IndiGo: not flying high enough
The company's first set of results post-listing has turned out to be mediocre, leaving an awfully sour taste
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Ahead of its initial public offering (IPO), InterGlobe Aviation Ltd’s financials looked elegant. The company’s first set of results post-listing has turned out to be mediocre. The sharp variance has left an awfully sour taste. IndiGo’s shares nosedived on Friday, ending the day nearly 20% lower.
Investors have two major concerns: first, reported profit for the year so far has turned out to be far lower than expectations. Then there is the uncertainty regarding the delay in the deliveries of A320neo aircraft.
The lower-than-expected profit has led to sharp cuts in earnings estimates. Analysts at Kotak Institutional Equities said in a note to clients, “In the light of weak margins in the 9MFY16 period, we have lowered our profit after tax estimates for FY2016E by 21%." Motilal Oswal Securities Ltd has cut its earnings estimate for FY16 by 25%.
The September quarter financial results, also out now, are particularly disappointing even though the quarter is generally weak for the airline industry. IndiGo’s profit for the September quarter was far lower at ₹ 113 crore. The December quarter profit of ₹ 657 crore too wasn’t spectacular considering the company had already earned a profit of ₹ 640 crore in the June quarter. Note that the December quarter is a seasonally stronger one. In fact, IndiGo’s earnings before interest, taxes, depreciation, amortization, and lease rentals (Ebitdar) margins at 38.9% did not show a material improvement from the June quarter’s Ebitdar margin of 37.4%. Ebitdar is a profitability gauge most analysts use for airline companies.
Airlines have been in a sweet spot this year. Thanks to lower crude oil prices, fuel costs fell by over 10 percentage points as a percentage of revenue. But IndiGo had to also pass on some of the gains from lower fuel costs to stimulate demand. As a result, average fares for December quarter fell 14% year-on-year to ₹ 4,517. Analysts at Kotak point out that a similar passing on of fuel cost benefits to passengers was responsible for the drop in revenue and profit in the September quarter.
Revenue per available seat kilometre declined 7% last quarter. “Average fares usually have a link with the biggest element of our costs, which is fuel in our case. So you did see some fares coming down and it happened industry-wide." Aditya Ghosh, president and whole-time director of the company, said in an earnings conference call on Thursday night. “If fuel prices stay the way they are, we don’t see fares going up in a rush", added Ghosh.
Analysts’ gung-ho estimates had assumed, it seems, that the benefits of lower fuel costs will completely flow into the company’s books. The company’s results, therefore, bring a much-needed reality check.
IndiGo had nothing short of a dream listing. Ahead of the results announcement, the stock had risen by as much as 57% compared with its issue price of ₹ 765. Suddenly, investors are waking up to some concerns. The sustainability of such high Ebitdar margins from a long-term viewpoint is one. However, if crude oil remains lower, then there will be some support for such high margins, which seems plausible at least in the near-term considering nobody’s bullish on crude oil these days. Secondly, the depreciating rupee is a worry and can eat into fuel price gains to some extent.
The most important worry is the delay in deliveries of A320neo aircrafts. The delay impacted profitability, say analysts, as the company has already hired staff and taken on additional overheads anticipating an increase in capacity. The company has said that its year-end FY16 target of 111 airplanes may not be met. Motilal Oswal’s analysts have cut earnings for FY17/18 by ~18% to factor in A320neo delivery delays and higher employee costs.
What does the delivery schedule look like? There is no clear answer at the moment. Regarding delivery timelines, Ghosh said that it’s a question better answered by Airbus and Pratt and Whitney—the engine maker. Frankly, investors don’t seem to like that uncertainty.
The writer does not own shares in the above-mentioned companies.
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