IndiGo’s steep valuation premium to global peers could clip the stock’s wings

Among the key highlights was that the air travel boom led by the Mahakumbh gathering and an extended wedding season could give a big boost to its profit in the March quarter (Q4FY25). The quarter is likely to be better than anticipated due to higher passenger revenue per available seat kilometre (PRASK) on 17% year-on-year growth in the number of passengers.

Since the Mahakumbh event, which began in Uttar Pradesh on 13 January, the Indigo stock has risen by 25%. In the last year, it has fetched 58% returns, beating the benchmark index, the Nifty 50, by a wide margin.

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The steep surge in share prices has meant that Indigo has become a more expensive airline stock than global peers, with a valuation of EV/EBITDAR of 9.5x based on FY26E, ahead of Air China’s 8.8x, according to a Nuvama Research report dated 19 March. EBITDAR stands for earnings before interest, tax, depreciation, amortization and rent or lease cost of aeroplanes.

Indigo’s valuation multiple is at a significant premium to the average valuation of global aviation stocks at 5.5x, added the report.

International flight path

Indigo is expanding on margin-accretive international routes and increasing its brand awareness. Currently, the airline's capacity as denominated in available seat kilometre (ASKM) (similar to installed capacity in a manufacturing company) in aviation terminology is skewed in favour of the domestic market at 72% for FY25. The remaining 28% is in the international market that is likely to move up to 40% by FY30, the management said at the analyst day meeting.

Also Read: IndiGo bets on overseas flights for growth

International routes are certainly more competitive than domestic ones, with many airlines operating. Interglobe has managed to keep its profitability high by keeping the cost per available seat kilometre (CASK) (excluding fuel and forex cost) low at $3.37. The cost is one of the lowest among the top ten low-cost carriers globally. However, it remains to be seen whether the company is able to maintain the low-cost advantage on global routes even as yields (ticket prices) on those routes might be higher.

Further, the company has guided for early double-digit growth in ASKM capacity and number of passengers in FY26. ASKM growth is expected on the back of getting delivery of an aeroplane per week and a reduction in the number of grounded aeroplanes from more than 60 to around 40.

In terms of passenger growth, the company is hoping for a repeat of FY25, which saw an 11% growth to 118 million. However, the base for FY26 is higher, and the exceptional benefit of higher traffic due to the Mahakumbh in FY25 has to be factored in.

“The 15% domestic industry traffic CAGR in FY15-20 has come off in FY20-25F (3%). While IndiGo is hopeful of 16% CAGR in FY25-30F, we expect a lower 8-10% CAGR," said Incred Research Services Pvt. Ltd report dated 19 March. IndiGo has grown ahead of the industry over the last decade, but we expect it to grow at closer to the industry rate over FY25-30, added the report.

Also Read: IndiGo's 100% stock rally: What comes next?

In short, even if one takes into account Indigo’s strategic growth initiatives, a robust balance sheet and positive tailwinds from benign aviation turbine fuel price outlook, valuations seem lofty. Brokerages Motilal Oswal Financial Services Ltd and Nuvama believe that the stock’s rich valuation does not leave room for a near-term upside in the stock.

Consequently, their target prices for the Indigo stock at ₹4,660 and ₹4,768, respectively, are lower than the current market price of ₹5,097.