IndiGo: Robust load factor, capacity to limit downside

Higher oil prices and rupee depreciation to impact rivals more than IndiGo

Given market share gains and higher capacity addition, InterGlobe Aviation, which runs the IndiGo airline, is better placed than peers to capture a larger chunk of robust passenger growth going ahead. The company posted a 43% year-on-year growth in passenger volumes for October and November against a sector growth of 23%. IndiGo’s passenger market share, which was under 40% between March and September, thus stood at 42% for October and November.
 

It has also been adding more capacity than its own projections over the June and September quarters. In October and November, too, the capacity or available seat kilometres was up 34% compared to the guidance of 30% for the quarter. Given that IndiGo has hit the 28-million mark of passengers flown till November of FY17, ICICI Securities believes there is potential upside to the 43-million estimate for the financial year. Ansuman Deb of the research firm says IndiGo possesses the lever of volume addition unlike others, which can insulate some of the company’s earnings even under a scenario of lower fares and higher crude oil prices. The higher passenger load factor (87.9% in November and 85% in October), according to Deb, can provide additional safeguard to the earnings of IndiGo through increase in top line as well as margins.
 
In comparison, volume levers for the other two airlines are limited given the recent trends with SpiceJet and Jet increasing capacity by 13% and three%, respectively, in the January-November 2016 period compared to 30% for IndiGo. This will only improve as IndiGo inducts Airbus A320 Neos.
 
The Street will, however, focus on yield performance, which has been under pressure across airlines given stiff price competition. What aggravates this is the higher cost base given the rise in crude oil prices and rupee depreciation. While airlines have thus far preferred higher load factor at the cost of yields, analysts say any further pressure on yields on account of rising oil prices could be counterproductive.
 
Analysts at JPMorgan say in case yields decline further, with higher operating margins, IndiGo will still have the bandwidth to absorb the price decline; whereas given their narrow margins (supported by oil price decline in FY16), profitability for Jet and SpiceJet could likely slip back into the red. Further, given that the Neos are expected to be 14% more fuel-efficient (over existing A320s), it should help IndiGo save on the costs if oil prices increase further.
 
While the stock, which is trading at 8.5 times its FY17 estimated enterprise value to Ebitda, is at a premium to peers, this is justified given the airline’s cost-efficient operations, higher volume growth and a stronger balance sheet. Investors can accumulate it at lower levels.