, Rs 302.4 crore in FY19, but earned profit of Rs 566.6 crore in FY18.

Against this backdrop, G Chokkalingam, founder and chief investment officer at Equinomics Research opines that the sector is not ripe for a re-rating at the moment as despite the aforementioned losses, the stocks are trading at premium valuations.

As per analysts’ estimates, IndiGo is trading at around 30x EV/Ebitda for FY22(E) and at 7.4x for FY23(E). SpiceJet’s EV/Ebitda is seen at 11x in FY22(E) and 5x in FY23(E).

Gagan Dixit and Rachael Alva, research analysts at Elara Capital, have downgraded both, IndiGo and SpiceJet, to ‘Reduce’ from ‘Accumulate’ given the near-to-medium term headwinds.

“For IndiGo, we decrease our FY23E earnings per share (EPS) by 16 per cent and reduce our target price to Rs 1,728 based on 8x FY23E EV/Ebitda. For SpiceJet, we lower our FY23E EPS by 71 per cent and cut target price to Rs 67 based on 5x FY23E EV/Ebitda,” they said.

According to the brokerage, air-travel demand had recovered to 66 per cent of pre-Covid levels by early March. However, the second Covid wave has dented recovery prospects. During May 1-9, air-travel demand remained subdued at 22 per cent of pre-Covid, the report suggests. As a result, the recovery in domestic demand has been delayed by six months, it notes.

For Ambit Capital, the pressure on air traffic in India could continue for another 3-4 months, implying a bottom around August or September 2021. 

Firm crude oil prices pose another risk. According to S&P Global Platts, Brent oil prices are likely to top $70 a barrel in the second half of 2021. Some refineries, it believes, may even cut jet fuel and diesel output as aviation and industrial fuel demand is likely to take a hit in the backdrop of travel restrictions amid the rise in Covid cases.

“The sector also would face additional challenges in FY22 relative to FY21 such as higher fuel cost (per unit fuel cost is up by 25 per cent YoY), yield decline with removal of minimum airfares cap, increased competition as higher capacity allowed for flying amid reduced demand, likely entry of new deep-pocket owners of Air India and Jet Airways (per unit revenue may decline by 7-16 per cent YoY), and ramp-up of Indian Railways operations,” Elara Capital said in a report.

The brokerage expects Passenger load factor (PLF) at a historical low of 52 per cent between May 1 and 9, 2021. Consequently, the delay in recovery could lead to FY22E earnings per share (EPS) losses of Rs 80.5 for IndiGo and Rs 12.6 to SpiceJet.

At the bourses, while aviation stocks have outperformed the Nifty in the last 12 months, they have been underperformers thus far in calendar year 2021 (CY21). (See table)

Meanwhile, Centrum Broking, too, has downgraded IndiGo as it believes valuations at 10x operating profit before rentals (Ebitdar), means that the risk reward is unfavourable.

Ambit Capital, however, sees IndiGo, along with Tata Group's Vistara (unlisted player), as key beneficiaries of the near-term sector disruptions. "SpiceJet and/or Go Air may fail to reach pre-Covid levels anytime soon," it says.