IndiGo IPO opens today: Should you invest?

Here is a quick compilation of what the top brokerages suggest

IndiGo's parent, InterGlobe Aviation, has hit the capital markets today with its initial public offer (IPO) to raise Rs 3,018 crore. It has set a price band for the public offer at Rs 700 – 765 and the offer will close on 29 October. On Monday, IndiGo raised Rs 832 crore from 43 anchor investors, ahead of its IPO.

Earlier, the size of Offer for Sale (OFS) by the promoters was reduced to 22.82 million, as against a plan to offload 26.11 million shares.

So should you invest in Indigo IPO or will it be a better strategy to skip now and invest at lower levels in case the market corrects?
 

Here is what the top brokerages suggest:

Ambit

Whilst we appreciate Indigo’s efficient operations and management capability to deliver profitable growth in an industry where few have succeeded globally; we find valuations expensive. At 10.2x FY15 EV/EBITDAR (higher end of peer sector range), the proposed issue price fully factors profits on aircraft trading and lower than industry aircraft maintenance costs in perpetuity plus the benefits of lower crude prices and mid teen volume growth over the next 10 years.



Investors must factor in the risks that (a) lower crude prices could make A320neo less attractive; (b) risks to leasing costs in the event of rate hike in US; (c) slowdown in China and impact on global aircraft demand; (d) regulatory risks to market share. We see the fresh issue as a masked OFS given high dividend payout in 1QFY16.

IIFL

The IPO is priced at rich valuations compared with Indian peers SpiceJet and Jet Airways (~0.7x EV/sales each). However, promoters have withdrawn all of the net worth year?after?year in the form of dividends leaving no retained earnings as on 30th June 2015. So while operating efficiency of the airline is high, investors get balance sheet with negative net worth and net debt of ~Rs 1,300cr. Their post IPO money will fund all expansion. In this context, valuation at EV/ sales of 1.9x?2.1x, leaves little on the table for retail investors.



IAL’s strong promoter background, significant growth potential and robust key metrics instills confidence in the business model. However issue looks richly priced and near term upside if any appears limited and those looking purely for listing gains may not be excited. However, investors with long-term horizon must monitor stock post listing for attractive entry points.

Angel Broking

We expect the company to report strong growth going forward and outperform competition in terms of market share gains. At the upper end of the price band, IndiGo is valued at 2.1x EV/Sales and at a P/E of 21.3x (FY2015). The company is not comparable to domestic peers on P/E basis as most of them are loss making while the premium on EV/Sales basis is warranted due to superior operating performance and profitability.



We have compared IndiGo to its like to like international peer Ryanair, which trades at 3.2x EV/Sales and at a P/E multiple of 20.6x (FY2015). We believe that the valuation of IndiGo is justified, considering the opportunity present in the vastly underpenetrated Indian air travel market. IndiGo is better placed than its peers to capture higher market share on the back of its proven Management track record, continuous fleet addition and with its sustainable profitable business model. Hence we recommend a “Subscribe” to the issue at the higher end of the price band.

Equinomics Research & Advisory

ATF is a major cost component for all airline operators. As on FY2015, the fuel cost as a percentage of sales stood at 41.3% for Indigo. Prior to September 2014, fuel expense as a percentage of sales was in the range of 49.4%. Going forward, we expect lower crude prices and consequently lower ATF prices to lead to a decline in airfares, which in turn would possibly boost air traffic volumes. We expect that improving penetration level will provide an opportunity to Indigo to capture market share as it is expanding its fleet size from currently 97 to 158 by FY2108E.

The stock is valued at 19.5x its FY2015 EPS of Rs.35.8 at the lower price band and at 21.4x its FY2015 EPS at the upper end of the price band. We recommend a “Subscribe” to the issue even at higher price band. We find, for a market leader in the aviation industry, a PE multiple of 21.4 at higher price for FY2015 quite attractive.

Sharekhan

On the valuation front, the company looks expensive comparing with most of its peers in the Europe, the Middle East and Africa (EMEA) and American regions. Further, comparing EV/EBITDA and P/E multiples with the players in the EMEA and American regions, the company is priced higher. Although, the company’s aggressive growth strategy, strong balance sheet, dominant market share and operational efficiency among global peers is unquestionable, but we believe the valuation factors all these into account.

Key investment positives: Largest domestic passenger airline in India; Aggressive fleet expansion strategy; Profitable airlines with free cash flows and young fleet of aircrafts. Key risks: Negative net worth as on June 30, 2015; Delay or cancellation of aircraft purchase agreements; Regulatory risk and limit to increasing market share; Depreciation of rupee against dollar


Anand Rathi

IndiGo is India’s largest passenger airline with a 33.9% and 37.4% market share of domestic passenger volume for fiscal 2015 and the five months ended August 31, 2015, respectively, according to the DGCA report.

In light of Indigo’s market leadership position, cost competitiveness, and a low-cost carrier (LCC) business model along India’s aviation potential makes Indigo one of the consistent performer & growing potential in this industry. On valuation front company is trading at 6.8xs EV/EBITDA and 1.6xs EV/Sales for FY16. Also on annualized basis Earning for FY16 comes around 10xs which is reasonable. Thus, this offer is worth considering for investment on a short and medium term basis. Hence, we recommend “Subscribe” to the issue.

As of March 2015, company has proposed dividend of Rs 1002.9 crore, the proceedings of which has been utilised from reserves and surplus. Therefore, Balance of Reserve and Surplus as at 30 June 2015 shows negative and has resulted in negative net worth.