After strong third quarter, IndiGo faces raw viruses and risks

InterGlobe Aviation Ltd, which operates IndiGo, India’s largest airline, proved itself with better than expected results for the December quarter (Q3FY22). Yield, a price measure, hit a multi-quarter high for 4.41, an increase of 19% year-on-year (yoy) and 5.2% sequentially. This happened as a result of an increase in domestic demand, which exceeded pre-covid levels, and international air bubble agreements. Overall capacity deployment in the third quarter was at 88% of pre-covid levels.

The reduction in restrictions allowed a sequential increase in available seat kilometer (ASK) capacity of 45%. Load factors were high and the cost per available seat kilometer (CASK), excluding fuel, was down. A combination of these factors helped the airline’s third-quarter spreads, revenue per available seat kilometer (RASK) minus CASK, turn positive, albeit by a hair’s breadth, after seven straight quarters.

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The result: IndiGo recorded an autonomous net profit of 128 crores even as many analysts expected a loss. Additionally, the company believes third quarter performance would have been better had it not been for the negative impact of the Omicron variant of the coronavirus that curbed travel in the second half of December 2021.

IndiGo has now reduced its operations due to lower demand due to the increase in covid-19 cases. Management expects current March quarter capacity in terms of ASK to decline 10% to 15% sequentially. It doesn’t help that oil prices are on fire, with Brent crude now surging above $90 a barrel. Given these headwinds, the company is expected to incur a loss in the fourth quarter.

“We are increasing IndiGo’s FY22 loss by 6.8% given the disruptions in demand and yield environment due to the third wave of covid,” said Prabhudas analyst Paarth Gala. Lilladher Pvt. Ltd in a February 4 report. The brokerage firm expects a net loss from IndiGo. so that FY22 is 6,564 crore, which would mean a 12.6% increase year over year (yoy).

As of September 30, IndiGo’s negative net worth was approximately 4,500 crore. But, there is enough money. As of December 31, the company’s free and restricted cash amounted to 7,814 crores and 9,505 crores, respectively. It’s also a factor that has kept feelings upbeat for IndiGo stock despite the pandemic and resulting losses. The airline also recorded domestic market share gains. No wonder, IndiGo shares are up 31% from pre-covid highs in January 2020.

“Management’s commentary in the third quarter earnings call will ensure that sentiments for IndiGo stock are favorable in the near term. The fourth quarter may be weak due to the impact of Omicron, but assuming that the pandemic is easing, the direction for the first quarter of FY23 looks good,” said Ashish Shah, analyst at Centrum Broking Ltd.

The return outlook is not bad either. “Third quarter returns are above expectations. Yields may not rise further, but there is no reason for them to fall, especially given the sharp rise in crude oil prices. Also, as things stand, the market seems to be absorbing higher yields,” Shah said.

Introducing new (neo) engine option aircraft to the fleet would increase fuel efficiency and save fuel costs. In its Q3 call, management said aircraft utilization in the quarter fell from 7.7 hours/day in Q3FY21 to 10.7 hours/day.

As restrictions on international flights gradually ease, the airline expects to reach 13 to 13.7 hours/day. “We carry our target multiple to FY24 and value the stock at 9x adj. EV/Ebitdar, arriving at a target price of 2,050,” Prabhudas Lilladher said.

EV is enterprise value and Ebitdar is earnings before interest, taxes, depreciation, amortization and rental. Ahead of third-quarter results, IndiGo shares closed up 1.7% at 1,974 on NSE Friday.

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