Here's why Kotak Institutional Equities thinks IndiGo stock may rerate

Kotak Institutional Equities on IndiGo: InterGlobe Aviation Limited-owned IndiGo airline's stock may rerate ahead, believe analysts at Kotak Institutional Equities, on the back of better-than-estimated load factor ahead and improving yields.

The brokerage said gains for its spreads may get amplified if crude remains within a range.  

"Our assessment of trends in monthly domestic air travel across airlines suggests a marked preference for flying IndiGo and supply getting constrained. We value IndiGo at 20X two-year forward earnings and a 6 per cent add-on effect of wide-bodied aircraft, that our estimates don't capture for now," the brokerage said in its report on August 20.

Kotak Institutional Equities has a 'Buy' rating on the stock with a target price of Rs 5,400, suggesting 28 per cent upside from current levels.

Healthy load factor
 

The report stated the airline company has a sustained lead on load factors as its peers falter on customer experience.

"This has happened for seven of the past eight months and is in sharp contrast to the prior period. The prior period is reflective of the optical effect on load factors of adding aircraft with higher seat count (A320NEO and A321NEO)—a greater number of seats per time slot are more difficult to fill. Such a context makes the recent consistent trend of higher-than-industry load factors for Indigo noteworthy," the report read. CLICK HERE FOR PLF FORECAST

The load factor is a metric used in the airline industry that measures the per cent of available seating capacity filled with passengers.

IndiGo peer comparison
 

Additionally, IndiGo is seeing far fewer cancellations than its peers. Also, at this time, supply, and market share for Tata-owned airlines have been stagnant since February 2024. While Airbus is limiting supply to Air India, Akasa has yet to receive a delivery since February 2024. Vistara doesn’t have a backlog.

"The supply situation is likely to get tighter—support from Boeing to Air India potentially ends in December 2024 and Pratt and Whitney (P&W) engine woes for IndiGo will continue in some form through CY2025. The

airline may be well-placed to benefit from improving load factors from the July-September (Q2FY25) and potentially from air fare hikes from Q3FY25, as it leverages enhanced customer preference for flying with it versus peer airlines," the report said.

Focus on Business Class
 

Moreover, analysts at Kotak Institutional Equities believe that customers may continue to prefer IndiGo at the same price point and some may even shift to IndiGo for their business class from Vistara which is on the verge of dissolution.

Another instance is that IndiGo could leverage consumer-centric aspects of business with its frequent flyer program, business class offering, and a revamped intuitive and contextual website.

Considering the above consumer-centric aspects, analysts believe the market should lead to a higher multiple for the dominant incumbent.