IndiGo stock hard-lands on negative Q2 surprise

Profit estimates cut; December quarter numbers suggest it will continue to post healthy earnings

A steep cut in the earnings estimates for FY16 of InterGlobe Aviation, which runs India’s largest airline under the IndiGo brand, saw aviation stocks end deep in the red on Friday. The immediate trigger was the lower-than-expected September 2015 quarter (second quarter or Q2) numbers for IndiGo, but what also hit investor sentiment were falling ticket prices amid increasing competition and uncertainty over delay in the delivery of the Airbus320neo. Rahul Shah of Motilal Oswal Securities says the IndiGo price fall was largely on the back of a 20-25 per cent earnings cut for FY16, brought on by higher employee costs for the nine months ended December 2015.

 

While IndiGo’s December quarter (third quarter or Q3) earnings were in line with margins expanding by 580 basis points year-on-year and net profits jumping 24 per cent on the back of a sharp fall in fuel costs, what played spoilsport was the Q2 performance. Net profit fell to Rs 113 crore from the June quarter earnings of Rs 640 crore before recovering to Rs 670 crore in Q3. Margins, too, came in at 25 per cent against estimates of 29 per cent. IndiGo was in the midst of an initial public offering and had not declared the Q2 results earlier. Based on June quarter run-rate, analysts had estimated net profit upwards of Rs 2,400 crore for FY16. Most brokerages have now cut this by about 20 per cent, to Rs 2,000 crore.

Pricing pressure is expected to continue. The IndiGo management has also been circumspect about improvement in yield, which is expected to be subdued as some gains in crude oil are likely to be passed on through rate cuts.

As with IndiGo, which had a good December quarter, SpiceJet, too, reported its best ever profits on steep fall in fuel costs. While sales were up 11 per cent on the back of higher volumes, fuel costs were down 35 per cent. Although rentals were up five per cent, interest costs, too, were down 51 per cent. A steep fall in aircraft delivery expenses also helped SpiceJet report a net profit of Rs 238 crore versus a loss of Rs 275 crore in the year-ago quarter. SpiceJet, thus, beat Bloomberg consensus estimates both on sales and net profit front.

Despite the steep fall on Friday, analysts believe aviation stocks would do well as profitability remains robust thanks to low fuel costs and firm load factors (around 80 per cent).