IndiGo: This aviation stock surged nearly 80% in 8 months. Is it still a ‘buy’
InCred Equities maintains 'reduce' rating on IndiGo due to high operating costs offsetting strong tariffs. Concerns include rising salary expenses and increased airport costs, impacting profitability. Target price raised to ₹2,400. IndiGo reported a net profit of ₹30 billion for 4QFY24.
Shares of InterGlobe Aviation, the parent company of India's largest airline, have been on a winning spree over the last eight months, appreciating from ₹2,381 apiece to the current trading price of ₹4,271, translating into a gain of 79.37%.
In the previous trading session, the stock crossed the ₹4,500 mark for the first time to hit a new record high of ₹4,529 apiece. Going forward, the stock may not extend its upward journey, according to projections made by InCred Equities.
The brokerage in its latest report has retained its 'reduce' rating on InterGlobe Aviation, pointing out that while the airline has benefited from strong tariffs, these gains are being largely offset by high operating costs.
The brokerage highlighted concerns about rising salary expenses and increased costs associated with airport operations, which are putting pressure on the airline's profitability.
Despite the robust revenue growth driven by higher fares, the elevated cost structure remains a significant challenge, leading InCred Equities to maintain a cautious stance on the stock.
It, however, has raised the target price on the stock to ₹2,400 apiece from ₹2,000 earlier. Nevertheless, the target price signals a 43.60% downside for the stock from its latest closing price.
Strong tariff largely offset by high costs
IndiGo reported a net profit of ₹30 billion for 4QFY24, marking a 107% year-on-year increase but a 37% quarter-on-quarter decrease. The airline booked claims from Pratt & Whitney (exact amount undisclosed) in its revenue for 3Q and 4QFY24.
Ancillary revenue increased by ₹1.7 billion compared to 2QFY24, and other operating income rose by ₹1.8 billion despite a 1.5% reduction in available seat kilometers (ASK). The brokerage estimates the claims booked in 4Q and 3Q FY24 at ₹3.5 billion and ₹4.2 billion, respectively.
It said that that ASK increased by 14% year-on-year but declined by 5% quarter-on-quarter. Despite this being a seasonally weak quarter, the passenger load factor (PLF) improved by 50 basis points to 86.3%. Gross profit per ASK ( ₹3.3) rose by ₹0.50 year-on-year and remained stable quarter-on-quarter.
However, despite the strong gross profit per ASK, the revenue per available seat kilometer (RASK) minus cost per available seat kilometer (CASK) rose by just ₹0.19 year-on-year and declined by ₹0.29 quarter-on-quarter.
This, according to the brokerage, was due to a 21% year-on-year and 11% quarter-on-quarter increase in salary per ASK and an 11% rise in ownership and maintenance costs.
IndiGo has guided for 10-12% year-on-year ASK growth in 1QFY25, implying 3% quarter-on-quarter growth despite the first quarter typically being seasonally strong.
The airline expects 1QFY25 RASK to be similar to the previous year ( ₹5.1). Based on 4QFY24 CASK, this implies a RASK-CASK of ₹0.34, significantly lower than 3QFY24 ( ₹0.55) and 1QFY24 ( ₹0.76), the brokerage noted.
Dark clouds gather - rapid industry fleet rise, wage cost pressure
From January to April 2024, domestic industry traffic rose by just 3.5% year-on-year. Despite this modest growth, IndiGo expanded by 11.5% and Tata Group airlines by 18.8%, benefiting from GoAir ceasing operations in May 2023, which resulted in market share gains for existing players.
However, starting in May 2024, InCred anticipates that the year-on-year traffic growth of existing players will align more closely with overall industry growth. With the planned capacity additions by Indian aviation companies and the return of older planes, it projects a 21% year-on-year increase in the industry fleet (excluding IndiGo).
IndiGo’s fleet alone is expected to grow by 18% in FY25. Consequently, it foresees the industry fleet outpacing demand growth in FY25.
"IndiGo stated cost pressure of salary & airport expenses in FY25F. We note that IndiGo’s salary/ ask ( ₹0.46 in 4QFY24) was similar to FY20 level," said the brokerage.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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