Pressure on IndiGo's yields to continue

Passenger volumes and market share of the aviation company have improved

The InterGlobe Aviation stock has gained 12 per cent over the past few trading sessions as a result of strong passenger growth and market share gains. In July, passenger volume grew 40 per cent, load factor by 520 basis points (bps) and market share by 407 bps, compared to July 2015.

The company also increased capacity with available seat kilometres (ASKs) growing faster than its guidance. ASKs increased 28 per cent year-on-year in July, against the management’s guidance of 25 per cent for the quarter ending September. The company achieved ASK growth of 25 per cent in the June quarter, while the guidance was for 23 per cent.

Load factor (capacity utilisation) and market share trailed those of peers in the June quarter. The former fell 470 bps in the quarter year-on-year (y-o-y), even though average fares fell 11 per cent as competitors operated at lower fares. While its load factor was 77.9 per cent in June, this rose to 83.6 per cent in July. Analysts at Kotak Institutional Equities (Kotak) say the July performance is a reflection of the management’s aim to improve market share and load factor by matching the aggressive pricing of peers for the rest of FY17.

However, analysts at ICICI Securities say low fares cannot be the only explanation for the jump in passenger traffic, considering that July is traditionally a weak month. The performance, according to them, establishes the underlying fundamentals of the domestic market. Analysts say their assumptions of domestic supply lagging growth is panning out, and this gap will increase with strong demand in the December and March quarters and supply side adjustments pointing to a slower pace of capacity addition than expected.

While the company has gained higher market share over the past year even as peers Jet Airways and Air India are constrained for capacity, the key for investors is whether increased load factor will be enough to negate falling fares and yields, the latter being a key profitability indicator.

Analysts at Kotak say while the strong passenger volume growth in July is encouraging and ahead of estimates, it is most likely at the expense of yield. It estimates IndiGo’s yield to fall five per cent in FY17 as all major players are likely to continue their aggressive discounting strategy. In addition to volume growth, a recovery in yield, according to them, is a key near-term trigger for the company’s stock price.