IndiGo has sufficient cash in hand—free cash of ₹7,527 crore and restricted cash of ₹10,922 crore at end-June
Many companies are scrambling to raise funds to offset the blow to cash flows caused by the pandemic. InterGlobe Aviation Ltd was in the race too, but the company has now said that the probability of raising funds through a qualified institutional placement (QIP) are now 50%. InterGlobe runs IndiGo, India’s largest airline.
At its annual general meeting last week, Ronojoy Dutta, the airline’s chief executive, said IndiGo would prefer to see its revenues increase even as QIP is an option. It has clearly helped that the government recently allowed an increase in capacity.
But another key reason IndiGo may defer or cancel the QIP is that it already has sufficient cash in hand—free cash of ₹7,527 crore and restricted cash of ₹10,922 crore at end-June. It has announced plans to cut costs and improve liquidity.
What’s more, IndiGo has gained market share during the pandemic. Based on the Directorate General of Civil Aviation data, IndiGo’s domestic market share in July stood at 60.4%. Pre-covid, it stood at about 48% in January-February. Some analysts believe the airline could have garnered more share in August. “Flight schedule data suggests that IndiGo may have further gained market share in August from July’s 60% levels as market share in terms of number of flights has increased from July-mid levels," point out analysts from Credit Suisse Securities (India) Pvt. Ltd.
IndiGo’s scale and better financial health helps at a time when smaller airlines are struggling. Varun Ginodia, an analyst at Ambit Capital Pvt. Ltd, said, “We continue to see IndiGo as a key beneficiary of consolidation in the sector and shift of market share from rail to air, given the safety concerns with the former. High liquidity implies IndiGo has fixed cost cover for a year versus 2-5 months for peers. Inducting more cost-efficient fleet and focusing on long-term relationships with lessors/employees imply cost advantage over peers, which was visible in FY20, would only widen."
IndiGo’s shares capture much of this optimism—they are now only about 18% away from their pre-covid highs in January.
True, investors are unlikely to see profits anytime soon. FY21 is expected to be a washout, especially with the net loss in the June quarter coming in at a massive ₹2,849 crore. IndiGo’s FY21 net loss is estimated at ₹4,943.8 crore, based on the median estimate of six analysts polled by Bloomberg. Credit Suisse estimates for full profit before tax break-even, IndiGo needs schedule resumption of 70% at 75% load factors.
While restrictions on capacity have been eased further, domestic airlines are allowed to operate only up to 60% of capacity. The festive season may throw more light on how demand is recovering. It will be a while before load factors reach optimal levels. Investors, however, are clearly betting on long-term gains for IndiGo at the expense of financially weaker competitors.
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