IndiGo flies into cloudy skies
InterGlobe Aviation Ltd’s (the firm that runs IndiGo airlines) recent fresh issue of shares fetched the company about Rs2,500 crore. One of the ways in which the airline intends to use this money is acquisition of aircraft.
IndiGo is considering a change in its fleet acquisition strategy. During the June quarter earnings conference call, it had said, “Going forward we anticipate reducing our use of short-term, sale and lease back model and gradually begin the process of owning aircraft with internal funds and maybe some debt.”
It’s worth mentioning here that IndiGo has a comfortable balance sheet. At the end of fiscal year 2017, its debt-to-equity ratio was 0.7 times. According to its June quarter earnings presentation, IndiGo’s debt stood at Rs2,524 crore as of end-June, a bit lower than a quarter ago. It had total cash of Rs10,185 crore, out of which Rs5,189 is free cash.
IndiGo also has ambitions of flying internationally and has expressed interest in Air India. Analysts say that the additional money raised will be useful to meet these goals.
But investors haven’t been feeling upbeat lately, what with the stock down almost 12.4% since it announced better-than-expected June quarter results on 31 July. Not without reason. For one, crude oil prices (influencing a good portion of operating costs of airlines) are not at a comfortable level. Secondly, the company is facing operational issues with its A320 Neo aircraft, which weigh on its growth prospects.
Valuations aren’t cheap. The IndiGo stock trades at 21.3 times this fiscal year’s estimated earnings. Triggers for meaningful appreciation appear limited.
SBICap Securities Ltd believes IndiGo’s change in strategy to tap growing markets would lead to an increase in business complexity, and thus to challenges in the near term. “This coupled with the uncertainty around resolution of engine issues for A320 Neo, and the resultant slowdown in capacity addition, would affect the premium multiples enjoyed by the company in the past,” said the brokerage firm in a report on 11 September.
Yet, there is a silver lining to this cloud. The forthcoming festival season and its impact on the December quarter numbers would be worth keeping an eye on. Recall that demonetisation had cast its dark shadow on IndiGo’s performance during last year’s third quarter financial performance. Accordingly, the base is favourable. The anticipation of a good December quarter performance should offer some support to the stock price.