IndiGo riding tailwinds in high-growth market

Stable fuel prices, rising rupee, market share gains drive earnings upgrades for stock

Earnings upgrades, market share gains, and strong passenger growth helped InterGlobe Aviation gain 26 per cent over the last month, making it the second-biggest gainer among BSE200 companies. Nearly seven per cent of those gains came on Thursday due to another month of robust passenger growth. The company, which runs an airline under the IndiGo brand, posted a 19.4 per cent year-on-year jump in passenger volumes for March as compared to industry growth of 18 per cent. Its market share has improved 150 basis points over the previous month and by 270 basis points over March 2016 quarter, to 39.9 per cent. 

The company dominates the domestic aviation space. Its closest competitor Jet Airways (including JetLite) has market share of 18 per cent. Jet is followed by Air India and SpiceJet, 13 per cent market share each. Just to give you an idea about the wide gap in volumes: IndiGo flies more passengers in a month than SpiceJet does in a quarter.  

In addition to passenger growth numbers, a near-term trigger would be March quarter results and the management outlook for FY18. ICICI Securities’ analysts highlight the 31 per cent year-on-year increase in passengers. While fuel costs would be much higher than those in the year-ago quarter, analysts believe tailwinds will come back from April-June period. Fuel costs rose 38 per cent year over year and 11 per cent sequentially in March quarter. But now, oil prices have stabilised. These, coupled with costlier rupee, should help check costs.  

The Street will keep an eye on passenger yields (average fare per mile), under pressure over the last two years. Analysts at HDFC Securities believe that, with industry capacity use of 87-88 per cent and expectations of supply additions of 14-16 per cent over the next two years, yields and profitability are expected to improve. They expect annual growth to be 15-17 per cent over next five years (after 22 per cent in the last two years) aided by government policy incentives for regional connectivity and new airports. 

Positive outlook and multiple tailwinds have led to earnings upgrades. According to CLSA, “With fuel prices that continue to fall and a rupee that’s getting costlier against the dollar, earnings prospects have improved.” The research firm has raised net profit forecasts for IndiGo by 1-26 per cent for FY17-19.   

However, with analysts’ target price ranging from Rs 1,200-1,250, investors could wait for better entry points.