INDIGO Q2- Still grounded post lock-down? Analysts predict potential downside of 23%

Air travel has picked up significantly since the lock- down norms were eased but it still remains very weekend focused. The weekday demand for the industry still remains 30%-35% below the pre-Covid levels, however November and December seems to be shaping up pretty well for the industry as people take long holidays during the winter season, along with Diwali vacations. The recovery for international demand is still in a precarious position.

Another detrimental fact for this industry is that the government currently has a cap on the fares. It is expected that this cap will be removed by early next year. According to analysts, the fare prices could fall significantly after the cap is reduced because the airlines focus more on loading more passengers than earning more from one passenger. The airlines will surely lower the fares to attract more and more customers.

The management of Indigo reported that corporate travel is steadily picking up as well and is back to almost 50% of the pre-Covid levels. Indigo being the airlines with the most corporate market share, was the most impacted. After Jet airways failed, Indigo picked up a large number of corporate customers. Due to their comparatively low prices and frequent flights and good connectivity, they were able to capture a large part of this market. But now with the advent of Tata+ Air India, Indigo is in a lurch. Assuming that Tata Group has a huge domestic and international network along with high quality products could lead to Indigo losing a big part of their market share. The company will have to start targeting leisure travel in this scenario. And the company can expect to gain more customers from the bottom end all the while losing customers from the top corporate end.

The biggest cost for the company, jet fuel has been rising since the last few months and currently stands at $95/bbl. Even though the price has been capped by the government, the lower tail of the price is also very high. In Q3 since the demand for fuel might be lower, the government may remove the capping which may in-turn lead to the fuel prices trading at higher levels than the current price. Even the airport costs are on the rise due to the drastic fall in demand because of the pandemic. They have been spending more on infrastructure.

The Q2 results of Indigo were much better than analysts expected. Indigo’s loss narrowed significantly this quarter to Rs.14.4 billion owing to the increase in air travel in the festive season. The company witnessed a per passenger yield as 9.6% YoY at Rs.4.19, which is the highest yield after 2014. A negative net worth of Rs.45 billion was reported by the company as compared to the Rs.1.1 billion at the end of March 2021. In the last 18 months the company has lost almost Rs.104 billion of net worth. The management of Indigo reported that their first priority is to fix the balance sheet of the company.

Talking about the liquidity, the company reported a free cash of Rs.63.5 billion in Q2 FY22 as compared to Rs.56 billion in Q1 FY22. This can be partially attributed to the fact that advanced sales have picked up in this quarter and are expected to continue well into Q3 as well. The debt of the company, excluding operating lease liabilities was down from Rs.47 billion, a Rs.10 billion decrease. According to the CFO, the company raised liquidity worth Rs.12 billion in Q2 FY22.

The company also added 11 new aircraft during Q2 and returned 13A320ceo aircraft too. The company stated that they will not be able to carry out their scheduled plan of returning 100 CEO aircraft this year but the capacity growth is set to resume again in 2024.

On a con call the CEO of Indigo mentioned that Akasa airlines will make make the low cost air travel industry much more competitive and if Tata group decides to launch a low cost airlines then the competition will be tremendous. He also expects the Q3 results to be up by 40% QoQ which is just 14% below the pre-Covid levels. The cargo business is expected to remain very strong owing to the small size of the market and less players.

Analysts have raised their forecasts for the next quarter, keeping in mind the Q2 results. Despite this, a REDUCE call has been given and the price target has been reduced from Rs.1525 to Rs.1300 with a potential downside of 23%.