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Inflation worries cloud IndiGo’s flight path

Q4 was impacted by the Omicron Covid wave, which hampered demand in the beginning of the quarter. While demand rebounded later on, higher aviation turbine fuel costs and the depreciating rupee weighed on profitability. (MINT_PRINT)Premium
Q4 was impacted by the Omicron Covid wave, which hampered demand in the beginning of the quarter. While demand rebounded later on, higher aviation turbine fuel costs and the depreciating rupee weighed on profitability. (MINT_PRINT)

  • Amid a strong demand scenario, IndiGo sees increase in capacity in the current fiscal year
  • Yield, a measure of pricing, improved sequentially for IndiGo in both April and May

InterGlobe Aviation Ltd management’s strong commentary on business outlook seems to have outweighed the enormous 1,680 crore reported net loss incurred in the March quarter (Q4FY22). The company runs IndiGo, India’s largest domestic carrier by marketshare.

The demand environment is strong with leisure and corporate travel picking up. Further, the guidance on capacity in terms of available seat kilometers (ASK) is heartening. The airline expects roughly 13-17% growth in capacity this financial year vis-à-vis FY20, a pre-covid year.

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Corporate travel has staged a healthy recovery and surpassed pre-covid levels in April and May, the management said in the earnings call. This is in contrast to the general expectation as virtual meetings and conferences were foreseen to replace physical interactions.

Investors were thrilled, taking the shares of the company 10% higher on Thursday on NSE.

In Q1FY23, capacity is expected to rise by 150% year-on-year (y-o-y). True, the growth is helped by a lower base in Q1FY22, which was a fallout of the second wave of covid. Even so, a 150% rise implies ASK of 28 billion in Q1FY23, which will be a multi-quarter high.

Additionally, the resumption of international travel bodes well. IndiGo is now operating more than 90% of its pre-covid international flights. It expects the share of international capacity to grow from 25% before the outbreak of coronavirus to 40% in the next five years.

Yield, a measure of pricing, also remains healthy, having improved sequentially in April and May. In Q4, yield was steady sequentially

“It is leveraging its strong network and choices for unique locations it services to enhance the share of customers booking in the 15-day window in the metro-to-non metro journeys. Its yield thus remained superior to its peers that are focusing more on metro-to-metro routes," said analysts at Kotak Institutional Equities in a report on 26 May.

These factors augur well, but the price of aviation turbine fuel, which forms a sizeable portion of operating expenses, have risen sharply. Crude oil prices have softened from their peak, but are still at an uncomfortable level. The weakening rupee is a headwind for profitability.

In Q4, cost per available seat kilometer (CASK) increased by 24% y-o-y and 19% sequentially. Overall, Q4 results were also hurt due to the impact of the Omicron wave of coronavirus. This meant IndiGo’s spreads (revenue per available seat kilometer less CASK) slipped into the negative territory, as per its presentation. Spreads had turned positive in Q3 after seven quarters. IndiGo had posted a net profit of 128 crore in Q3

As the carrier modernizes its fleet, fuel costs can be saved to an extent. However, analysts at Reliance Securities expect higher losses in H1FY23 because of ongoing challenges. “The steady improvement in profitability would result in the net worth turning positive in FY24," said analysts at Reliance Securities in a report on 25 May.

As of FY22 end, IndiGo had a negative net worth of around Rs6,000 crore and free and restricted cash of Rs7,763 crore and Rs10,464 crore, respectively. This strong cash position augurs well amid high competitive intensity.

“However, the resurgence of airlines (such as Air India and SpiceJet) and upcoming Akasa along with established Jet Airways would reduce IndiGo’s market share," said analysts at Motilal Oswal Financial Services in a report on 25 May. IndiGo’s market share was 59% in April.

Moreover, potential resurgence in covid cases or demand disruption is undesirable for the stock, which is nearly 24% lower from its 52-week high seen on 16 November.

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