IndiGo parent InterGlobe Aviation’s IPO subscribed 87% on day 1

The much anticipated ₹ 3,130 crore initial public offering (IPO) of InterGlobe Aviation Ltd, owner of India’s largest and most profitable airline, IndiGo, was subscribed 87% on Tuesday.

An analyst saw the response as an indication of faith in the Indian aviation story, although it probably has more to do with the company’s own performance and the profits it has declared consistently.

The share sale saw low retail interest on the first day and a second analyst attributed this to the valuation, which leaves little room for so-called listing gains (or a sharp appreciation in the share price on listing).

The largest share sale in the country since 2012 values Interglobe at around $4 billion.

“IndiGo’s very successful IPO, which values the company at $4- 4.2 billion, is a significant milestone for the entire industry and will structurally rerate the sector. IndiGo’s success is more valuable as the market conditions over last 9-10 years have been extremely adverse,” said Kapil Kaul, chief executive officer (South Asia) at aviation consulting firm CAPA India.

He added that he sees more low fare airlines listing. “IndiGo’s valuation also reflects a very strong confidence in the India’s aviation story, especially with massive growth upside for next three to four decades.”

The portion of shares set aside for qualified institutional buyers (QIBs) was subscribed 2.79 times on the first day of the sale. However, only 5% of the shares set aside for individual retail investors and 2% of those set aside for non-institutional investors were subscribed, according to stock exchange filings.

“It seems that the retail portion might see a small amount of oversubscription by the end of the IPO. However, this does not look like a product for retail investors. Retail investors want listing gains, but that is not being seen in the case of this IPO,” said Deven Choksey, group managing director and chief executive officer of KR Choksey Shares and Securities Pvt. Ltd.

“From the fundamental valuation perspective, it does not seem that the stock price could jump up very dramatically on listing. Also, because of the lack of floating stock available in the market post listing, prices are unlikely to get affected beyond a certain point,” he said.

“Whilst we appreciate IndiGo’s efficient operations and management capability to deliver profitable growth in an industry where few have succeeded globally, we find valuations expensive,” domestic brokerage Ambit Capital Pvt. Ltd said in a 21 October note.

Not everyone agrees.

“Over the last 10 years, IndiGo has created a huge gap between itself and the next best, and truly deserves the valuation being ascribed to it,” said K.G. Vishwanath, partner at Trinity Aviation Consultants. “For any long-term investor in any sector, it makes great sense to invest in the market leader, which will grow at 18-20% per annum with a huge margin gap. The valuation of IndiGo is not steep. It’s probably 12-13 times of FY16 earnings. So for me, it’s a great value buy.”

Some domestic brokerages, such as Angel Broking Pvt. Ltd and Aditya Birla Money Ltd, recommended that investors subscribe to the issue at the higher end of the price band, considering the opportunity present in the vastly under-penetrated Indian air travel market.

InterGlobe’s day 1 went better than that of another high-profile IPO that debuted early this month. Coffee Day Enterprises Ltd (CDEL), the firm behind India’s biggest coffee chain, had a slow start on the first day of its share sale. The IPO, which opened on 14 October, witnessed just 14% subscription on the first day. CDEL’s IPO closed on 16 October with an overall subscription of 1.8 times.

The first day’s demand for InterGlobe’s IPO excludes the shares that the airline agreed to sell to anchor investors on Monday.

On Monday, InterGlobe finalized the allocation of 10.87 million equity shares at ₹ 765 per share, the upper end of the price band, aggregating to ₹ 832.03 crore, to anchor investors.

These anchor investors include Fidelity Investments, GIC Pte Ltd, Acacia Partners LP, HDFC Trustee Co. Ltd, DB International (Asia) Ltd, DSP BlackRock India Tiger Fund, Kuwait Investment Authority Fund, Merrill Lynch Capital Markets Espana SA SV, Credit Suisse Singapore Ltd, Harvard Management Co. Inc., Sundaram Mutual Fund and Goldman Sachs India Fund.

The anchor book is that portion of the IPO that bankers can allot to institutional investors on a discretionary basis. Anchor book subscription opens a day before the launch of an IPO and is a barometer of institutional investor interest.

IndiGo, the only domestic airline to be consistently profitable since 2009, has fixed a price band of ₹ 700-765 for the public issue that will close on 29 October.

“A lot of this demand is from the anchor investors, but several non-anchor investors have also put in bids. The demand is pretty strong and we are expecting the QIB (qualified institutional buyer) category to be oversubscribed anywhere from five to 10 times,” said an investment banker involved in the issue. “Retail demand is also decent and we should see the category fully subscribed”, he added, speaking on condition of anonymity.

Separately, InterGlobe Aviation has cut the number of shares set aside for employees. According to a filing by investment bankers, InterGlobe will reserve up to 2.2 million equity shares for staff, down from the 3.2 million shares planned earlier, to meet IPO requirements.

India has the fastest growing domestic aviation market in the world, ahead of China and the US. The number of passengers increased 20.2% in the eight months ended 31 August, compared with the same period a year ago, owing to more flights, fare cuts and faster economic growth, according to the International Air Travel Association.

India is one of the most under-penetrated aviation markets in the world, with around 350 aircraft plying domestic routes. US low-fare airline Southwest Airlines has around twice the number of aircraft.

Citigroup Global Markets India Pvt. Ltd, JPMorgan India Pvt. Ltd, Morgan Stanley India Co. Pvt. Ltd, Barclays Bank Plc, Kotak Mahindra Capital Co. Ltd and UBS Securities India Pvt. Ltd are the bankers to the issue.