With its balance sheet in good shape, IndiGo is set to cope with the covid-19 crisis better
Its net worth may have eroded, but the company still has a fair amount of cash on its books
After the covid-19 crisis is over, InterGlobe Aviation Ltd could well be the last man standing. That seems to be the bet investors are taking. After all, what explains the resilience of the stock even as losses have piled up to an extent where the firm’s net worth has completely eroded?
InterGlobe runs India’s largest airline, IndiGo. The June-quarter results (Q1FY22) announced on Tuesday after market hours show losses are higher than forecasted. Its standalone net loss stood at nearly ₹3,180 crore, which is over ₹1,000 crore higher than Ambit Capital Pvt. Ltd’s estimates. With this, the airline’s net worth has now turned negative. At the end of FY21, IndiGo’s net worth was merely ₹71 crore, declining from ₹5,860 crore a year ago.
But IndiGo’s shares fell just 2% on Wednesday on the NSE. What’s more, the IndiGo stock is 11% above its pre-covid highs seen in early 2020. Indeed, investors have so far ignored all the bad news. The argument that supports the stock’s performance is that IndiGo’s balance sheet is in relatively much better shape and the firm is best placed to cope with the ongoing pandemic crisis.
Its net worth may have eroded, but it still has a fair amount of cash on its books. Some also believe that IndiGo would benefit from potential consolidation in the sector as weaker aviation firms find it tougher to survive this extended war against covid-19.
“We believe IndiGo continues to remain better placed than its peers and is likely to emerge stronger post covid given its superior balance sheet ( ₹5,600 crore free cash), which is likely to be further strengthened with a ₹3,000 crore QIP, industry leading cost structure and strong management team," pointed out a report by Prabhudas Lilladher Pvt. Ltd.
Note that IndiGo’s free cash at the end of Q4FY21 had stood at ₹7,100 crore. For Q1FY22, average net cash burn increased to ₹33.4 crore per day, up from ₹19 crore per day in Q4. According to Ambit Capital, weaker-than-expected yields, higher employee costs and lease rentals were key negative surprises in the Q1 results. IndiGo’s employee costs have increased by around 9% sequentially.
Further, the aviation industry has had to grapple with higher crude oil prices, a factor that hurt IndiGo’s profitability as well. Moreover, the second covid wave severely hit traffic demand, impacting revenues for the quarter.
IndiGo said the best way to illustrate the covid demand impact is through monthly revenues over April to July. Revenues for the months of April, May and June stood at ₹1,540 crore, ₹670 crore and ₹960 crore, respectively.
“July is projected to recover back to April levels," said the company’s management in a post-earnings call.
Needless to say, investors would follow recovery in traffic closely hereon, but upsides in the stock could well be limited. Prabhudas Lilladher values the stock at 9 times FY23 adjusted EV/Ebitdar and arrives at a target price of ₹1,630. EV is enterprise value. Ebitdar is earnings before interest, tax, depreciation, amortization and lease rentals.
The IndiGo stock now is marginally higher at ₹1,667.45 apiece.
Meanwhile, JM Financial Institutional Securities Ltd has a ‘sell’ rating on the stock with a target price of ₹1,260. The broker said in a report on 27 July: “IndiGo’s share price at current market price not only factors in the improving (expected) momentum in passenger demand but also factors in a favourable change in competitive landscape, ignoring the sharp rise in Brent and the adverse impact on cash flows."
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