Turbulence at IndiGo gets far worse
IndiGo’s disastrous March quarter results close on the heels of a mysterious resignation by Aditya Ghosh is clearly more turbulence than what investors can handle
InterGlobe Aviation Ltd’s investors were still recovering from the sudden resignation of Aditya Ghosh, IndiGo’s de facto chief executive officer (CEO). Now they need to grapple with another shock. The company’s yields declined as much as 5.6% in the March quarter, in stark contrast from the first three quarters of the year, when yields had risen.
And Ebitdar, a key measure of an airline’s profitability, fell 16% year-on-year last quarter. In the first three quarters of the year, Ebitdar had risen 38%. Ebitdar is short for earnings before interest, tax, depreciation, amortization and aircraft lease rentals.
IndiGo’s disastrous results close on the heels of an unexpected resignation by its CEO is clearly more turbulence than what investors can handle. Expect the airline’s shares to continue their descent when trading resumes on Thursday.
“Currently, we are seeing yield pressures in the industry. We saw that in the 0-15 day booking window, the fares are materially lower compared to a year ago. This is typically high yielding traffic and consequently, our yields have been impacted more than expected and that is in spite of increasing fuel prices,” the company said in a call with analysts. The pressure on yields has continued in April, it added.
While the drop in yields came as a complete surprise, some pressure on Ebitdar was expected thanks to the rise in crude oil prices. Average fuel prices rose 11.6% on a year-on-year basis. IndiGo’s fuel costs on a per unit basis rose by about 10%, demonstrating some cost control. Even so, fuel costs rose 421 basis points as a percentage of revenues over the same period last year . So, even though load factors were a robust 89%, the benefits of that were negated owing to these two variables.
Profit margin on a per unit basis (RASK-CASK) was weak at Rs0.10 per available seat kilometre (ASKM) compared to Rs0.44 per ASKM in the March 2017 quarter. RASK is revenue per ASKM and a measurement of unit revenues, whereas CASK is cost per ASKM and a measurement of unit costs for airlines.
The company’s reported net profit declined a whopping 73% to Rs118 crore. Profits were way below expectations. Edelweiss Securities Ltd and SBICAP Securities Ltd were expecting IndiGo to report a net profit of Rs377 crore and Rs487 crore, respectively.
It’s worth noting here that IndiGo’s other income of Rs258 crore saved the day. Else, the airline’s Ebitda of Rs130 crore was not enough to cover its interest and depreciation costs worth Rs93 crore and Rs129 crore, respectively.
Needless to say, after the March quarter results, analysts will rush to clip their earnings estimates for this year. And considering that IndiGo shares trade at a healthy 18 times earnings, there seems to be ample room for downside, what with the triple whammy investors are having to deal with—a change in leadership, higher fuel costs and now lower yields.
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