IndiGo skids 9% on promoter dispute; SpiceJet up 2%. Here's what lies ahead

Analysts have turned cautious on IndiGo post the development and said management distractions could impact Interglobe Aviation's (Indigo) currently strong franchise.

IndiGo puts tech start-ups at the heart of its plan to become global player

Shares of IndiGo extended decline and slipped another 9 per cent in the morning trade on Thursday amid spat between promoters of the company over issues of excessive control and corporate governance. SpiceJet, on the other hand, rose as much as 2.29 per cent. 

At 10:35 am, the stock of IndiGo was trading around 7 per cent lower at Rs 1,304 apiece on the BSE. SpiceJet was ruling half a per cent higher at Rs 120.25 apiece. In comparison, the benchmark S&P BSE Sensex was trading at 38,732 levels, up 175 points or 0.45 per cent.

On Tuesday, Rakesh Gangwal, one of the founder-promoters of IndiGo, wrote a letter to the market regulator Securities & Exchange Board of India (Sebi) to intervene in the matter. Gangwal, who owns 36.68 per cent stake in the listed airline, had raised issues on related party transactions (RPTs) between InterGlobe and companies controlled by co-promoter Rahul Bhatia.

Following the development, shares of IndiGo tanked as much as 18 per cent in the intra-day trade on Wednesday before settling 11 per cent down. 

Gangwal wants the company board to be expanded so that the number of independent directors goes up. Gangwal has also asked the Securities and Exchange Board of India (Sebi) to intervene and rewrite the Article of Association (AoA) to ensure that with 37 per cent stake he gets equal rights in the management of the company — a demand that the Rahul Bhatia camp says would be impossible to implement without 75 per cent shareholder support, said a Business Standard report dated July 11, 2019. READ MORE

Analysts have turned cautious post the development and said management distractions could impact Interglobe Aviation’s (Indigo) currently strong franchise. "We believe, scenarios range from “not good” to “ugly”. While we do not perceive immediate risk to earnings, we believe the market is sensitive to governance issues. Hence, we revise down target FY21E EV/EBIDTAR from 9.0x to 7.5x and the target price (TP) 26 per cent to Rs 1,390 and downgrade to ‘HOLD’," say analysts at Edelweiss Securities. 

On the business front, both IndiGo and SpiceJet have gained immensely after gaining slots of Jet Airways, which went bankrupt in April this year. At the bourses, shares of IndiGo have rallied around 20 per cent on YTD basis while those of SpiceJet have jumped 34 per cent. Going ahead, while most brokerages are bullish on both the stocks, unless IndiGo's management spat gets ugly, they believe SpiceJet has been the largest beneficiary of Jet Airways' domestic slot reallocation. 

For the June quarter, analysts at Edelweiss Securities expect Indigo to continue to clock steady 25 per cent passenger growth YoY bolstered by international operations, SpiceJet's passenger growth growth is likely to surge to 25 per cent due to addition of Jet Airways. The brokerage has buy ratings on both IndiGo and SpieceJet, with the target price of Rs 1,890 and Rs 179 apiece.

Elara Capital, on the other hand, has 'Buy' rating on SpiceJet with a target price of Rs 203 and an Accumulate rating on IndiGo with a target price of Rs 1,927 based on market share gains and strong FY20-21E RASK-CASK margin at Rs 0.3-0.5. RASK stands for revenue per available seat kilometer while CASK means Cost per available seat kilometer.