IndiGo  becomes  top  aviation  stock globally as vaccine fuels optimism

Global aviation stocks are flying high this week as positive news of Pfizer’s covid-19 vaccine fuelled hopes of a rebound in air traffic. As it turns out, leading the charge is India’s InterGlobe Aviation Ltd. Its shares are trading close to a 52-week high and comfortably above its pre-covid highs. InterGlobe’s shares are about 1% away from its 52-week high, while Korean Airlines, Wizz Air Holdings, China Airlines and Spring Airlines, who are next in line, are trading about 5-7% lower.

“The recent increase in share price is a function of improving trends in daily traffic for the sector, market share gains for IndiGo and path to recovery in domestic traffic in light of the upcoming festive season and positive developments related to a vaccine,” said Aditya Mongia, an analyst at Kotak Institutional Equities.

Data from Directorate General of Civil Aviation shows InterGlobe’s domestic market share rose to 57.5% in September from 47.9% in January. While it remains to be seen how much of the market share gains will sustain, investors are betting that IndiGo’s fortunes will be better compared to pre-covid levels. Its stock is now about 8% higher than pre-covid highs. “Its all-round focus on customer experience has driven meaningful share gains in a fairly competitive market and bodes well as it prepares to breach pre-covid levels of demand in FY2023,” analysts at Kotak said in a 29 October note.

What’s more, InterGlobe’s better-than-expected September quarter revenue performance has prompted the airline to defer the decision to raise funds through a qualified institutional placement (QIP) to December-end. Given the rate of cash burn in Q2, IndiGo can sustain operations for over a year without a need to raise funds, say analysts. While InterGlobe’s free cash as of September 2020 declined by 20% year-on-year, it is still at a relatively healthy level of nearly ₹7,000 crore. Also, a higher-than-expected share of the revenue from cargo operations has prompted analysts to raise their revenue and earnings estimates lately.

Besides, a recent Bloomberg report said that InterGlobe is in talks with Pratt & Whitney and CFM International Inc. for its next batch of jet engine orders, citing people familiar with the matter. “While this is finalizing engines for an aircraft order that was already placed a year ago, it reflects IndiGo’s confidence in its growth trajectory,” said analysts from Credit Suisse Securities (India) Pvt. Ltd in a report on 6 November.

While the IndiGo stock is benefitting from these tailwinds, it should also be noted that the gush of liquidity has driven up share prices across various sectors. As such, investors would do well to exercise some caution. Note that while Kotak’s analysts raised their target price for the stock at end-October, they pegged its fair value at ₹1,610, which is a notch lower than the current market price of ₹1,620.

Ashwin Ramarathinam contributed to this story.