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Business News/ Market / Mark-to-market/  IndiGo IPO analysis: a good bet on the Indian aviation story
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IndiGo IPO analysis: a good bet on the Indian aviation story

Given its superior financials, investors are unlikely to fret about higher valuations being demanded in IndiGo IPO

Given the far superior financials, investors are unlikely to fret about higher valuations being demanded in the IPO. Premium
Given the far superior financials, investors are unlikely to fret about higher valuations being demanded in the IPO.

Interglobe Aviation Ltd, which runs India’s largest airline IndiGo, is reportedly looking to raise $400 million ( 2,544 crore) through its initial public offering. This will give it a pre-money equity valuation of about 14,500 crore and an enterprise value of 17,000 crore. That works out to a valuation of about 1.2 times estimated revenue for the year ended 31 March. In comparison, Jet Airways (India) Ltd’s enterprise value is about half the size of its revenue.

But then, compared with Jet’s recurring losses and bloated balance sheet, Interglobe boasts of handsome profit margins and free cash flow generation. For every 100 of revenue, while Jet reported net loss of almost 10 last year, Interglobe reported a profit of 7. Its net debt-equity stands at a mere 0.26 times, while in the case of Jet, it is as high as 2.4 times. In fact, as the chart alongside shows, Interglobe outscores Jet on nearly all counts by a long margin.

Its revenue per available seat kilometre flown last year exceeded costs by about 10%. For Jet Airways, revenue was about 4% lower than costs. Of course, these aren’t apple-to-apple comparisons, since Jet still flies business class on some sectors and its numbers also reflect its international operations. IndiGo, of course, only has low-cost operations, and its international presence is smaller than Jet’s. But it’s worthwhile noting here that IndiGo’s revenue-costs ratio is superior to other low-cost airline operators such as Ryanair and AirAsia.

Its earnings before interest, tax, depreciation and aircraft rentals were impressive at 19.8% of revenues in financial year 2013-14, especially considering the Indian average of 4%. However, Asian low-cost operators averaged a profit margin of 24%. (Comparable numbers are available only for FY14 in Interglobe’s IPO offer document.) Cash flow from operations stood at 1,680 crore, or as much as 16% of revenues in the first nine months of financial year 2014-15. What’s more, it had funds left over after accounting for capital expenditure.

Given the far superior financials, investors are unlikely to fret about higher valuations being demanded in the IPO. So far, an exposure to the aviation sector in India meant poor choices between two highly leveraged companies. Interglobe not only has better financials, it has also grown at a much better pace.

As such, it finally offers a decent bet on the Indian aviation story, especially after Jet’s disappointing 74% drop from its IPO price 10 years ago.

The writers do not have positions in the companies discussed here.

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Published: 01 Jul 2015, 12:23 AM IST
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