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InterGlobe Aviation Ltd, which operates IndiGo, India’s largest airline, proved its mettle with better-than-expected December quarter (Q3FY22) results . Yield, a measure of pricing, rose to a multi-quarter high to 4.41, an increase of 19% year-on-year (y-o-y) and 5.2% sequentially. This came on the back of a rise in domestic demand, which surpassed pre-covid levels, and international air bubble arrangements. Overall capacity deployment in Q3 was at 88% of pre-covid levels.

Fewer restrictions aided sequential capacity increase in available seat kilometre (ASK) by 45%. Load factors were high and cost of available seat kilometre (CASK), excluding fuel, lower. A combination of these factors helped the airline’s Q3 spreads, which is revenue per available seat kilometre (RASK) less CASK, turn positive, though by a whisker, after seven continuous quarters.

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The upshot: IndiGo reported a standalone net profit of 128 crore even as many analysts were expecting a loss. What is more is that the company reckons Q3 performance would have been better if it wasn’t for the adverse impact of the Omicron variant of coronavirus that curbed travel in the latter half of December 2021.

IndiGo has reduced operations now because of the drop in demand as a result of rising covid-19 cases. The management expects capacity in the current March quarter in terms of ASK to reduce by 10%-15% sequentially. It doesn’t help that oil prices are on fire, with Brent crude oil now more than $90 a barrel. In view of such headwinds, the company is likely to incur a loss in Q4.

“We increase IndiGo’s FY22 loss by 6.8% given disruption to demand and yield environment on account of the third covid wave," said Paarth Gala, analyst at Prabhudas Lilladher Pvt. Ltd in a report on 4 February. The brokerage firm expects IndiGo’s net loss for FY22 to be 6,564 crore, which would mean a 12.6% increase year-on-year (y-o-y).

As on 30 September, IndiGo’s negative net-worth was about 4,500 crore. But, there is ample cash. As on 31 December, the company’s free and restricted cash stood at 7,814 crore and 9,505 crore, respectively. This is also one factor that has kept sentiments upbeat for the IndiGo stock despite the pandemic and the consequent losses. The airline also saw domestic market share gains. Small wonder, IndiGo’s shares have risen 31% from pre-covid highs in January 2020.

“The management commentary in the Q3 earnings call will ensure sentiments for the IndiGo stock are favourable from a near-term perspective. Q4 may be soft because of Omicron impact, but assuming the pandemic subsides, the direction for Q1FY23 is looking good," said Ashish Shah, analyst at Centrum Broking Ltd.

The outlook on yields is not bad, either. “Q3 yields are higher than expected. Yields may not expand further, but there is no reason why they should decline, especially given the steep rise in crude oil prices. Moreover, as things stand, the market seems to be absorbing higher yields," Shah said.

Induction of new engine option (neo) aircraft to the fleet would increase fuel efficiency and enable savings on fuel cost. In its Q3 call, the management said that the aircraft utilization during the quarter increased to 10.7 hours/day from 7.7 hours/day in Q3FY21.

As restrictions on international flying gradually ease, the airline expects to reach 13-13.7 hours/day. “We roll forward our target multiple to FY24 and value the stock at 9x adj. EV/Ebitdar, arriving at a target price of 2,050," said Prabhudas Lilladher.

EV is enterprise value and Ebitdar is earnings before interest, taxes, depreciation, amortization and rental. Ahead of the Q3 results, IndiGo’s shares closed 1.7% higher at 1,974 on NSE on Friday.

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