InterGlobe Aviation’s (IndiGo) March quarter (Q4FY26) performance was hit by an enormous mark-to-market forex loss of ₹4,823 crore, mainly on aircraft lease liability. Ebitdar (earnings before interest, tax, depreciation and aircraft lease rent), excluding forex loss, declined by 6% year-on-year to nearly ₹6,400 crore, but some of it was anticipated as Q4FY25 had the benefit of increased passenger traffic from the Mahakumbh.
Capacity utilization was down 160 basis points year-on-year to 85.8%. Revenue per available seat kilometre (ASK) decreased by 2.2% to ₹5.15, but the blow on Ebitdar was softened by a 4.9% drop in fuel cost per ASK to ₹1.53.
While Ebitdar performance does not seem like a big dampener, should investors worry about the huge forex loss? Aircraft lease liabilities are long-term in nature and payable over 8-10 years. IndiGo has a net exposure of about $10 billion in terms of foreign liability and for each rupee of depreciation versus the US dollar, the liability rises by about ₹900 crore.
The forex loss occurred due to the depreciation of rupee versus dollar, inflating the liability, but it can reverse if the Indian currency appreciates in future. The real loss will materialize as and when payment towards lease liability is made over the years even though the notional loss has been shown in a single quarter of Q4FY26.
In this backdrop, IndiGo’s investors need to focus on one key parameter: normalized earnings or profit before tax from operations, excluding other income, forex and exceptional items. Normalized earnings fell by 36% year-on-year in Q4FY26 to ₹1,329 crore.
Quarterly normalized earnings are volatile and affected by seasonality, so the annual numbers offer a better picture. FY26’s annualized normalized earnings declined by 28% year-on-year to ₹4,260 crore. This means the current market capitalization-to-normalized earnings ratio works out to 40x. While there is no comparable listed airline of significant scale, IndiGo’s valuation based on FY26 looks steep.
Forecasting normalized earnings for FY27 is a tough task. Aviation turbine fuel (ATF) prices in domestic market are up by 25% in Q1FY27 sequentially, much lower than the over 100% rise in the global market—owing to disruptions in crude oil market in the aftermath of the West Asia war. IndiGo is likely to operate about three-fourth of its flights in the domestic market in Q1FY27, which is due to redirecting some international flight capacity to domestic capacity in the wake of the war, which should mitigate the shock from the surging global ATF prices.
Also, the management has introduced fuel price surcharge that should lead to mid-teens year-on-year growth in per unit passenger revenue in Q1FY27. When questioned in the earnings call, if the growth estimate is higher, the management clarified that the growth number looks magnified owing to muted Q1FY26 when the India-Pakistan conflict had occurred.
On capacity, the management expects ASK to grow 3-4% year-on-year in Q1FY27. Cost control, the other lever of profit growth, is likely to get a push in FY27 under new chief executive William Walsh, who is known to have earned a nickname of “Slasher” Walsh given his aggressive cost-cutting initiatives while at Aer Lingus.
IndiGo’s shares had jumped 6% on the next trading day after his appointment was announced on 31 March. Be that as it may, to justify the steep valuation multiple that IndiGo is enjoying, it must achieve substantial improvement in profit hereon.