IndiGo: Lower oil prices, higher yields key to improving valuations
IndiGo’s yields declined 4% year-on-year in the March quarter, comparatively slower than the previous two quarters
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InterGlobe Aviation Ltd (which runs the IndiGo airline) just about managed a decent landing in the March quarter. The good thing is the airline’s yields declined 4% year-on-year, comparatively slower than the previous two quarters (see the chart alongside). Yield refers to pricing and is calculated as passenger ticket revenue divided by revenue passenger kilometre. Yield performance is better than some analysts’ expectations.
At the time of announcing its December quarter results, the company had said its yields in January had declined 10%. In a post-results conference call on Tuesday evening, IndiGo said February and March were better months on the yield front, without quantifying the extent of improvement in each month.
However, the relatively better yield performance during the March quarter hardly helped profitability in a meaningful way. Higher year-on-year average fuel prices took a toll on profits. For instance, even though revenue increased 18.5% to Rs4,848 crore, Ebitdar declined 11.7%. There was about a 1,100 basis points increase in fuel costs as a percentage of revenue last quarter, to 36%.
Ebitdar is earnings before interest, tax, depreciation, amortization, and aircraft and engine rentals. A basis point is one-hundredth of a percentage point.
The upshot: IndiGo’s reported that net profit declined 25% to Rs440 crore despite 59% jump in other income during the quarter.
Further, the airline has decided to buy turboprop planes to enter into regional aviation operations. “IndiGo’s interest in regional aviation is understandable given the government’s thrust on it,” said an analyst who did not want to be named, adding that at this stage it’s difficult to gauge the exact impact on the company. Typically, regional aviation operations enjoy lower margins.
Meanwhile, the InterGlobe Aviation board has recommended a dividend of Rs34 per share, translating into a 3% dividend yield, which should offer some cheer to investors. The IndiGo stock has underperformed the Nifty 50 index in the past year. Yield pressure is one reason. After the March quarter, investors would want to know whether the improvement in yield performance will continue. That will be one of the key parameters to watch for the stock.
Another measure to watch out for would be domestic passenger traffic growth. According to Directorate General of Civil Aviation data, domestic passenger traffic growth was 15% for the month of March. February was relatively slower as well. Note that in calendar year 2016, domestic traffic growth was 23%.
Currently, the IndiGo stock trades at about 19 times fiscal year 2018 estimated earnings per share, based on Bloomberg data. Improvement in yields will offer scope for valuations to improve from these levels.